File No. 2-99861
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 36
to the
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
and
POST-EFFECTIVE AMENDMENT NO. 37
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.
Registrant filed its Rule 24f-2 Notice on May 26, 1995
for its most recent fiscal year ended March 31, 1995.
It is proposed that this Post-Effective Amendment will become effective
sixty days after filing pursuant to paragraph (a) 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 , 1996
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Smith Barney Muni Funds - Florida Portfolio
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Prospectus July , 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 June 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
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Smith Barney Muni Funds - Florida Portfolio
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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 32
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Performance 32
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Management of the Fund 33
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Distributor 34
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Additional Information 35
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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.
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2
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Smith Barney Muni Funds - Florida Portfolio
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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
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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
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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
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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 ............................. -- -- -- --
---- ---- ---- ----
Total Portfolio Operating Expenses .......... -- -- -- --
==== ==== ==== ====
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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 $122
Class B.................................. 57 68 76 132
Class C.................................. 23 40 69 151
Class Y.................................. 5 17 30 66
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A.................................. $47 $61 $77 $122
Class B.................................. 12 38 66 132
Class C.................................. 13 40 69 151
Class Y.................................. 5 17 30 66
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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(a)
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Period Ended March 31, 1996 1995 1994 1993 1992(b)
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Net Asset Value,
Beginning of Period $ 12.82 $ 13.21 $ 12.32 $ 12.00
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Net investment income 0.75 0.77 0.79 0.73
Net realized and change
in unrealized gains
(losses)(2) 0.08 (0.39) 0.91 0.29
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Total from Operations 0.83 0.38 1.70 1.02
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Less Distributions From:
Net investment income (0.76) (0.77) (0.80) (0.70)
Net realized gains -- -- (0.01) --
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Total Distributions (0.76) (0.77) (0.81) (0.70)
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Net Asset Value,
End of Period $ 12.89 $ 12.82 $ 13.21 $ 12.32
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Total Return# 6.77% 2.75% 14.21% 8.70%++
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Net Assets,
End of Period (000's) $107,724 $104,681 $102,202 $67,998
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Ratios to Average
Net Assets:
Expenses (1) 0.61% 0.54% 0.46% 0.23%+
Net Investment Income 5.97% 5.71% 6.15% 6.70%+
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Portfolio Turnover Rate 43.23% 20.40% 25.57% 41.72%
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(a) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(b) From April 2, 1991 (commencement of operations) to March 31, 1992.
+ 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.
* See page 10 for full footnote disclosures for (1) and (2).
9
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Smith Barney Muni Funds - Florida Portfolio
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Financial Highlights (continued)
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Class B Shares Class C Shares (a)
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Period Ended March 31, 1996 1995(c) 1996 1995 1994 1993(b)
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Net Asset Value,
Beginning of Period $11.91 $12.81 $13.20 $12.86
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Income from Operations:
Net Investment Income 0.30 0.67 0.68 0.19
Net Realized and Unrealized
Gain (Loss) (2) 0.97 0.08 (0.39) 0.33
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Total from Operations 1.27 0.75 0.29 0.52
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Less Distributions From:
Net Investment Income (0.29) (0.67) (0.68) (0.18)
Net Realized Gains -- -- -- --
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Total Distributions (0.29) (0.67) (0.68) (0.18)
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Net Asset Value,
End of Period $12.89 $12.89 $12.81 $13.20
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Total Return# 10.77%++ 6.12% 2.05% 4.05%++
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Net Assets,
End of Period (000's) $1,990 $2,750 $2,487 $691
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Ratios to Average
Net Assets:
Expenses 1.20%+ 1.25% 1.24% 1.24%+
Net Investment Income 5.57%+ 5.40% 4.95% 5.21%+
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Portfolio Turnover Rate 43.23% 43.23% 20.40% 25.57%
================================================================================
(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.
++ 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.
(2) Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at net asset values less
than the beginning of the period.
10
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Smith Barney Muni Funds - Florida Portfolio
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Investment Objective and Management Policies
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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.
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 somewhat higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Corporation ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA-rated even though the issuer does not obtain a new rating. Up to
one-third of the assets of the Portfolio may be invested in municipal bonds
rated Baa or BBB (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium quality and has
speculative characteristics; in addition, changes in economic conditions or
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
11
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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
12
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 municipal 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.
13
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 1982 has been
increasing approximately 2.5% annually. The state's current population,
estimated at 13.5 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, construction, construction-related manufacturing 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 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,
14
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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.
15
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, 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
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.
16
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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-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.
17
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 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
18
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 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
19
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
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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
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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; and (f) investments of distributions from a UIT sponsored by Smith
Barney. In order to obtain such discounts, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at 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
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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
the
24
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
25
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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
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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
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.
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
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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
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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
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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
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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 of the Portfolio
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 Fund's last fiscal year, the management fee was 0.45% of the
Portfolio's average daily net assets for each Class of shares. For the fiscal
year ended March 31, 1996, total expenses were __% of the average daily net
assets for Class A shares; __% of the average daily net assets for Class B
shares; and __% 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.
35
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
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, 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
36
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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 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 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 transferrable (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.
37
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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.
38
<PAGE>
SMITH BARNEY
------------
A Member of TravelersGroup [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 , 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 , 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 June 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 15
- --------------------------------------------------------------------------------
Purchase of Shares 18
- --------------------------------------------------------------------------------
Exchange Privilege 24
- --------------------------------------------------------------------------------
Redemption of Shares 27
- --------------------------------------------------------------------------------
Minimum Account Size 29
- --------------------------------------------------------------------------------
Performance 29
- --------------------------------------------------------------------------------
Management of the Fund 30
- --------------------------------------------------------------------------------
Distributor 32
- --------------------------------------------------------------------------------
Additional Information 32
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
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 alternative, Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Portfolio.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of this Class. Because the Portfolio's
future return cannot be predicted, however, there can be no assurance that this
would be the case. Finally, investors should consider the effect of the CDSC
period in the context of their own investment time frame.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fees. The maximum purchase amount for Class A shares is $4,999,999
and Class C shares is $499,999. There is no maximum purchase amount for Class Y
shares.
No Initial Sales Charge. The initial sales charge on Class A shares may be
waived for certain eligible purchasers, and the entire purchase price would be
immediately invested in the Portfolio. In addition, Class A share purchases,
which when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The $500,000 aggregate investment
may be met by adding the purchase to the net asset value of all Class A shares
offered with a sales charge held in funds sponsored by Smith Barney Inc. ("Smith
Barney") listed under "Exchange Privilege." See "Purchase of Shares." Because
the ongoing expenses of Class A shares will be lower than those for Class C
shares, purchasers eligible to purchase Class A shares at net asset value should
consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class C shares is the same as that of the initial sales charge
on the Class A shares.
4
<PAGE>
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 and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:
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 --% --% --%
---- ---- ----
Total Portfolio Operating Expenses --% --% --%
==== ==== ====
- --------------------------------------------------------------------------------
* 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 during the fiscal year ended March 31, 1996.
*** 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............................... $27 $43 $59 $108
Class C............................... 19 28 49 110
Class Y............................... 6 18 31 70
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A............................... $27 $43 $59 $108
Class C............................... 9 28 49 110
Class Y............................... 6 18 31 70
- --------------------------------------------------------------------------------
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. No
information is presented for Class Y Shares, because no Class Y Shares were
outstanding for the periods shown.
For a Portfolio share outstanding throughout each period:
<TABLE>
<CAPTION>
Period Ended March 31,
- -------------------------------------------------------------------------------------------------------------------
Class A Shares: 1996 1995 1994 1993 1992 1991 1990 1989(a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $6.55 $6.68 $6.45 $6.38 $6.28 $6.20 $6.25
- -------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net Investment Income 0.36 0.37 0.39 0.42 0.43 0.44 0.13
- -------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(or Loss) -- (0.13) 0.23 0.07 0.07 0.10 (0.05)
- -------------------------------------------------------------------------------------------------------------------
Total Income from Operations 0.36 0.24 0.62 0.49 0.50 0.54 0.08
===================================================================================================================
Less Distributions From:
Net Investment Income (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
- -------------------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.37) (0.39) (0.42) (0.40) (0.36) (0.13)
- -------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period 6.54 6.55 6.68 6.45 6.38 6.28 6.20
===================================================================================================================
Total Return# 5.69% 3.65% 9.82% 7.99% 8.23% 9.07% 1.09%++
- -------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(in millions) $ 245 $ 282 $ 242 $ 157 $ 65 $ 20 $ 5
- -------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (1) 0.61% 0.53% 0.55% 0.49% 0.33% 0.30% 0.30%+
Net Investment Income 5.61% 5.53% 5.90% 6.42% 6.77% 6.98% 6.58%+
- -------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21.80% 24.72% 24.53% 26.27% 14.92% 64.50% 14.27%
===================================================================================================================
</TABLE>
9
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
Period Ended March 31,
- --------------------------------------------------------------------------------
Class C Shares (c): 1996 1995 1994 1993 (b)
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $6.54 $6.68 $6.62
- --------------------------------------------------------------------------------
Income From Operations:
Net Investment Income 0.35 0.35 0.10
- --------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(or Loss) on Investments 0.00 (0.14) 0.05
- --------------------------------------------------------------------------------
Total from Operations 0.35 0.21 0.15
================================================================================
Less Distributions From:
Net Investment Income (0.35) (0.35) (0.09)
- --------------------------------------------------------------------------------
Net Realized Gains 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Distributions (0.35) (0.35) (0.09)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $6.54 $6.54 $6.68
================================================================================
Total Return# 5.51% 3.15% 2.28%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (in millions) $ 27 $ 27 $ 6
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (1) 0.89% 0.88% 0.88%+
Net Investment Income 5.34% 5.10% 5.35%+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 21.80% 24.72% 24.53%
================================================================================
(1) The Manager has waived all or a part of its fees for each of the years in
the six-year period ended March 31, 1992. If such fees were not waived, the
per share effect on expenses and ratios of expenses to average net assets
would be as follows:
Increase in Per Share Expenses 1992 1991 1990 1989
- --------------------------------------------------------------------------------
Class A $.003 $.011 $.018 $.022(b)
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets
- --------------------------------------------------------------------------------
Class A .56% .30%* .30%* .30%*+(b)
- --------------------------------------------------------------------------------
* As a result of expense limitations.
+ Annualized.
++ Figures are not annualized, as they may not be representative of the total
return for the year.
# Total returns do not reflect sales loads or contingent deferred sales
charges.
(a) From November 28, 1988 (commencement of operations) to March 31, 1989.
(b) From January 5, 1993 (inception date) to March 31, 1993.
(c) On November 7, 1994 the former Class B Shares were renamed Class C Shares.
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.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he or she is subject to that tax. Such
private activity bonds include bonds issued to finance such projects as certain
solid waste disposal facilities, student loan programs, and water and sewage
projects. Because interest income on AMT-Subject Bonds is taxable to certain
investors, it is expected, although there can be no guarantee, that such
municipal obligations generally will provide somewhat higher yields than other
municipal obligations of comparable quality and maturity. There is no limitation
on the percent or amount of the Portfolio's assets that may be invested in
AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Corporation ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA rated even though the issuer does not obtain a new rating. Up to
one third of the assets of the Portfolio may be invested in municipal bonds
rated Baa or BBB (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium quality and has
speculative
11
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 securities (such as Industrial Development Bonds) owned by
banks. Participations are frequently backed by an irrevocable letter of credit
or guarantee of a bank that the Manager has determined meets the prescribed
quality standards for the Portfolio. Participation interests will be purchased
only if management believes interest income on such interests will be tax-exempt
when distributed as dividends to shareholders.
The Portfolio will not invest more than 10% of the value of its net assets
in illiquid securities, including those that are not readily marketable or for
which there is no established market.
12
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Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or liquid high
grade debt securities, marked-to-market daily, of a dollar amount sufficient to
make payment at settlement will be segregated at the custodian bank. Interest
rates at settlement may be lower or higher than on the purchase date, which
would result in appreciation or depreciation, respectively. Although the
Portfolio will only purchase a municipal obligation on a when-issued basis with
the intention of actually acquiring the securities, the Portfolio may sell these
securities before the settlement date if it is deemed advisable.
Portfolio transactions will be undertaken principally to accomplish the
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.
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 contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the Statement of Additional
Information.
In each of the Fund's prior fiscal years, 100% of the Portfolio's dividends
were exempt-interest dividends, excludable from gross income for Federal income
tax purposes. It is a fundamental policy that under normal market conditions,
the Portfolio will seek to invest 100% of its assets -- and the Portfolio will
invest not less than 80% of its assets -- in municipal obligations the interest
on which is exempt from Federal income taxes (other than the alternative minimum
tax.) The Portfolio may invest up to 20% of its assets in taxable fixed-income
securities but only in obligations issued or guaranteed by the full faith and
credit of the United States and may invest more than 20% of its assets in U.S.
Government securities during periods when in the Manager's opinion a temporary
defensive posture is
13
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Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Portfolio's portfolio securities ordinarily are purchased from and sold
to parties acting as either principal or agent. Newly issued securities
ordinarily are purchased directly from the issuer or from an underwriter; other
purchases and sales usually are placed with those dealers from which it appears
that the best price or execution will be obtained. Usually no brokerage
commissions, as such, are paid by the Portfolio for purchases and sales
undertaken through principal transactions, although the price paid usually
includes an undisclosed compensation to the dealer acting as agent.
14
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.
When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there is no readily obtainable market quotation (which may constitute a majority
of the portfolio securities) are carried at fair value of securities of similar
type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends of substantially all of the Portfolio's net investment income are
declared and paid monthly and any realized capital gains are declared and
distributed annually.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.
15
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her 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.
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
16
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
shareholders to be subject to (or result in an increased liability under) the
AMT. The Fund will annually furnish to its shareholders a report indicating the
ratable portion of exempt-interest dividends attributable to AMT-Subject Bonds.
The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined separately and net capital gains
distributed by the Portfolio are determined after offsetting any capital loss
carryover of the Portfolio from prior periods.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Fund will not be deductible to the extent that the Fund's
distributions are exempt from Federal income tax. In addition, any loss realized
upon the redemption of shares held less than 6 months will be disallowed to the
extent of any exempt-interest dividends received by the shareholder during such
period. However, this holding period may be shortened by the Treasury Department
to a period of not less than the greater of 31 days or the period between
regular dividend distributions. Further, persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisors before purchasing Fund
shares.
Distributions that are exempt for Federal income tax purposes will not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Generally, only interest earned on obligations issued
by the state or locality in which the investor resides will be exempt from state
and local taxes; however, the laws of the several states and local taxing
authorities vary with respect to the taxation of exempt-interest income paid by
investment companies, and each shareholder should consult a tax advisor in that
regard.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional information. Investors are urged to consult their
tax advisors with specific reference to their own tax situation.
17
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers three Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000. See "Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase.
Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Portfolio, investors must
specify whether the purchase is for Class A, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Portfolio.
Investors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in the Portfolio's Systematic Investment Plan, the
minimum initial investment requirement for Class A and Class C shares and the
subsequent investment requirement for all Classes is $50. There are no minimum
investment requirements in Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, unitholders who invest distributions from
a UIT sponsored by Smith Barney, and 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 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
18
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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.
19
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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; and (f) investments of distributions from a UIT
sponsored by Smith Barney. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at net asset value determined by aggregating the dollar amount of the new
20
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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.
21
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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
22
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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
23
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
24
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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
29
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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, 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 of the Portfolio 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
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
For the Fund's last fiscal year the management fee was 0.45% of the Limited
Term Portfolio's average net assets. For the last fiscal year total expenses
were --% of the average daily net assets for Class A shares; and --% of the
average daily net assets for Class C 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 its
inception [(November 28, 1988)] and manages the day to day operations of the
Fund, including making all investment decisions. Mr. Coffey also serves as the
portfolio manager for the Fund's other non-money market Portfolios.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 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.
33
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a holder
of that Class. Smith Barney Financial Consultants may receive different levels
of compensation for selling the different Classes of shares.
Payments under the Plan with respect to Class 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."
34
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
PNC Bank, National Association, located at 17th and Chestnut Streets,
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 __, 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 ___, 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 June ___, 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 Objectives and Management Policies 12
- --------------------------------------------------------------------------------
Valuation of Shares 17
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 18
- --------------------------------------------------------------------------------
Purchase of Shares 20
- --------------------------------------------------------------------------------
Exchange Privilege 27
- --------------------------------------------------------------------------------
Redemption of Shares 31
- --------------------------------------------------------------------------------
Minimum Account Size 32
- --------------------------------------------------------------------------------
Performance 33
- --------------------------------------------------------------------------------
Management of the Fund 34
- --------------------------------------------------------------------------------
Distributor 35
- --------------------------------------------------------------------------------
Additional Information 36
- --------------------------------------------------------------------------------
================================================================================
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. 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 original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
3
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
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 Systematic Investment Plan described below is $50. There is no minimum
5
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
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. SBMFMprovides
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 each 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 - 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:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 ................................
---- ---- ---- ----
Total Portfolio Operating Expenses .................. ___% ___% ___% ___%
---- ---- ---- ----
==== ==== ==== ====
- --------------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will
be subject to a CDSC of 1.00% on redemptions made within 12 months.
** "Other Expenses" for Class 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
<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."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years*
- -----------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each time
period:
New York Portfolio
CLASS A ................................ $47 $62 $79 $127
Class B ................................ 58 70 80 140
Class C ................................ 23 41 70 155
Class Y ................................ 6 18 32 71
- -----------------------------------------------------------------------------------
</TABLE>
An investor would pay the following expenses on the same investment, assuming
the same annual return and no redemption:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years*
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York Portfolio
Class A ................................ $47 $62 $79 $127
Class B ................................ 13 40 70 140
Class C ................................ 13 41 70 155
Class Y ................................ 6 18 32 71
- -----------------------------------------------------------------------------------
</TABLE>
*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 informattion 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, since no Class Yshares were
outstanding for the periods indicated.
<TABLE>
<CAPTION>
For a Portfolio share outstanding throughout each period:
=====================================================================
Period Ended March 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------
Class A Shares (a): 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(b)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning
of Period $12.83 $13.25 $12.33 $11.80 $11.67 $11.48 $11.25 $12.46 12.50
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (1) 0.76 0.78 0.81 0.83 0.85 0.86 0.86 0.83 0.16
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain (or loss)
on investments (2) 0.01 (0.41) 0.92 0.51 0.13 0.20 0.23 (1.20) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 0.77 0.37 1.73 1.34 0.98 1.06 1.09 (0.37) 0.09
- ----------------------------------------------------------------------------------------------------------------------------------
Less Dividends from
Net Investment Income (0.77) (0.79) (0.81) (0.81) (0.85) (0.87) (0.86) (0.85) (0.13)
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions from
Net Realized Gains 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.77) (0.79) (0.81) (0.81) (0.85) (0.87) (0.86) (0.85) (0.13)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $12.83 12.83 13.25 12.33 11.80 11.67 11.48 11.25 12.46
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return# 6.32% 2.66% 14.48% 11.98% 8.74% 9.28% 10.04% (2.63)% 0.52%++
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period
(in thousands) $82,768 $70,065 $61,532 $40,370 $33,158 $28,091 $12,022 $9,703 $5,682
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3) 0.63% 0.55% 0.55% 0.48% 0.28% 0.25% 0.24% 0.37% 0.45%+
Net investment income 6.00 5.79 6.32 6.86 7.31 7.10 7.48 7.34 6.49+
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 30.38% 19.65% 21.91% 23.80% 69.75% 25.36% 56.49% 62.76% 0.00%
==================================================================================================================================
</TABLE>
+ Annualized
++ Figures are not annualized, as they may not be representative of the total
return for the year.
# Total returns do not reflect sales loads or contingent deferred sales charges.
(a) 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.
See page 11 for full footnote disclosures for (1) and (2).
10
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Financial Highlights (continued)
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Class B Shares Class C Shares(b)
-------------- -----------------------------------------------
1996 1995(a) 1996 1995 1994 1993(c)
- -------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.96 $12.82 $13.24 $12.84
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.31 0.68 0.68 0.15
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (or loss)
on investments (2) 0.86 0.01 (0.40) 0.37
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income from Investment Operations 1.17 0.69 0.28 0.52
- ------------------------------------------------------------------------------------------------------------------------------------
Less Dividends from Net Investment Income (0.29) (0.68) (0.70) (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from Net Realized Gains 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.29) (0.68) (0.70) (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.84 $12.83 $12.82 $13.24
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return# 9.92%++ 5.66% 1.96% 4.04%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (in thousands) $3,813 $5.896 $5,461 $1,368
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.27%++ 1.28% 1.23% 1.23%+
Net invesatment income income 5.76+ 5.38 4.98 5.37+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 30.38% 30.38% 19.65% 21.91%
====================================================================================================================================
+ Annualized.
++ Figures are not annualized, as they may not be representative of the total return for the year.
# Total returns do not reflect sales loads or contingent deferred sales
charges.
(a) 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) 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 effect on expenses and the ratios of expenses to average net
assets would be as follows:
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Per Share Increase Ratios Without Fee Waivers
Portfolio 1994 1993 1992 1991 1990 1989 1994 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New York Portfolio 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
(2) Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at net asset values less
than the beginning of the period.
11
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Investment Objective and Management Policies
================================================================================
The New York 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 New York 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. Each 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.
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
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
12
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
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
more than one year, but contain a demand feature that enables the holder to
redeem the investment on no more than 30 days' notice; variable rate demand
instruments provide for automatic establishment of a new interest rate on set
dates; floating rate demand instruments provide for automatic adjustment of
their interest rates whenever some other specified interest rate changes (e.g.,
the prime rate). The Portfolio may purchase participation interests in variable
rate tax-exempt securities (such as Industrial Development Bonds) owned by
banks. Participations are frequently backed by an irrevocable letter of credit
or guarantee of a bank that the Manager has determined meets the prescribed
quality standards for the Portfolio. Participation interests will be purchased
only if management believes interest income on such interests will be tax-exempt
when distributed as dividends to shareholders.
The Portfolio will not invest more than 10% of the value of its net assets
in illiquid securities, including those that are not readily marketable or for
which there is no established market.
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
13
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
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
Portfolio'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.
Though they have not done so, the Portfolio may invest in municipal bond
index futures contracts (currently traded on the Chicago Board of Trade) or in
listed contracts based on U.S. Government securities as a hedging policy in
pursuit of its investment objective; provided that immediately thereafter not
more than 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 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) 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
14
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
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 irmunicipal 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
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
15
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
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. 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 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
16
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
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
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, 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 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
17
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Valuation of Shares (continued)
================================================================================
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.
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
18
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Dividends, Distributions and Taxes (continued)
================================================================================
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-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.
NEW YORK STATE AND CITY TAXES
New York shareholders will not be subject to New York State and City
personal income tax on New York 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 subdivisions (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 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 New York
Portfolio are not excluded in determining New York State franchise or City
business taxes on corporations and financial institutions.
19
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Dividends, Distributions and Taxes (continued)
================================================================================
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 (continued)
================================================================================
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.
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
20
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
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 of the Fund, and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the shareholder's
account by the Fund's transfer agent, TSSG, a subsidiary of First Data
Corporation. Share certificates are issued only upon a shareholder's written
request to TSSG. It is not recommended that the Portfolio be used as a vehicle
for Keogh, IRA or other qualified retirement plans.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or introducing brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value, are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. 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 TSSG is authorized through
preauthorized transfers of $50 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide systematic additions to the shareholder's Portfolio
account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account. Additional information is
available from the Fund or a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:
21
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
================================================================================
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 the 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 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 purchaseer that the purchasse is made for
investment purposes and that the securities will not be resold excepty 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
22
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
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; and (f) investments of
distributions from a UIT sponsored by Smith Barney. In order to obtain such
discounts, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of 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 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 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.
23
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
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 unds 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 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 TSSG to obtain a Letter of Intent
application.
Class Y shares. A letter of intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
24
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
make an initial minimum purchase of $1,000,000 in Class Y shares of the
portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same portfolio within six months from the date of the letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class y
shares purchased to date will be transferred to Class a shares, where they will
be subject to all fees (including a service fee of 0.15%) And expenses
applicable to the portfolio's Class a shares, which may include a CDSC of 1.00%.
Please contact a smith barney financial consultant or tssg for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in 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. CDSCShares 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
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders:
25
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
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 CDSCShares 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.
26
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
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 TSSG in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
================================================================================
Exchange Privilege
================================================================================
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, 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.
27
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Smith Barney Muni Funds - New York Portfolio
================================================================================
Exchange Privilege (continued)
================================================================================
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.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
28
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Exchange Privilege (continued)
================================================================================
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.
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
29
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Exchange Privilege (continued)
================================================================================
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
shareholder was a Class B shareholder of the Short-TermWorld 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 a 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 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
30
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Exchange Privilege (continued)
================================================================================
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 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/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
31
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Redemption of Shares (continued)
================================================================================
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to TSSG together with the redemption request. Any signature
appearing on a 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.TSSG may require
additional supporting documents for redemptions made
by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until TSSG
receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.
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.
- --------------------------------------------------------------------------------
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 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.
32
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Performance (continued)
================================================================================
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 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 a Portfolio's shares. Such
performance information may include data from Lipper Analytical Services, Inc.
and other financial publications.
33
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Management of the Fund (continued)
================================================================================
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 thelaws 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 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 of
the Portfolio 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 Fund's last fiscal year, the management fee was 0.45% of the
Portfolio's average daily net assets for each Class of shares. For the fiscal
year ended March 31, 1996, total expenses were __% of the average daily net
assets for Class A shares; __% of the average daily net assets for Class B
shares; and __% 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 New York Portfolio since
their inception (January 16, 1987) and manages the day to day operations of the
34
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Management of the Fund (continued)
================================================================================
Portfolio, including making all investment decisions. Mr. Coffey also serves as
the portfolio manager for the 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 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.
35
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Distributor (continued)
================================================================================
Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Trustees will evaluate the appropriateness of the
Plan and its payment terms on a continuing basis and in so doing will consider
all relevant factors, including expenses borne by Smith Barney, amounts received
under the Plan and proceeds of the CDSC.
================================================================================
Additional Information
================================================================================
The Fund, an open-end non-diversified, management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of Trust
dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees have
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.
36
<PAGE>
Smith Barney Muni Funds - New York Portfolio
================================================================================
Additional Information (continued)
================================================================================
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 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.
37
<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
JUNE ___, 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 20
Custodian 20
Independent Auditors 20
The Fund 21
Voting Rights 22
Financial Statements 25
Appendix A 26
Appendix B 29
Appendix C 38
Appendix D 49
Appendix E 54
Appendix F 59
Appendix G 61
Appendix H 63
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.; 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 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 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.
*PETER M. COFFEY, Vice President and Investment Officer
Managing Trustee of Smith Barney and Vice President of the Manager and three
investment companies associated with Smith Barney; 52.
*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; 44.
__________________
* Designates an "interested person" as defined in the Investment Company Act
of 1940 whose business address is 388 Greenwich Street, New York, NY 10013.
Such person is not separately compensated as a Fund officer or Trustee.
The following table shows the compensation paid by the Fund to
each Trustee during the Fund's last fiscal year. None of the officers of the
Fund received any compensation from the Fund for such period. Officers and
interested Trustees of the Fund are compensated by Smith Barney.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<C>
<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 11,196.00 0 50,900.00 10
Donald R. Foley 11,396.00 0 51,500.00 10
Paul Hardin 6,698.00 0 27,800.00 12
Francis P. Martin 11,396.00 0 51,500.00 10
Heath B. McLendon() 0 0 0 0 41
Roderick C. Rasmussen 11,396.00 0 51,500.00 10
John P. Toolan 11,396.00 0 51,500.00 10
C. Richard Youngdahl 11,396.00 0 51,500.00 10
Designates an "interested Trustee."
</TABLE>
On May 10, 1996 Trustees and officers owned in the aggregate less than 1% of
the outstanding shares of the Fund.
ADDITIONAL INFORMATION REGARDING INVESTMENT POLICIES
In general, municipal obligations are debt obligations (bonds or notes) issued
by or on behalf of states, territories and possessions of the United States
and their political subdivisions, agencies and instrumentalities the interest
on which is exempt from Federal income tax in the opinion of bond counsel to
the issuer. Municipal obligations are issued to obtain funds for various
public purposes that enhance the quality of life, including the construction
of a wide range of public facilities, such as airports, bridges, highways,
housing hospitals, mass transportation, schools, streets, water and sewer
works and gas and electric utilities. They may also be issued to refund
outstanding obligations, to obtain funds for general operating expenses, or to
obtain funds to loan to other public institutions and facilities and in
anticipation of the receipt of revenue or the issuance of other obligations.
In addition, the term "municipal obligations" includes certain types of
industrial development bonds issued by public authorities to obtain funds to
provide various privately-operated facilities for business and manufacturing,
housing, sports, convention or trade show facilities, airport, mass transit,
port and parking facilities, air or water pollution control facilities, and
certain facilities for water supply, gas, electricity or sewerage or solid
waste disposal.
The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the 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, 1995 the unused capital
loss carryovers of the Fund by Portfolio were approximately as follows:
National Portfolio, $5,911,171; New York Portfolio, $1,310,119, Florida
Portfolio, $313,998, New Jersey, $999,309, Limited Term Portfolio, $5,131,067,
Georgia Portfolio, $36,179, Ohio Portfolio $28,813, Pennsylvania Portfolio,
$114,695, California Limited Term Portfolio, $188,158 and Florida Limited Term
Portfolio, $514,327. For Federal income tax purposes theses amounts are
available to be applied against future securities gains, if any, realized.
The carryovers expire as follows:
<TABLE> March 31,
<S> <C> <C> <C> <C> <C> <C> <C>
PORTFOLIO 1997 1998 1999 2000 2001 2002 2003
(in thousands)
National -- -- -- -- -- -- $ 5911
California -- -- -- -- -- -- --
Florida -- -- -- -- -- -- 314
New Jersey -- -- -- -- -- -- 999
New York $427 $ 79 -- -- -- -- 804
Georgia -- -- -- -- -- -- 36
Ohio -- -- -- -- -- -- 29
Pennsylvania -- -- -- -- -- -- 115
Limited Term -- -- -- $ 450 $ 196 -- 4,485
California Limited Term -- -- -- -- -- -- 188
Florida Limited Term -- -- -- -- -- $ 2 512
</TABLE>
Generally, interest on municipal obligations is exempt from Federal income
tax. However, interest on municipal obligations that are considered to be
industrial development bonds (as defined in the Internal Revenue Code (the
"Code"), will not be exempt from Federal income tax to any shareholder who is
considered to be a "substantial user" of any facility financed by the proceeds
of 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 California Portfolio, the New Jersey Portfolio,
the Florida Portfolio, the California Limited Term Portfolio, the Florida
Limited Term Portfolio, the Georgia Portfolio, the Pennsylvania Portfolio and
the Ohio Portfolio each may not:
(1) Borrow money, except from banks for temporary purposes (such as
facilitating redemptions or for extraordinary or emergency purposes) in an
amount not to exceed 10% of the value of its total assets at the time the
borrowing is made (not including the amount borrowed) and no investments will
be made while borrowing exceed 5% of total assets; (2) Mortgage or pledge any
of its assets, except to secure borrowings permitted under (1) above; (3)
Invest more than 25% of total assets taken at market value in any one
industry; except that Municipal Obligations and securities of the U.S.
Government, its agencies and instrumentalities and Municipal Obligations of
California with respect to the California Portfolio and the California Limited
Term Portfolio, Municipal Obligations of New Jersey with respect to the New
Jersey Portfolio, Municipal Obligations of Georgia with respect to the Georgia
Portfolio, Municipal Obligations of Pennsylvania with respect to the
Pennsylvania Portfolio and Municipal Obligations of Florida with respect to
the Florida Portfolio and the Florida Limited Term Portfolio are not
considered an industry for purposes of this limitation; (4) Purchase or hold
any real estate, except that the Portfolio may invest in securities secured by
real estate or interests therein or issued by persons (other than real estate
investment trusts) which deal in real estate or interests therein; (5) Write
or purchase put, call, straddle or spread options; purchase securities on
margin or sell "short"; (6) Underwrite the securities of other issuers: (7)
Purchase or sell commodities and commodity contracts, except that the
Portfolio may invest in or sell municipal bond index futures contracts,
provided that immediately thereafter not more than 33 1/3% of its net assets
would be hedged or the amount of margin deposits on the Portfolio's existing
futures contracts would not exceed 5% of the value of its total assets; or (8)
Make loans, except to the extent the purchase of bonds or other evidences of
indebtedness or the entry into repurchase agreements or deposits with banks,
including the Funds' Custodian, may be considered loans.
Without the approval of a majority of its outstanding voting securities, the
California Money Market Portfolio and the New York Money Market Portfolio each
may not:
(1) Borrow money, except from banks for temporary purposes (such as
facilitating redemptions or for extraordinary or emergency purposes) in an
amount not to exceed 10% of the value of its total assets at the time the
borrowing is made (not including the amount borrowed) and no investments will
be made while borrowings exceed 5% of total assets; (2) Mortgage or pledge
any of its assets, except to secure borrowings permitted under (1) above; (3)
Invest more than 25% of total assets taken at market value in 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 4.52% 7.76% 7.72% 8/20/86
Limited Term 4.57% 6.32% 6.79% 11/28/88
New York 4.32% 7.85% 7.01% 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. Term5.27 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 3.56% N/A 10.37% 11/11/94
Florida 3.59% N/A 4.97% 11/16/94
Georgia 4.59% N/A 4.51% 6/15/94
Ohio 6.05% N/A 5.75% 6/14/94
Pennsylvania 3.05% 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 6.93% N/A 6.07% 1/8/93
Florida 4.28% N/A 7.27% 1/5/93
Georgia 8.05% N/A 7.19% 4/14/94
Ohio 2.60% N/A 3.64% 6/14/94
Pennsylvania 6.56% N/A 7.89% 4/5/94
Florida Ltd. Term6.17% 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 N/A
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. TermN/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 ______% (the effective yield
was _____%) with an average dollar-weighted portfolio maturity of ____ 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 ____% (the effective yield
was ____%) with an average dollar-weighted portfolio maturity of ____ 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.
On April 27, 1994, the Trustees approved new management agreements between the
Fund, on behalf of each of the California Money Market Portfolio and the New
York Money Market Portfolio (collectively the "Money Market Portfolios"). The
new management agreements were subsequently approved by shareholders at a
meeting of held on September 2, 1994. The new management agreements provide
for the payment of an effective management fee at an annual rate based on each
Money Market Portfolio's average daily net assets in accordance with the
following schedule:
0.50% on the first $2.5 billion of net assets;
0.475% on the next $2.5 billion; and
0.45% on net assets in excess of $5 billion.
Based on the current asset levels of each Money Market Portfolio, the
effective management fee is 0.50%.
The new management agreements were proposed and approved in conjunction with
the proposed acquisition (the "Acquisition") by each of the Money Market
Portfolios of the assets of Smith Barney Shearson California Money Market Fund
and Smith Barney Shearson New York Money Market Fund, respectively. As a
result of the Acquisitions, it is expected that the level of assets of each
Money Market Portfolio will substantially increase. The new management fee
would result in the same effective management fee on each Portfolio's current
net assets and on the assets expected immediately after the Acquisitions.
However, the management fee payable would be reduced as higher levels of
assets are attained
<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 $ 1,918,961 $ 1,985,609
Limited Term 1,351,567 1,339,152
New York 373,385 334,878
Florida (a) 484,744 505,761
California Money (b) 2,239,712 897,858
New York Money (c) 1,525,102 293,600
FL Ltd. Term (d) (e) 12,445 --
Georgia (f) -- N/A
Ohio (g) -- N/A
Pennsylvania (h) -- N/A
</TABLE>
(a) The Manager waived its management fee in excess of 0.035% of the Florida
Portfolio's average daily net assets for the period April 1, 1992 through
January 1, 1993.
(b) The Manager waived its management fee in excess of 0.03% of the
California Money Market Portfolio's average daily net assets for the period
from April 1, 1994 through March 31, 1995.
(c) 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.
(d) 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.
(e) 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.
(f) The Manager waived its entire management fee with respect to the Georgia
Portfolio's average daily net assets for the period from April 4, 1994 through
March 31, 1995.
(g) The Manager waived its entire management fee with respect to the Ohio
Portfolio's average daily net assets for the period from June 13, 1994 through
March 31, 1995.
(h) The Manager waived its entire management fee with respect to the
Pennsylvania Portfolio's average daily net assets for the period from April 4,
1994 through March 31, 1995.
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
Limited
Florida
Florida Ltd.
Georgia
New York
Ohio
Pennsylvania
CUSTODIAN
All portfolio securities and cash owned by the Fund will be held in the
custody of PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, have been
selected as independent auditors for the Fund for its fiscal year ending March
31, 1997 to report annually on their audit of the financial statements of the
Fund and to perform required reviews of certain filings with the
Commission.</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 June 30, 1995: William C. Lochmoeller TTEE, FBO The
Lochmoeller Family Trust U/A/D 07/29/80, 1270 Mesa Rd., San Marino, CA 91108,
owned 11,576.461 (17.269%) of the outstanding Class B shares of the California
Portfolio; Joan Barnett, 3917 Alta Mesa Drive, Studio City, CA 91604, owned
9,537.048 (14.22%) of the outstanding Class B shares of the California
Portfolio; Patricia S. Gonzalez, 204 Upland Court, Redwood City , CA 94062,
owned 8,337.641 (12.43%) of the outstanding Class B shares of the California
Portfolio; Janet C. Higgins, Successor TTEE, FBO Donald R. Higgins & Janet C.
Higgins Revocable Trust A, U/A/D 6/10/85, 3119 Claridge Way, Sacramento, CA
95821, owned 8245.169 (12.30%) of the outstanding Class B shares of the
California Portfolio; Steven H. Pettit TTEE, FBO The Tina & Tom Pettit
Irrevocable Trust DTD 04-13-95, 4839 Meadow Ridge Road, Santa Ysabel, CA
92070, owned 6,162.150 (9.19%) of the outstanding Class B shares of the
California Portfolio; Vivian Gilbert Strell Laurie Gilbert and Samuel Gilbert
JTWROS, 7008 Lipmann Street, San Diego, CA 92212, owned 3,849.714 (5.74%) of
the outstanding Class B shares of the California Portfolio; Mutual Management
Corp., C/O Smith Barney, Inc., Attn: Thomas Reynolds, 388 Greenwich Street,
New York, NY 10013, owned 149,766.909 (20.47%) of the outstanding Class A
shares of the California Limited Portfolio; Alan D. Levy Abby Jane Levy
JTWROS, 910 N. Roxbury, Beverly Hills, CA 90210, owned 74,963.00 (3.33%) of
the outstanding Class A shares of the California Limited Portfolio; Jeff
Herman & Kara Ann Herman JTWROS, 12021 Doral Street, Northridge, CA 91326,
owned 16,875.514 (6.83%) of the outstanding Class C shares of the California
Limited Portfolio; Robert L. Smith & Lucille L. Smith TRS, UA DTD 2/18/76,
FBO Smith Family Trust, 420 Pebble Beach Place, Fullerton, CA 92635, owned
16,849.115 (6.82%) of the outstanding Class C shares of the California Limited
Portfolio; Aloke Bosu, 12070 Telegraph Road, Suite #340, Santa Fe Springs, CA
90670, owned 15,934.412 (6.45%) of the outstanding Class C shares of the
California Limited Portfolio; Camilla Schoch Gerald Schoch TTEE, U/A/D
07/06/90, FBO Melbourne J Schoch, 41B Niniko Pl, Honolulu, HI 96817, owned
15,815.459 (6.40%) of the outstanding Class C shares of the California Limited
Portfolio; Anthony S. Wong & Mandy Tang Wong TTEEs for the AMP Wong Family
Trust, U/A/D 12/08/89, 1071 Piedmont, Sacramento, CA 95822; The E.G.
Rosenblatt Living TR, E.G. Rosenblatt TTEE, 2295 South Ocean Blvd., Palm
Beach, FL 33480, owned 624,871.770 (7.61%) of the outstanding Class A shares
of the Florida Portfolio; Norman S Jaffe & Ann L Jaffe TTEES, Norman S Jaffe &
Ann L Jaffe Revocable Trust, U/A/D 6/10/90, 5700 North Bay Road, Miami Beach,
FL 33140, owned 16,455.156 (7.72%) of the outstanding Class B shares of the
Florida Portfolio; Blanche Kaplan, 6039 Collins Avenue, Apt. 1056, Miami
Beach, FL 33140, David S. Light TTEE, FBO David S. Light U/A/D 11/12/90, The
David S. Light REV TR, 9406 W Broadview Drive, Bay Harbor Isle, FL 33154,
owned 13,233.408 (6.21%) of the outstanding Class B shares of the Florida
Portfolio; Samuel R. Gardner and Sharon E. Gardner as Trustees Under a Joint
Revocable Trust Agreement DTD 12/03/92, 235 Ocean Way, Vero Beach, FL 32963,
owned 11,140.903 (5.23%) of the outstanding Class B shares of the Florida
Portfolio; Benjamin S. Loewenstein and Eleanor S. Loewenstein TTEES UDT DTD
2/3/84, 198 Northwest 67th Street #306, Boca Raton, FL 33487, owned
10,043.103 (6.14%) of the outstanding Class C shares of the Florida Portfolio;
Sari Galan, 49-14 Skyline Blvd., Cape Coral, FL 33432, owned 9,960.516
(6.10%) of the outstanding Class C shares of the Florida Portfolio; Phyllis L
O9Neill, 341 Alexander Palm Road, Boca Raton, FL 33432, 9,604.000 (5.87%) of
the outstanding Class C shares of the Florida Portfolio; Susan H. Dupuis
Trustee, Susan H. Dupuis LIV. REV. TR. DTD 9/26/89, 4100 Bay Point Road,
Miami, FL 33137, owned 151,343.096 (7.64%) of the outstanding Class A shares
of the Florida Limited Term Portfolio; Alico Inc., ATTN: Craig Simmons, P.O.
Box 338, Labelle, FL 33935, owned 46,013.436 (10.11%) of the outstanding
Class C shares of the Florida Limited Term Portfolio; Rita Green, Person Rep
Estate of Samuel Auerbach, 11 Islan Avenue, Apartment #1112. Miami Beach, FL
33139, owned 34,243.051 (7.53%) of the outstanding Class C shares of the
Florida Limited Term Portfolio; Slyvia Pawliger TTEE FBO, Sylvia Pawliger
Living TR DTD 11/14/94, 5440 SW 85th Street, Miami, FL 33143, owned
32,237.785 (7.09%), of the outstanding Class C shares of the Florida Limited
Term Portfolio; Dominick Amatulli TTEE, FBO Dominick Amatulli U/A/D 01/25/93,
120 Shore Drive, Rivera Beach, FL 33404, owned 32,194.048 (7.08%) of the
outstanding Class C shares of the Florida Limited Term Portfolio; Gabriel H.
Pou and Guillermina F. Pou, owned 1265 Mariola Ct., Coral Gables, FL 33134,
owned 23,249.793 (5.11%) of the outstanding Class C shares of the Florida
Limited Term Portfolio; Mutual Management Corp., C/O Smith Barney, Inc., ATTN:
Thomas Reynolds, 388 Greenwich Street, New York, NY 10013, owned 62,599.636
(10.62%) of the outstanding Class A shares of the Georgia Portfolio; Jeanne A.
Sellers, 1 Peachtree Battle #7, Atlanta, GA 30305, owned 43,272.325 (7.34%)
of the outstanding Class A shares of the Georgia Portfolio; John H. Bennett
Sr., 4846 Salaccoa Road, Waleska, GA 30183, owned 17,449.361 (7.08%) of the
outstanding Class B shares of the Georgia Portfolio; Anna M. Fowlkes, 3750
Peachtree Road N.E. Apt. #712, Atlanta, GA 30319, owned 12,763.285 (5.18%) of
the outstanding Class B shares of the Georgia Portfolio; Robert B.
Quattlebaum, 2201 Azalea Drive, Valdosta, GA 31602, owned 12,727.017 (5.17%)
of the outstanding Class B shares of the Georgia Portfolio; Jeanette L
Griffis, Rt.1 Box 266, Fargo, GA 31631, owned 12,514.371 (9.12%) of the
outstanding Class C shares of the Georgia Portfolio; Larry S. Leake, 4084
Admiral Drive, Atlanta, GA 31631, owned 12,277.731 (8.95%) of the outstanding
Class C shares of the Georgia Portfolio; Thomas A. Collentine MD and Judith W.
Collentine JTWROS, 1841 Lakehurst Court, Smyrna, GA 30080, owned 9,035.359
shares of the outstanding Class C shares of the Georgia Portfolio; Ben W.
Andrew Hope P. Andrew JTWROS, 3110 Nottaway Ct. NE, Atlanta, GA 30341, owned
7,692.617 (5.61%) of the outstanding Class C shares of the Georgia Portfolio;
Kurt F. Wilkening, 243 Robin Drive, Sarasota, FL 34236, owned 30,965.592
(100%) of the outstanding Class Y shares of the Limited Term Portfolio; James
R. Scheele P.O. Box 2477, Williston, ND 58802, owned 181,280.770 (32.67%) of
the outstanding Class B shares of the National Portfolio; Joseph Mayson, 6615
Glenridge Drive, Atlanta, GA 30328, owned 29,995.027 (5.41%) of the
outstanding Class B shares of the National Portfolio; Raymond P. Kane, 1 North
Court, Port Washington, NY 11050, owned 28,835.323 (5.20%) shares of the
outstanding Class B shares of the National Portfolio; Mr. Abe Simon, 191
Cokesbury Road, PO Box 404, Lebanon, NJ 08833, owned 7,539.079 (5.93%) of the
outstanding Class B shares of the New Jersey Portfolio; Carleton N. Rowe
Margaret T. Rowe JTWROS, 206 Lenape Trail, Wenonah, NJ 08090, owned
19,339.416 (7.53%) of the outstanding Class C shares of the New Jersey
Portfolio; Merel Julia and Martin Leaf, TTEES UAD 2/3/89 Raul Julia Insurance
Trust, C/O Faden & Co., 605 3rd Ave. 11th flr., New York, NY 10158, owned
20,599.007 (5.54%) of the outstanding Class B shares of the New York
Portfolio; SBS Ohio Muni C/O Dahlia McQueen, Treasury Admin, 388 Greenwich
Street 39th Flr., New York, NY 10013, owned 62,761.584 (26.04%) of the
outstanding Class A shares of the Ohio Portfolio; John B. Roderer, 7540 Peters
Pk, Dayton, OH 45414, owned 10,669.983 (5.11%) of the outstanding Class B
shares of the Ohio Portfolio; Plaford E. Meredith, 5063 Waterloo Rd., Atwater,
OH 44201, owned 8,318.847 (14.33%) of the outstanding Class C shares of the
Ohio Portfolio; James A Wilkirson and Carolyn G. Wilkirson JTWROS, 2400
Wimbledon Park Blvd., Toledo, OH 43617, owned 5,185.043 (8.93%) of the
outstanding Class C shares of the Ohio Portfolio; Sandhya R. Nuthakki,
Municipal Bond Account, 4625 Schrubb Dr., Kettering, OH 45429, owned
4,425.086 (7.62%) of the outstanding Class C shares of the Ohio Portfolio;
Nancy L. Schardt, 1648 West Alex-Bell Rd, Dayton, OH 45459, owned 3,582.396
(6.17%) of the outstanding Class C shares of the Ohio Portfolio; James J.
Broussard, 530 Derwyn Rd., Drexel Hill, PA 19026, owned 102,939.291 (14.69%)
of the outstanding Class A shares of the Pennsylvania Portfolio; Murray L.
Katz and Harriet L. Katz JTWROS, 1130 Countryside Drive, Harrisburg, PA
17110, owned 86,904.114 (12.41%) of the outstanding Class A shares of the
Pennsylvania Portfolio; Carol L Shields, Idlewild Farm, 617 Williamson Road,
Bryn Mawr, PA 19010, owned 50,793.026 (7.25%) of the outstanding Class A
shares of the Pennsylvania Portfolio; Nand Todi and Shashi Todi TTEES Todi
Living Trust U/A/D 12/10/93, FBO Nand K. Todi & Shashi P. Todi, 424 Gwynedd
Valley Drive, Gwynedd Valley, PA 19437, owned 43,463.633 (6.20%) of the
outstanding Class A shares of the Pennsylvania Portfolio.
FINANCIAL STATEMENTS
The following information is hereby incorporated by reference to the Fund's
March 31, 1995 Annual Reports to Shareholders:
Page(s) in:
Annual Report
Annual Report of Limited
of National Term
Portfolio Portfolio
Schedules of Investments 7 - 23 7 - 20
Statements of Assets and Liabilities 26 22
Statements of Operations 27 23
Statements of Changes in Net Assets 28 24
Notes to Financial Statements 29-32 25 - 27
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 33-34 28 - 29
Independent Auditors' Report 35 30
Page(s) in:
Annual Report
Annual Report of California,
of Florida & CA Limited Term,
Florida Limited Term CA Money Market
Portfolios Portfolios
Schedules of Investments 10 - 19 12 - 30
Statements of Assets and Liabilities 21 33
Statements of Operations 22 34
Statements of Changes in Net Assets 23 35 - 36
Notes to Financial Statements 24 - 27 37 - 42
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 28-31 43 - 46
Independent Auditor's Report 32 47 - 48
Page(s) in:
Annual Report
of NY &
Annual Report New York
of New Jersey Money Market
Portfolio Portfolios
Schedules of Investments 7 - 11 8 - 18
Statements of Assets and Liabilities 14 21
Statements of Operations 15 22
Statements of Changes in Net Assets 16 23
Notes to Financial Statements 17 - 20 24 - 27
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 21 - 22 28 - 30
Independent Auditors' Report 23 31
Page(s) in:
Annual Report
of Ohio, Georgia
& Pennsylvania
Portfolios
Schedules of Investments 11 - 18
Statements of Assets and Liabilities 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 24 - 28
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 29 - 31
Independent Auditor's Report 32
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
California's economy is the largest among the 50 states. The State's
January 1, 1992 population of 31 million represented approximately 12.0% of
the total United States population. Total employment was about 14 million,
the majority of which was in the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced the
worst economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
have all been severely affected. Job losses have been the worst of any post-
war recession and have continued through the end of 1993. Employment levels
are expected to stabilize before net employment starts to increase and pre-
recession job levels are not expected to be reached for several more years.
Unemployment is expected to remain above 9% through 1994.
The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for
health and welfare programs. The State is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund--K-14
education (kindergarten through community college), health, welfare and
corrections--growing at rates significantly higher than the growth rates for
the principal revenue sources of the General Fund. As a result, the State
entered a period of chronic budget imbalance, with expenditures exceeding
revenues for four of the last five fiscal years. Revenues declined in 1990-91
over 1989-90, the first time since the 1930s. By June 30, 1993, the State's
General Fund had an accumulated deficit, on a budget basis, of approximately
$2.8 billion. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for specific
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to
repay this deficit over two years. The original budget for 1993-94
reflected revenues which exceeded expenditures by a approximately $2.8
billion. As a result of continuing recession, the excess of revenues over
expenditures for the fiscal year is now expected to be only about $500
million. Thus, the accumulated budget deficit at June 30, 1994 is now
estimated by the Department of Finance to be approximately $2 billion, and the
deficit will not be retired by June 30, 1995 as planned. The accumulated
budget deficits over the past several years, together with expenditures for
school funding which have not been reflected in the budget, and the reduction
of available internal borrowable funds, have combined to significantly
depleted the State's cash resources to pay as ongoing expenses. In order to
meet its cash needs, the State has had to rely for several years on a series
of external borrowings, including borrowings past the end of a fiscal year.
The State's tax revenue clearly reflects sharp declines in employment,
income and retail sales on a scale not seen in over 50 years. The May 1994
revision to the 1994-95 Governor's Budget (the "May Revision"), released May
20, 1994, assumes that the State will start recovery from recessionary
conditions in 1994, with a modest upturn beginning in 1994 and continuing into
1995, a year 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 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 current fiscal year commenced on April 1, 1994, and ends in
March 31, 1995, and is referred to herein as the State's 1994-95 fiscal year.
The State's budget for the 1994-95 fiscal year was enacted by the Legislature
on June 7, 1994, more than two months after the start of the fiscal year.
Prior to adoption of the budget, the Legislature enacted appropriations for
disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1994-95 fiscal year was formulated on June 16, 1994 and
is based on the State's budget as enacted by the Legislature and signed into
law by the Governor.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State.
The State Financial Plan is based upon forecasts of national and State
economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. Many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, Federal
financial and monetary policies, the availability of credit, and the condition
of the world economy, which could have an adverse effect on the State. There
can be no assurance that the State economy will not experience results in the
current fiscal year that are worse than predicted, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.
The State Division of the Budget ("DOB") believes that its projections
of receipts and disbursements relating to the current State Financial Plan,
and the assumptions on which they are based, are reasonable. Actual results,
however, could differ materially and adversely from the projections set forth
below, and those projections may be changed materially and adversely from time
to time.
As noted above, the financial condition of the State is affected by
several factors, including the strength of the State and regional economy and
actions of the Federal government, as well as State actions affecting the
level of receipts and disbursements. Owing to these and other factors, the
State may, in future years, face substantial potential budget gaps resulting
from a significant disparity between tax revenues projected from a lower
recurring receipts base and the future costs of maintaining State programs at
current levels. Any such recurring imbalance would be exacerbated if the
State were to use a significant amount of nonrecurring resources to balance
the budget in a particular fiscal year. To address a potential imbalance for
a given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year,
and under the State Constitution the Governor is required to propose a
balanced budget each year. To correct recurring budgetary imbalances, the
State would need to take significant actions to align recurring receipts and
disbursements in future fiscal years. There can be no assurance, however,
that the State's actions will be sufficient to preserve budgetary balance in a
given fiscal year or to align recurring receipts and disbursements in future
fiscal years.
The 1994-95 State Financial Plan contains actions that provide
nonrecurring resources or savings, as well as actions that impose nonrecurring
losses of receipts or costs. It is believed that the net positive effect of
nonrecurring actions represents considerably less than one-half of one percent
of the State's General Fund, an amount significantly lower than the amount
included in the State Financial Plans in recent years; it is believed that
those actions do not materially affect the financial condition of the State.
In addition to those nonrecurring actions, the 1994-95 State Financial Plan
reflects the use of $1.026 billion in the positive cash margin carried over
from the prior fiscal year, resources that are not expected to be available in
the State's 1995-96 fiscal year.
The General Fund is the general operating fund of the State and is used
to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1994-95 fiscal year, the General Fund is expected to
account for approximately 52 percent of total governmental-fund receipts and
51 percent of total governmental-fund disbursements. General Fund moneys are
also transferred to other funds, primarily to support certain capital projects
and debt service payments in other fund types.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
tax and revenue anticipation notes ("TRANs"). First, the national recession,
and then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For
its 1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a
cash basis, with substantial fund balances in each year as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion
in the tax refund reserve account, $265 million in its Contingency Reserve
Fund ("CRF") and $134 million in its Tax Stabilization Reserve Fund. These
fund balances were primarily the result of an improving national economy,
State employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income
tax refund reserve have the effect of reducing reported personal income tax
receipts in the fiscal year when made and withdrawals from such reserve
increase receipts in the fiscal year when made. The balance in the tax refund
service account will be used to pay taxpayer refunds, rather than drawing from
1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account,
$1.026 billion was available for budgetary planning purposes in the 1994-95
fiscal year. The remaining $114 million will be redeposited in the tax refund
reserve account at the end of the State's 1994-95 fiscal year to continue the
process of restructuring the State's cash flow as part of the Local Government
Assistance Corporation ("LGAC") program. The balance in the CRF will be used
to meet the cost of litigation facing the State. The Tax Stabilization
Reserve Fund may be used only in the event of an unanticipated General Fund
cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund service account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of
this variance, and more than offset weaker-than-projected collections from
the sales and use tax and miscellaneous receipts. Collections from individual
taxes were affected by various factors including changes in Federal business
laws, sustained profitability of banks, strong performance of securities
firms, and higher-than-expected consumption of tobacco products following
price cuts.
Disbursements and transfers from the General Fund were $303 million
below the level projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which
in the April 1993 State Financial Plan were planned to be deferred into the
1994-95 fiscal year. Compared to the estimates included in the State Financial
Plan formulated in April 1993, lower disbursements resulted from lower
spending for Medicaid, capital projects, and debt service (due to refundings)
and $114 million used to restructure the State's cash flow as part of the LGAC
program. Disbursements were higher-than-expected for general support for
public schools, the State share of income maintenance, overtime for prison
guards, and highway snow and ice removal.
In certain prior fiscal years, the State has failed to enact a budget
prior to the beginning of the State's fiscal year. A delay in the adoption of
the State's budget beyond the statutory April 1 deadline and the resultant
delay in the State's Spring borrowing has in certain prior years delayed the
projected receipt by the City of State aid, and there can be no assurance that
State budgets in the future fiscal years will be adopted by the April 1
statutory deadline.
The State has noted that its forecasts of tax receipts have been subject
to variance in recent fiscal years. As a result of these uncertainties and
other factors, actual results could differ materially and adversely from the
State's current projections and the State's projections could be materially
and adversely changed from time to time. There can be no assurance that the
State will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain State
programs at current levels. To address any potential budgetary imbalance, the
State may need to take significant actions to align recurring receipts and
disbursements in future fiscal years.
Ratings on general obligation bonds of the State of New York were
lowered by Standard & Poor's Corporation and Moody's Investors Service during
1990 from AA- to A and Aa to A, respectively. On January 6, 1992, Moody's
Investors Service lowered its rating on certain appropriations-backed debt of
New York State to Baa1 from A. The agency cited the failure of Governor Mario
M. Cuomo and New York State lawmakers to close New York's current year budget
gap. Moody's Investors Services also placed the general obligation, State
guaranteed and New York local Municipal Assistance Corporation Bonds under
review for possible downgrade in coming months. In addition, on January 13,
1992, Standard & Poor's Corporation lowered its rating on general obligation
debt and guaranteed debt to A- from A. Standard & Poor's Corporation also
downgraded its rating on variously rated debt, State moral obligations,
contractual obligations, lease purchase obligations and other State
guarantees. Additional reductions in ratings could result in a loss to Unit
holders.
As of March 31, 1994, the State had approximately $5.370 billion in
general obligation bonds, excluding refunding bonds and $294 million in bond
anticipation notes outstanding. On May 24, 1993, the State issued $850
million in tax and revenue anticipation notes, all of which matured on
December 31, 1993. Principal and interest due on general obligation bonds and
interest due on bond anticipation notes and on tax and revenue anticipation
notes were $782.5 million for the 1993-94 fiscal year, and are estimated to be
$786.3 million for the 1994-95 fiscal year. These figures do not include
interest on refunding bonds issued in July 1992, to the extent that such
interest is to be paid from escrowed funds.
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 has plummeted by
approximately 360,000 jobs since 1987. But, after nearly five years of
decline, the City appears to be on the verge of a broad-based recovery which
will lift many sectors of the local economy. Most of the nascent local
recovery can be attributed to the continued improvement in the U.S. economy,
but a great deal of the strength expected in the City economy will be due to
local factors, such as the heavy concentration of the securities and banking
industries in the City. The current forecast calls for modest employment
growth of about 20,000 a year (0.6 percent) on average through 1998 with some
slowing but still positive growth in employment in 1995-96 as U.S. growth
slows (local job gains slow from 25,000 to around 10,000 per year).
During the most recent economic downturn, the City has faced recurring
extraordinary budget gaps that have been addressed by undertaking one-time,
one-shot budgetary initiatives to close then projected gaps in order to
achieve a balanced budget as required by the laws of the State. For example,
in order to achieve a balanced budget for the 1992 fiscal year, the City
increased taxes and reduced services during the 1991 fiscal year to close a
then projected gap of $3.3 billion in the 1992 fiscal year which resulted
from, among other things, lower than expected tax revenue of approximately
$1.4 billion, reduced State aid for the City of approximately $564 million and
greater than projected increases in legally mandated expenditures of
approximately $400 million, including public assistance and Medicare
expenditures. The gap-closing measures for fiscal year 1992 included receipt
of $605 million from tax increases, approximately $1.5 billion of proposed
service reductions and proposed productivity savings of $545 million.
Notwithstanding its recurring projected budget gaps, for fiscal years
1981 through 1993 the City achieved balanced operating results (the City's
General Fund revenues and transfers reduced by expenditures and transfers), as
reported in accordance with Generally Accepted Accounting Principles ("GAAP"),
and the City's 1994 fiscal year results are projected to be balanced in
accordance with GAAP.
The City's ability to maintain balanced budgets in the future is subject
to numerous contingencies; therefore, even though the City has managed to
close substantial budget gaps in recent years in order to maintain balanced
operating results, there can be no assurance that the City will continue to
maintain a balanced budget as required by State law without additional tax or
other revenue increases or reduction in City services, which could adversely
affect the City's economic base.
Pursuant to the laws of the State, the City prepares an annual four-year
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections. The City is
required to submit its financial plans to review bodies, including the New
York State Financial Control Board ("Control Board"). If the City were to
experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood and imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the
public credit markets to satisfy the City's capital and seasonal financing
requirements, the Control Board would be required by State law to exercise
powers, among others, of prior approval of City financial plans, proposed
borrowings and certain contracts.
1995-1998 Financial Plan. On July 8, 1994, the City submitted to the
Control Board the Financial Plan for the 1995-1998 fiscal years (the "1995-
1998 Financial Plan or "Financial Plan"), which relates to the City, the Board
of Education ("BOE") and the City University of New York ("CUNY"). The
Financial Plan is based on the City's expense and capital budgets for the
City's 1995 fiscal year, which were adopted on June 23, 1994.
The 1995-1998 Financial Plan projects revenues and expenditures for the
1995 fiscal year balanced in accordance with GAAP. The projections for the
1995 fiscal year reflect proposed actions to close a previously projected gap
of approximately $2.3 billion for the 1995 fiscal year, which include City
actions aggregating $1.9 billion, a $288 million increase in State actions
over the 1994 and 1995 fiscal years, and a $200 million increase in Federal
assistance. The City actions include proposed agency actions aggregating $1.1
billion, including productivity savings; tax and fee enforcement initiatives;
service reductions; and savings from the restructuring of City services. City
actions also include savings of $45 million resulting from proposed tort
reform, the projected transfer to the 1995 fiscal year of $171 million of the
projected 1994 fiscal year surplus, savings of $200 million for employee
health care costs, $51 million in reduced pension costs, savings of $225
million from refinancing City bonds and $65 million from the proposed sale of
certain City assets. The proposed savings for employee health care costs are
subject to collective bargaining negotiation with the City's unions; the
proposed savings from tort reform will require the approval of the State
Legislature; and the $200 million increase in Federal assistance is subject to
approval by Congress and the President.
The Financial Plan also set forth projections for the 1996 through 1998
fiscal years and outlines a proposed gap-closing program to close projected
gaps of $1.5 billion, $2.0 billion and a $2.4 billion for the 1996 through
1998 fiscal years, respectively, after successful implementation of the $2.3
billion gap-closing program for the 1995 fiscal year.
The projections for the 1996 through 1998 fiscal years assume the
extension by the State Legislature of the 14% personal income tax surcharge
beyond calendar year 1995 and extension of the 12.5% personal income tax
surcharge beyond calendar year 1996, resulting in combined revenues of $159
million, $633 million and $920 million in the 1996, 1997 and 1998 fiscal
years, respectively. However, as part of the tax reduction program reflected
in the Financial Plan, the City is proposing the elimination of the 12.5%
personal income tax surcharge when it expires at a cost of $184 million in
fiscal year 1997 and $455 million in fiscal year 1998. The proposed gap-
closing actions include City actions aggregating $1.2 billion, $1.5 billion
and $1.7 billion in the 1996 through 1998 fiscal years, respectively; $275
million, $375 million and $525 million in proposed additional State actions in
the 1996 through 1998 fiscal years, respectively, primarily from the proposed
State assumption of certain Medicaid costs; and $100 million and $200 million
in proposed additional Federal assistance in the 1997 and 1998 fiscal years,
respectively. The proposed additional City actions, a substantial number of
which are unspecified, include additional spending reductions, the reduction
of City personnel through attrition, government efficiency initiatives,
procurement initiatives, labor productivity initiatives, and the proposed
privatization of City sewage treatment plants. Certain of these initiatives
may be subject to negotiation with the City's municipal unions. Various
actions proposed in the Financial Plan for the 1996-1998 fiscal years,
including the proposed state actions, are subject to approval by Congress and
the President. The State Legislature has in previous legislative sessions
failed to approve certain of the City's proposals for the State assumption of
certain Medicaid costs and mandate relief, thereby increasing the uncertainty
as to the receipt of the State assistance included in the Financial Plan. In
addition, the Financial Plan assumes the continuation of the current
assumption with respect to wages for City employees and the assumed 9%
earnings on pension fund assets for the 1994 fiscal year are expected to be
substantially below the 9% assumed rate, which will increase the City's future
pension contributions. In addition, a review of the pension fund earnings
assumptions is currently being conducted which could further increase the
City's future pension contributions. In addition, a review of the pension fund
earnings assumptions is currently being conducted which could further increase
the City's future pension contributions by a substantial amount.
The City expects that tax revenue for the 1994 fiscal year will be
approximately $65 million less than forecast in the 1994 Modification,
primarily due to shortfalls in the personal income tax and sales tax, and that
expenditures will be approximately $25 million greater than forecast.
Accordingly, the $171 million of the projected surplus for the 1994 fiscal
year, which is currently projected in the 1994 Modification and the Financial
Plan to be transferred to the 1995 fiscal year will decrease to 81 million. As
a result, the City will reduce expenditures for the 1995 fiscal year to offset
this decrease, which is expected to be reflected in the first quarter
modification to the Financial Plan. In addition, the Financial Plan assumes
that a special session of the State Legislature, which may take place in the
near future, will enact, and the Governor will sign, State legislation
relating to the proposed tort reform, which would save the City $45 million in
payments for tort liability in fiscal year 1995, and certain anticipated
improvements in fine and fee collections forecast to earn $25 million in City
revenue in fiscal year 1995, and that the State Legislature will not enact
proposed legislation mandating additional pension benefits for City retirees
costing the City approximately $200 million annually. To address these and
other possible contingencies, on July 11, 1994, the Mayor stated that he will
reserve $100 million from authorized spending by City agencies in fiscal year
1995 in addition to the existing general reserves of $150 million. In
addition, the City has identified a $360 million contingency program for the
1995 fiscal year, primarily consisting of layoffs and service reductions.
Actions to Close the Gaps. The 1995-1998 Financial Plan reflects a
program of proposed actions by the City, State and Federal governments to
close the gaps between projected revenues and expenditures of $1.5 billion,
$2.0 billion and $2.4 billion for the 1996, 1997 and 1998 fiscal years,
respectively.
City gap-closing actions total $1.2 billion in the 1996 fiscal year,
$1.5 billion in the 1997 fiscal year and $1.7 billion in the 1998 fiscal year.
These actions, a substantial number of which are unspecified, include
additional spending reductions, aggregate $501 million, $598 million and $532
million in the 1996 through 1998 fiscal years, respectively; government
efficiency initiatives aggregating $50 million, $100 million and $150 million
in the 1996 through 1998 fiscal years, respectively; labor productivity
initiatives, aggregating $250 million in each of the 1996 through 1998 fiscal
years; and a proposed privatization of City sewage treatment plants which
would result in revenues of $200 million in each of the 1996 through 1998
fiscal years. Certain of these initiatives may be subject to negotiation with
the City's municipal unions.
State actions proposed in the gap-closing program total $275 million,
$375 million and $525 million in each of the 1996, 1997 and 1998 fiscal years,
respectively. These actions include savings primarily from the proposed State
assumption of certain Medicaid costs.
The Federal actions proposed in the gap-closing program are $100 million
and $200 million in increased Federal assistance in fiscal years 1997 and
1998, respectively.
Various actions proposed in the Financial Plan, including the proposed
increase in State aid, are subject to approval by the Governor and the State
Legislature, and the proposed increase in Federal aid is subject to approval
by Congress and the President. State and Federal actions are uncertain and no
assurance can be given that such actions will in fact be taken or that the
savings that the City projects will result from these actions will be
realized. The State Legislature failed to approve a substantial portion of the
proposed State assumption of Medicaid costs in the last session. The Financial
Plan assumes that these proposals will be approved by the State Legislature
during the 1995 fiscal year and that the Federal government will increase its
share of funding for the Medicaid program. If these measures cannot be
implemented, the City will be required to take other actions to decrease
expenditures or increase revenues to maintain a balanced financial plan.
Although the City has maintained balanced budgets in each of its last
thirteen years, and is projected to achieve balanced operating results for the
1993 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the
City will maintain a balanced budget in future years without additional State
aid, revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.
Assumptions. The 1995-1998 Financial Plan is based on numerous
assumptions, including the continuing improvement in the City's and the
region's economy and a modest employment recovery during calendar year 1994
and the concomitant receipt of economically sensitive tax revenues in the
amounts projected. The 1995-1998 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent,
if any, to which wage increases for City employees exceed the annual increases
assumed for the 1995 through 1998 fiscal years; continuation of the 9%
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State, in the context,
of the State's current financial condition, to provide the aid contemplated by
the Financial Plan and to take various other actions to assist the City,
including the proposed State takeover of certain Medicaid costs and State
mandate relief; the ability of HHC, BOE and other such agencies to maintain
balanced budgets; the willingness of the Federal government to provide Federal
aid; approval of the proposed continuation of the personal income tax
surcharge; adoption of the City's budgets by the City Council in substantially
the forms submitted by the Mayor; the ability of the City to implement
proposed reductions in City personnel and other cost reduction initiatives,
which may require in certain cases the cooperation of the City's municipal
unions, and the success with which the City controls expenditures; savings for
health care costs for City employees in the amounts projected in the Financial
Plan; additional expenditures that may be incurred due to the requirements of
certain legislation requiring minimum levels of funding for education; the
impact on real estate tax revenues of the current weakness in the real estate
market; the City's ability to market its securities successfully in the public
credit markets; the level of funding required to comply with the Americans
with Disabilities Act of 1990; and additional expenditures that may be
incurred as a result of deterioration in the condition of the City's
infrastructure.
The projections and assumptions contained in the 1995-1998 Financial
Plan are subject to revision which may involve substantial change, and no
assurance can be given that these estimates and projections, which include
actions which the City expects will be taken but which are not within the
City's control, will be realized.
Certain Reports. From time to time, the Control Board staff, the City
Comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City
to eliminate projected operating deficits. Some of these reports and
statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the
City may not have adequately provided for future contingencies. Certain of
these reports have analyzed the City's Future economic and social conditions
and have questioned whether the City has the capacity to generate sufficient
revenues in the future to meet the costs of its expenditure increases and to
provide necessary services.
On March 1, 1994, the City Comptroller issued a report on the state of
the City's economy. The report concluded that, while the City's long recession
is over, moderate growth is the best the City can expect, with the local
economy being held back by continuing weakness in important international
economies.
On July 11, 1994, the City Comptroller issued a report on the City's
adopted budget for the 1995 fiscal year. The City Comptroller stated that if
none of the uncertain proposals are implemented, the total risk could be as
much as $763 million to $1.02 billion. risks which were identified as
substantial risks include a possible $208 million to $268 million increase in
overtime costs; approval by the State Legislature of a tort reform program to
limit damage claims against the City, which would result in savings of $45
million; the $65 million proceeds from a proposed asset sale; additional
expenditures at Health and Hospitals Corporation totaling $60 million; and $60
million of increased pension contributions resulting from lower than assumed
pension fund earnings. Additional possible risks include obtaining the
agreement of municipal unions to the proposed reduction in City expenditures
for health care costs by $200 million; uncertainties concerning the assumed
improvement in the collection of taxes, fines and fees totaling $75 million;
and uncertainty concerning the receipt of the $200 million of increased
Federal aid projected for the 1995 fiscal year. The City Comptroller noted
that there are a number of additional issues, including possible larger than
projected expenditures for foster care and public assistance and the receipt
of $100 million from assumed FICA refunds. The City Comptroller has also
stated in a report issued on June 8, 1994 that certain of the reductions in
personnel and services proposed in the City's financial plan submitted to the
Control Board on May 10, 1994 (the "May Financial Plan") will have long-term
and, in some cases, severe consequences for City residents.
In addition, on July 11, 1994, the private members of the Control Board,
Robert R. Kiley, Heather L. Ruth and Stanley S. Shuman, issued a statement
which concluded that the 1995 fiscal year is not reasonably balanced and that
further budget cuts are unavoidable in the next six months. In addition, the
private members stated that the Financial Plan does not set forth a path to
structural balance. The private members stated that, in order to achieve this
goal, City managers must be given fiscal targets they can be expected to meet;
solid new proposals must be developed that back up the savings the City has
committed to achieve to balance future budgets; and the deferral of expenses
to future years, through actions such as the sale of property tax receivables,
stretching out pension contributions and delaying debt service payments
through refundings, must stop. On July 11, 1994, the Control Board staff
stated that the City faces risks of greater than $1 billion and $2 billion for
the 1995 and 1996 fiscal years, respectively, and risks of approximately $3
billion for each of the 1997 and 1998 fiscal years.
Substantially all of the City's full-time employees are members of labor
unions. The Financial Emergency Act requires that all collective bargaining
agreements entered into by the City and the Covered Organizations be
consistent with the City's current financial plan, except under certain
circumstances, such as awards arrived at through impasse procedures.
On January 11, 1993, the City announced a settlement with a coalition of
municipal unions, including Local 237 of the International Brotherhood of
Teamsters ("Local 237"), District 37 of the American Federation of State,
County and Municipal Employees ("District Council 37") and other unions
covering approximately 44% of the City's workforce. The settlement, which has
been ratified by the unions, includes a total net expenditure increase of
8.25% over a 39-month period, ending March 31, 1995 for most of these
employees. On April 9, 1993 the City announced an agreement with the Uniformed
Fire Officers Association (the "UFOA") which is consistent with the coalition
agreement. The agreement has been ratified. The Financial Plan reflects the
costs associated with these settlements and provides for similar increases for
all other City-funded employees.
The Financial Plan provides no additional wage increases for City
employees after their contracts expire in the 1995 and 1996 fiscal years.
Each 1% wage increase for all employees commencing in the 1995 and 1996 fiscal
years would cost the City an additional $130 million for the 1995 fiscal year
and $140 million for the 1996 fiscal year and $150 million each year
thereafter above the amounts provided for in the Financial Plan.
The terms of eventual wage settlements could be determined through the
impasse procedure in the New York City Collective Bargaining Law, which can
impose a binding settlement.
New York City Indebtedness. Outstanding indebtedness having an initial
maturity greater than one year from the date of issuance of the City as of
March 31, 1994 was $21,290,000 compared to $19,624,000 as of March 31, 1993.
A substantial portion of the capital improvement in the City are
financed by indebtedness issued by the Municipal Assistance Corporation of the
City of New York ("MAC"). MAC was organized in 1975 to provide financing
assistance for the City and also to exercise certain review functions with
respect to the City's finances. MAC bonds are payable out of certain State
sales and compensating use taxes imposed within the City, State stock transfer
taxes and per capita State aid to the City. Any balance from these sources
after meeting MAC debt service and reserve fund requirements and paying MAC's
operating expenses is remitted to the City or, in the case of stock transfer
taxes, rebated to the taxpayers. The State is not, however, obligated to
continue the imposition of such taxes or to continue appropriation of the
revenues therefrom to MAC, nor is the State obligated to continue to
appropriate the State per capita aid to the City which would be required to
pay the debt service on certain MAC obligations. MAC has not taxing power and
MAC bonds do not create an enforceable obligation of either the State or the
City. As of March 31, 1994, MAC had outstanding an aggregate of approximately
$4.071 billion of its bonds compared to $4.470 billion as of March 31, 1993.
On February 11, 1991, Moody's Investors Service lowered its rating on
the City's general obligation bonds from A to Baa1. On July 2, 1993, Standard
& Poor's reconfirmed its A- rating of City bonds, continued its negative
rating outlook assessment and stated that maintenance of such ratings depended
upon the City's making further progress towards reducing budget gaps in the
outlying years. In January 1995, Standard & Poor's reconfirmed its negative
outlook and placed it on CreditWatch because of the City's accounting methods.
On July 10, 1995, Standard & Poor's Ratings Group ("Standard & Poor's")
downgraded its rating on New York City's $23 billion of outstanding general
obligation bonds to "BBB+" from "A-", citing to the City's chronic structural
budget problems and weak economic outlook. Standard & Poor's stated that New
York City's reliance on one-time revenue measures to close annual budget gaps,
a dependence on unrealized labor savings, overly optimistic estimates of
revenues and state and federal aid and the City's continued high debt levels
also contributed to its decision to lower the rating.
Litigation
The State is the subject of numerous legal proceedings relating to State
finances, State programs and miscellaneous tort, real property and contract
claims in which the State is a defendant and where monetary damages sought are
substantial. These proceedings could adversely affect the financial condition
of the State in the 1994-95 fiscal years or thereafter.
In addition to the proceedings noted below, the State is party to other
claims and litigation which its legal counsel has advised are not probable of
adverse court decisions. Although the amounts of potential losses, if any are
not presently determinable, it is the State's opinion that its ultimate
liability in these cases is not expected to have a material adverse effect on
the State's financial position in the 1994-95 fiscal year or thereafter.
APPENDIX D
The following information is a summary of special factors affecting New Jersey
municipal obligations. It does not purport to be a complete description and
is based on information from statements relating to securities offerings of
New Jersey issuers.
Additional Discussion of Special Factors Relating to New Jersey Municipal
Obligations
Risk Factors: Prospective investors should consider the recent
financial difficulties and pressures which the State of New Jersey (the
"State") and certain of its public authorities have undergone.
The State's 1995 fiscal year budget became law on June 30, 1994.
Reflecting the downturn, the rate of unemployment in the State rose from
a low of 3.6% during the first quarter of 1989 to a recessionary peak of 9.3%
during 1992. Since then, the unemployment rate fell to 6.7% during the fourth
quarter of 1993. The jobless rate averaged 7.1% during the first nine months
of 1994, but this estimate is not comparable to those prior to January
because of major changes in the federal survey from which these statistics are
obtained.
In the first nine months of 1994, relative to the same period a year
ago, job growth took place in services (3.5%) and construction (5.7%), more
moderate growth took place in trade (1.9%), transportation and utilities
(1.2%) and finance/insurance/real estate (1.4%), while manufacturing and
government declined by 1.5% and 0.1%, respectively. The net result was a 1.6%
increase in average employment during the first nine months of 1994 compared
to the first nine months of 1993.
The economic recovery is likely to be slow and uneven in both New Jersey
and the nation. Some sectors, like commercial and industrial construction,
will undoubtedly lag because of continued excess capacity. Also, employers in
rebounding sectors can be expected to remain cautious about hiring until they
become convinced that improved business will be sustained. Other firms will
continue to merge or downsize to increase profitability. As a result, job
gains will probably come grudgingly and unemployment will recede at a
corresponding slow pace.
Pursuant to the State Constitution, no money may be drawn from the State
Treasury except for appropriations made by law. In addition, all monies for
the support of State purposes must be provided for in one general
appropriation law covering one and the same fiscal year.
In addition to the Constitutional provisions, the New Jersey statutes
contain provisions concerning the budget and appropriation system. Under
these provisions, each unit of the State requests an appropriation from the
Trustee of Division of Budget and Accounting, who reviews the budget requests
and forwards them with his recommendation to the Governor. The Governor then
transmits his recommended expenditures and sources of anticipated revenue to
the legislature, which reviews the Governor's Budget Message and submits an
appropriations bill to the Governor for his signing by July 1 of each year.
At the time of signing the bill, the Governor may revise appropriations or
anticipated revenues. That action can be reversed by a two-thirds vote of
each House. No supplemental appropriation may be enacted after adoption of
the act, except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet the appropriation. Finally, the Governor
may, during the course of the year, prevent the expenditure of various
appropriations when revenues are below those anticipated or when he determines
that such expenditure is not in the best interest of the State.
One of the major reasons for cautious optimism is found in the
construction industry. Total construction contracts awarded in New Jersey have
turned around, rising by 8.6% in 1993 compared with 1992. By far, the largest
boost came from residential construction awards which increased by 37.7% in
1993 compared with 1992. In addition, non residential building construction
awards have turned around, posting a 6.9% gain.
Nonbuilding construction awards increased approximately 4% in the first
eight months of 1994 compared with the same period in 1993.
Finally, even in the labor market there are signs of recovery. Thanks to
a reduced layoff rate and the reappearance of job opportunities in some parts
of the economy, unemployment in the State has been receding since July 1992,
when it peaked at 9.6% according to U.S. Bureau of Labor Statistics estimates
based on the federal government's monthly household survey. The same survey
showed joblessness dropped to an average of 6.7% in the fourth quarter of
1993. The unemployment rate registered an average of 7.8% in the first quarter
of 1994, but this rate cannot be compared with prior data due to the changes
in the U.S. Department of Labor procedures fir determining the unemployment
rate that went into effect in January 1994.
State Aid to Local Governments is the largest portion of fiscal year
1995 appropriations. In fiscal year 1995, $5,782.2 million of the State's
appropriations consisted of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriation, in the
amount of $3,900.1 million, was provided for local elementary and secondary
education programs. Of this amount, $2,431.6 million is provided as
foundation aid to school districts by formula based upon the number of
students and the ability of a school district to raise taxes from its own
base. In addition, the State provided $582.5 million for special education
programs for children with disabilities. A $293 million program was also
funded for pupils at risk of educational failure, including basic skills
improvement. The State appropriated $474.8 million on behalf of school
districts as the employer share of the teachers' pension and benefits
programs, $263.8 million to pay for the cost of pupil transportation and $57.4
million for transition aid, which guaranteed school districts a 6.5% increase
over the aid received in fiscal year 1991 and is being phased out over six
years.
Appropriations to the Department of Community Affairs total $635.1
million in State Aid monies for fiscal year 1995. The principal programs
funded were the Supplemental Municipal Property Tax Act ($314.1 million); the
Municipal Revitalization Program ($165.0 million); municipal aid to urban
communities to maintain and upgrade municipal services ($40.7 million); and
the Safe and Clean Neighborhoods Program ($58.9 million). Appropriations to
the State Department of the Treasury total $321.3 million in State Aid monies
for fiscal year 1995. The principal programs funded by these appropriations
were payments under the Business Personal Property Tax Replacement Programs
($158.7 million); the cost of senior citizens, disabled and veterans property
tax deductions and exemptions ($41.7 million); aid to densely populated
municipalities ($25.0 million); Municipal Purposes Tax Assistance ($30.0
million); and payments to municipalities for services to state owned property
($34.9 million).
Other appropriations of State aid in fiscal year 1995 include: welfare
programs ($499.1 million); aid to county colleges ($123.6 million); and aid to
county mental hospitals ($79.4 million).
The second largest portion of appropriations in fiscal 1995 is applied
to Direct State Services: the operation of State government's 17 departments,
the Executive Office, several commissions, the State Legislature and the
Judiciary. In fiscal 1995, appropriations for Direct State Services aggregate
$5,203.1 million. Some of the major appropriations for Direct State Services
during fiscal 1995 are detailed below.
$595.3 million was appropriated for programs administered by the
Department of Human Services. The Department of Labor is appropriated $51.4
million for the administration of programs for workers' compensation,
unemployment and disability insurance, manpower development, and health safety
inspection.
$27.7 million is appropriated for administration of the Medicaid and
pharmaceutical assistance to the aged and disabled programs; $14.9 million for
administration of the various income maintenance programs, including Aid to
Families with Dependent Children(AFDC); $69.3 million for the Division of
Youth and Family Services, which protects the children of the State from abuse
and neglect and $15.0 million for juvenile community programs which serves
juveniles who have violated the laws of the State and have been committed to
the Juvenile Services Division.
The Department of Health was appropriated $32.3 million for the
prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities, and the uncompensated care program.
$689.3 million was appropriated to the Department of Higher Education
for the support of eight State colleges, Rutgers University, the New Jersey
Institute of Technology, and the University of Medicine and Dentistry of New
Jersey.
$932.6 million was appropriated to the Department of Law and Public
Safety and the Department of Corrections.
$92.3 million was appropriated to the Department of Transportation for
the various programs it administers, such as the maintenance and improvement
of the State highway systems and subsidies for railroads and bus companies.
$176.6 million was appropriated to the Department of Environmental
Protection for the protection of air, land, water, forest, wildlife and
shellfish resources and for the provision of outdoor recreational facilities.
The primary method for State financing of capital projects is through
the sale of the general obligation bonds of the State. These bonds are backed
by the full faith and credit of the State. State tax revenues and certain
other fees are pledged to meet the principal and interest payments required to
pay the debt fully. No general obligation debt can be issued by the State
without prior voter approval, except that no voter approval is required for
any law authorizing the creation of a debt for the purpose of refinancing all
or a portion of outstanding debt of the State, so long as such law requires
that the refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November, 1975, and is charged with the preparation of the
State Capital Improvement Plan, which contains proposals for State spending
for capital projects.
The aggregate outstanding general obligation bonded indebtedness of the
State as of June 30, 1993 was $3.549.7 billion. The debt service obligation
for outstanding indebtedness is $119.9 million for fiscal year 1994.
Aside from its general obligation bonds, the State's "moral obligation"
backs certain obligations issued by the New Jersey Housing and Mortgage
Finance Agency, the South Jersey Port Corporation (the "Corporation") and the
Higher Education Assistance Authority. As of June 30, 1992, there was
outstanding in excess of $1 billion of moral obligation bonded indebtedness
issued by such entities, for which the maximum annual debt service was over
$101 million as of such date. The State provides the Corporation with funds
to cover debt service and property tax requirements when earned revenues are
anticipated to be insufficient to cover these obligations. For the calendar
years 1986 through 1992, the State has appropriated $12,237,565.00 to cover
property tax shortfalls of the Corporation.
At any given time, there are various numbers of claims and cases pending
against the State, State Agencies and employees, seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the Tort
Claims Act, N.J.S.A. 59:1-1 et seq. In addition, at any given time there are
various contract claims against the State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for these
claims and cases. An independent study estimated an aggregate potential
exposure of $50 million for claims pending, as of January 1, 1982. It is
estimated that were a similar study made of claims currently pending, the
amount of such estimated exposure would be somewhat higher. New Jersey is
involved in a number of lawsuits in which adverse decisions could materially
affect revenues or expenditures. Such cases include challenges to its system
of educational funding, the methods by which the State Department of Human
Services shares with county governments the maintenance recoveries and costs
for residents in State psychiatric hospitals and residential facilities for
the developmentally disabled.
Other lawsuits that could materially affect revenue or expenditures
include a suit by a number of taxpayers seeking refunds of taxes paid to the
Spill Compensation Fund pursuant to N.J.S.A. 58:10-23.11; a suit alleging that
unreasonably low Medicaid payment rates have been implemented for long-term
care facilities in New Jersey; a suit alleging unfair taxation on interstate
commerce; a suit by Essex County seeking to invalidate the State's method of
funding the medical system and a suit seeking return of moneys paid by various
counties for maintenance of Medicaid or Medicare eligible residents of
institutions and facilities for the developmentally disabled, and a suit
challenging the imposition of premium tax surcharges on insurers doing
business in New Jersey, and assessments upon property and casualty liability
insurers pursuant to the Fair Automobile Insurance Reform Act.
Legislation approved June 30, 1992, effective immediately, called for
revaluation of several public employee pension funds, authorized an adjustment
to the assumed rate of return on investment and refunds $773 million in public
employer contributions to the State from various pension funds, to be
reflected as a revenue source for Fiscal Year 1992 and $226 million in Fiscal
Year 1993 and each fiscal year thereafter. Several labor unions filed suit
seeking a judgment directing the State Treasurer to refund all monies
transferred from the pension funds and paid into the General Fund. An adverse
determination would have a significant impact on Fiscal Years 1992 and 1993
revenue estimates.
Bond Ratings: Citing a developing pattern of reliance on non-recurring
measures to achieve budgetary balance, four years of financial operations
marked by revenue shortfalls and operating deficits, and the likelihood that
financial pressures will persist, on August 24, 1992 Moody's lowered from Aaa
to Aa1 the rating assigned to New Jersey general obligation bonds. Currently,
Standard & Poor's rates New Jersey general obligation bonds AA+. On July 6,
1992, Standard & Poor's affirmed its AA+ ratings on New Jersey's general
obligation and various lease and appropriation backed debt, but its ratings
outlook was revised to negative for the longer term horizon (beyond four
months) for resolution of two items: (i) the Federal Health Care Facilities
Administration ruling concerning retroactive Medicaid hospital reimbursements
and (ii) the State's uncompensated health care funding system, which is under
review in the U.S. Supreme Court.
APPENDIX E
The following information is a summary of special factors affecting Florida
municipal obligations. It does not purport to be a complete description and
is based on information from statements relating to securities offerings of
Florida issuers.
Additional Discussion of Special Factors Relating to Florida Municipal
Obligations
In 1980, Florida was the seventh most populous state in the U.S. The
State has grown dramatically since then an as of April 1, 1993, ranks fourth
with an estimated population of 13.5 million. Florida's attraction, as both a
growth and retirement state, has kept net migration fairly steady with an
average of 292,988 new residents a year from 1983 through 1993. The U.S.
average population increase since 1982 is about 1% annually, while Florida's
average annual rate of increase is about 2.5%. Florida continues to be the
fastest growing of the ten largest states. This strong population growth is
one reason the State's economy is performing better than the nation as a
whole. In addition to attracting senior citizens to Florida as a place for
retirement, the State is also recognized as attracting a significant number of
working age individuals. Since 1983, the prime working age population (18-44)
has grown at an average annual rate of 2.6%. The share of Florida's total
working age population (18-59) to total State population is approximately 54%.
This share is not expected to change appreciably into the twenty-first
century.
The State's personal income has been growing strongly the last several
years and has generally out performed both the U.S. as a whole and the
southeast in particular, according to the U.S. Department of Commerce and the
Florida Consensus Economic Estimating Conference. This is due to the fact that
Florida's population has been growing at a very strong pace and, since the
early 70's the State's economy has diversified so as to provide greater
insulation from national economic downturns. As a result, Florida's real per
capita personal income has tracked closely with the national average and has
tracked above the southeast. From 1984 through 1993, the State's real per
capita income rose an average 5.4% a year, while the national real per capita
income increased at an average 5.5%.
Because Florida has a proportionately greater retirement age population,
property income (dividends, interest and rent) and transfer payments (Social
Security and pension benefits among other sources of income) are relatively
more important sources of income. For example, Florida's total wages and
salaries and other labor income in 1993 was 62% of total personal income,
while a similar figure for the nation for 1990 was 72%. Transfer payments are
typically less sensitive to the business cycle than employment income and,
therefore, act as stabilizing forces in weak economic periods.
The State's per capita personal income in 1993 of $20,857 was slightly
above the national average of $20,817 and significantly ahead of that for the
southeast United States, which was $18,753. Real personal income in the State
is estimated to increase 4.5% in 1994-95 and 4.2% in 1995-96. By the end of
1995-96, real personal income per capita in the State is projected to average
4.5% higher than its 1993-94 level.
Since 1980, the State's job creation rate is well over twice the rate
for the nation as a whole, and its growth rate in new non-agricultural jobs is
the fastest of the 11 most populous states and second only to California in
the absolute number of new jobs created. Contributing to the State's rapid
rate of growth in employment and income is international trade. In addition,
since 1980, the State's unemployment rate has generally tracked below that of
the Nation's unemployment rate. However, as the State's economic growth has
slowed from its previous highs, the State's unemployment rate has tracked
above the national average. The average rate in Florida since 1980 has been
6.5% while the national average is 7.1%. According to the U.S. Department of
Commerce, the Florida Department of Labor and Employment Security, and the
Florida Consensus Economic Estimating Conference (together the
"Organization") the State's unemployment rate was 8.2% during 1992. As of
January 1994, the Organization estimates that the unemployment rate will be
6.7% for 1993-94 and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector has exceeded
that of the U.S. From the beginning of 1980 through 1993, the state added over
50,100 new manufacturing jobs, an 11.7% increase. During the same period,
national manufacturing employment declined ten out of the fourteen years, for
a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 2.7% in
1993-94 and rise 3.8% in 1994-95. Trade and services, the two largest, account
for more than half of the total non-farm employment. Employment in the service
sectors should experience an increase of 5.4% in 1994-95, while growing 4.7%
in 1995-96. Trade is expected to expand 3.1% in 1995 and 3.2% in 1996. The
service sector is now the State's largest employment category.
Construction
The State's economy has in the past been highly dependent on the
construction industry and construction related manufacturing. This dependency
has declined in recent years and continues to do so as a result of continued
diversification of the State's economy. The State is still somewhat at the
mercy of the construction and construction related manufacturing industries.
For example, in 1980, total contract construction employment as a share of
total non-farm employment was just over 7%, and in 1993, the share had edged
downward to 5%. This trend is expected to continue as the State's economy
continues to diversify. Florida, nevertheless, has a dynamic construction
industry, with single and multi-family housing starts accounting for 8.5% of
total U.S. housing starts in 1993 while the State's population is 5.3% of the
U.S. total population. Florida's housing starts since 1980 have represented an
average of 11.0% of the U.S.'s total annual starts, and since 1980, total
housing starts have averaged 156,450 a year.
A driving force behind the State's construction industry has been the
State's rapid rate of population growth. Although the State currently is the
fourth most populous state, its annual population growth is now projected to
decline as the number of people moving into the State is expected to hover
near the mid 250,000 range annually throughout the 1990s. This population
trend should provide fuel for business and home builders to keep construction
activity lively in Florida for some time to come. However, other factors do
influence the level of construction in the State. For example, federal tax
reform in 1986 and other changes to the federal income tax code have
eliminated tax deductions for owners of more than two residential real estate
properties and have lengthened depreciation schedules on investment and
commercial properties. Economic growth and existing supplies of homes also
contribute to the level of construction in the State. Also, while interest
rates remain low currently, an increase in interest rates could significantly
adversely impact the financing of new construction with the State, thereby
adversely impacting unemployment and other economic factors within the State.
In addition, available commercial office space has tended to remain high over
the past few years. So long as this glut of commercial rental space continues,
construction of this be of space will likely continue to remain slow.
Single and multi-family housing starts in 1994-95 are projected to reach
a combined level of 118,000, increasing to 124,100 next year. Lingering
recessionary effects on consumers and tight credit are some of the reasons for
relatively slow core construction activity, as well as lingering effects from
the 1986 tax reform legislation discussed above. However, construction is one
of the sectors most severely affected by Andrew. Total construction
expenditures are forecasted to increase 6.6% this year and increase 7.5% next
year.
The State has continuously been dependent on the highly cyclical
construction and construction related manufacturing industries. While that
dependency has decreased, the State is still somewhat at the mercy of the
construction related manufacturing industries. The construction industry is
driven to a great extent by the State's rapid growth in population. There can
be no assurance that population growth will continue throughout the 1990's in
which case there could be an adverse impact on the State's economy through the
loss of construction and construction related manufacturing jobs. Also, while
interest rates remain low currently, an increase in interest rates could
significantly adversely impact the financing of new construction within the
State, thereby adversely impacting unemployment and other economic factors
within the State. In addition, available commercial office space has tended to
remain high over the past few years. So long as this glut of commercial rental
space continues, construction of this type of space will likely continue to
remain slow.
Tourism
Tourism is one of State's most important industries. Approximately 41.1
million tourists visited the State in 1993, as reported by the Florida
Department of Commerce. In terms of business activities and state tax
revenues, tourists in Florida in 1993 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive equally by air and
car. The State's tourist industry over the years has become more
sophisticated, attracting visitors year-round and, to a degree, reducing its
seasonality. The dollar's depreciation has enhanced the State's tourism
industry. Tourist arrivals are expected to increase by almost 5.0% percent
this year and 3.4% next year. Tourist arrivals to Florida by air and car are
expected to diverge from each other, air decreasing 9.2% and 2.95 next year
and auto increasing 0.7% this year and 4.0% next year. By the end of the
State's current fiscal year, 42.1 million domestic and international tourists
are expected to have visited the State. In 1995-96, tourist arrivals should
approximate 43.6 million.
Revenues and Expenses
Estimated fiscal year 1994-95 General Revenue plus Working Capital funds
available to the State total $14,624.4 million, a 5.7% increase over 1993-94.
This reflects a transfer of $159 million in non-recurring revenue due to
Andrew, to a hurricane relief trust fund. Of the total General Revenue plus
Working Capital funds available to the State, $13,858.4 million of that is
Estimated Revenues (excluding the Andrew impact) which represents an increase
of 7.9% over the previous year's Estimated Revenues. With effective General
Revenues plus Working Capital Fund appropriations at $14.311.1 million,
unencumbered reserves at the end of 1994-95 are estimated at $313.3 million.
Estimated, fiscal year 1995-96 General Revenue plus Working Capital and Budget
Stabilization funds available total $15,145.9 million. a 3.6% increase over
1994-95. The $14,647.2 million in Estimated Revenues represents an increase of
5.7% over the previous year's Estimated Revenues.
In fiscal year 1993-94, approximately 66% of the State's total direct
revenue to its three operating funds were derived from State taxes, with
Federal grants and other special revenue accounting for the balance. State
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax amounted to 66%, 8%, 4% and 4%, respectively, of total General
Revenue Funds available during fiscal 1993-94. In that same year,
expenditures for education, health and welfare, and public safety amounted to
approximately 49%, 32%, and 12%, respectively, of total expenditures from the
General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the State's
single largest source of tax receipts. Slightly less than 10% of the State's
sales and use tax is designated for local governments and is distributed to
the respective counties in which collected for use by the counties, and the
municipalities therein. In addition to this distribution, local governments
may (by referendum) assess a 0.5% or a 1.0% discretionary sales surtax
within their county. Proceeds from this local option sales tax are earmarked
for funding local infrastructure programs and acquiring land for public
recreation or conservation or protection of natural resources as provided
under applicable Florida law. Certain charter counties have other taxing
powers. In addition, and non-consolidated counties with a population in
excess of 800,000 may levy a local option sales tax to fund indigent health
care. It alone cannot exceed 0.5% and when combined with the infrastructure
surtax cannot exceed 1.0%. For the fiscal year ended June 30, 1994, sales
and use tax receipts (exclusive of the tax on gasoline and special fuels)
totaled $10,012.5 million, an increase of 6.9% over fiscal year 1992-1993.
The second largest source of State tax receipts is the tax on motor
fuels. However, these revenues are almost entirely dedicated trust funds for
specific purposes and are not included in the State's General Revenue Fund.
The State imposes an alcoholic beverage, wholesale tax (excise tax) on
beer, wine, and liquor. This tax is one of the State's major tax sources,
with revenues totaling $439.8 million in fiscal year ending June 30, 1994.
Alcoholic beverage tax receipts decreased 1.0% from the previous year's total.
The revenues collected from this tax are deposited into the State's General
Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year
ended June 30, 1994, receipts from this source were $1,047.4 million, and
increase of 23.7% from fiscal year 1992-93.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The
documentary stamp tax collections totaled $775.0 million during fiscal year
1993-94, a 21.3% increase from the previous fiscal year. Beginning in fiscal
year 1992-93, 71.29% of these taxes are to be deposited to the General Revenue
Fund.
The State imposes an intangible personal property tax on stocks,
bonds, including bonds secured by liens in Florida real property, notes,
governmental leaseholds, and certain other intangibles, not secured by alien
on Florida real property. The annual rate of tax is 2 mils. Second, the
State imposes a non-recurring 2 mil tax on mortgages and other obligations
secured by liens on Florida real property. In fiscal year 1993-94, total
intangible personal property tax collections were $836.0 million, a 6.7%
increase over the prior year. Of the tax proceeds, 66.5% are distributed to
the General Revenue Fund.
The State's severance tax taxes, oil, gas and sulfur production, as well
as the severance of phosphate rock and other solid minerals. Total
collections from severance taxes total $54.8 million during fiscal year 1993-
94, down 15.0% from the previous year. Currently, 60% of this amount is
transferred to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0% for costs of administering the
lottery. Fiscal year 1993-94 lottery ticket sales totaled $2.15 billion,
providing education with approximately $816.2 million.
Debt-Balanced Budget Requirement
At the end of fiscal 1993, approximately $5.61 billion in principal
amount of debt secured by the full faith and credit of the State was
outstanding. In addition, since July 1, 1993, the State issued about $1.13
billion in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget, as a
whole, and each separate fund within the State budget, be kept in balance
form currently available revenues each fiscal year. If the Governor or
Comptroller believes a deficit will occur in any State fund, by statute, he
must certify his opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a sufficient
amount to prevent a deficit in any fund. Additionally, the State Constitution
prohibits issuance of State obligations to fund State operations.
Litigation
Currently under litigation are several issues relating to State actions
or State taxes that put at risk substantial amounts of General Revenue Fund
monies. Accordingly, there is no assurance that any of such matters,
individually or in the aggregate, will not have a immaterial adverse affect on
the State's financial position.
Florida law provides preferential tax treatment to insurers who maintain
a home office in the State. Certain insurers challenged the constitutionality
of this tax preference and sought a refund of taxes paid. Recently, the
Florida Supreme Court ruled in favor of the State. This case and others,
along with pending refund claims, total about $150 million.
The State imposes a $295 fee on the issuance of certificates of title
for a motor vehicles previously titled outside the State. The State has been
sued by plaintiffs alleging that this fee violates the Commerce Clause of the
U.S. Constitution. The Circuit Court in which the case was filed has granted
summary judgment for the plaintiffs and has enjoined further collection of
the impact fee and has ordered refunds to all those who have paid the fee
since the collection of the fee went into effect. The State has appealed the
lower Court's decision and an automatic stay has been granted to the State
allowing it to continue to collect the fee. The potential refund exposure to
the State if it should lose the case may be in excess off $100 million.
The State maintains a rating of Aa and AA from Moody's Investors Service
and Standard & Poors Corporation, respectively, on the majority of its
general obligation bonds, although the rating of a particular series of
revenue bonds relates primarily to the project, facility, or other revenues
source from which such series derives funds for repayment. While these
ratings and some of the information presented above indicate that the State is
in satisfactory economic health, there can be no assurance that there will not
be a decline in economic conditions or that particular conditions or that
particular Bonds purchased by the Trust will not be adversely affected by any
such changes.
APPENDIX F
The following information is a summary of special factors affecting Georgia
Municipal Obligations. It does not purport to be a complete description and
is based on information from statements relating to securities offerings of
Georgia issuers.
Additional Discussion of Special Factors Relating to Georgia Municipal
Obligations
On December 31, 1992, the state government of Georgia had the 46th lowest debt
level per capita of all states in the United States, which is reflective of a
very conservative fiscal approach taken by elected state officials, tempered
during a three to four year economic slow-down. Typically, general obligation
bonds of the state are issued pursuant to the powers granted under Article
VII, Section IV of the Constitution of the State of Georgia ( the "Georgia
Constitution"), which provides that the bonds are the direct and general
obligations of the state.
The Georgia Constitution further mandates that the General Assembly "shall
raise by taxation and appropriate each fiscal year ... such amounts as are
necessary to pay debt service requirements in such fiscal year on all general
obligation debt". The Georgia Constitution further provides for the
establishment of a special trust fund which is designated the "State of
Georgia General Obligation Debt Sinking Fund" which is used for the payment of
annual debt service requirements on all general obligation debt.
Virtually all debt obligations represented by bonds issued by the State of
Georgia, counties, or municipalities or other public authorities require
validation by a judicial proceeding prior to the issuance of such obligation.
The judicial validation makes these obligations incontestable and conclusive,
as provided under the Georgia Constitution.
The State of Georgia operates on a fiscal year beginning on July 1 and ending
on June 30. Each year the State Economist, the Governor, and the State Revenue
Commissioner jointly prepare a revenue forecast upon which is based the state
budget which is considered, amended, and approved by the Georgia General
Assembly. Since 1975, the Governor and the General Assembly have attempted to
maintain a $100 million reserve fund, which in 1992 was eroded because of a
revenue shortfall. For the first ten months of the fiscal year ending June
30, 1995, the State of Georgia enjoyed an 8.0% growth in revenues and had an
$565,3111,040.50 increase in revenues above the same ten month period ending
fiscal 1994. However, this is decrease compared to fiscal year 1994 which had
a 9.5% growth in revenues over fiscal year 1993. The surplus for fiscal year
1993 far exceeded the Governor's budget allocation of $124 million.
In the past two years, the Governor has successfully eliminated more than
5,000 state jobs, which has contributed dramatically to his efforts to balance
the state budget.
For the next several years, Georgia has a very bright economic future
highlighted by a $2 billion stimulus to the economy which is expected from
Atlanta's hosting of the 1996 Summer Olympic Games. Manufacturing activity,
particularly in the textile, apparel and carpet sectors, has increased
dramatically as a result of increased home building. However, the real
estate/construction industry remains in a recession caused by over-building of
commercial office space and industrial parks in the late 1980s. Military base
closings in other states are expected to mildly impact the Georgia economy
with the consolidation of military installations so that Georgia will have a
net gain in service personnel. In recent years, Georgia has enjoyed the
economic stimulus caused by a number of major corporate relocations led by
United Parcel Service of America, Inc., which moved its World Headquarters
from Greenwich, Connecticut to Atlanta. This move was followed by Holiday Inn
Worldwide, which moved its headquarters to Atlanta from Memphis.
APPENDIX G
The following information is a summary of special factors affecting
Pennsylvania Municipal Obligations. It does not purport to be a complete
description and is based on information from statements relating to securities
offerings of Pennsylvania issuers.
Additional Discussion of Special Factors Relating to Pennsylvania Municipal
Obligations
Potential purchasers of Units of the Trust should consider the fact that
the Trust's portfolio consists primarily of securities issued by the
Commonwealth of Pennsylvania (the "Commonwealth"), its municipalities and
authorities and should realize the substantial risks associated with an
investment in such securities. Although the General Fund of the Commonwealth
(the principal operating fund of the Commonwealth) experienced deficits in
fiscal 1990 and 1991, tax increases and spending decreases helped return the
General Fund balance to a surplus at June 30, 1992 of $87.5 million and at
June 30, 1993 of $698.9. The deficit in the Commonwealth's
unreserved/undesignated funds of prior years also was reversed to a surplus of
$64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services.
Agricultural industries continue to be an important part of the economy,
including not only the production of diversified food and livestock products,
but substantial economic activity in agribusiness and food-related industries.
Service industries currently employ the greatest share of non-agricultural
workers, followed by the categories of trade and manufacturing. Future
economic difficulties in any of these industries could have an adverse impact
on the finances of the Commonwealth or its municipalities, and could adversely
affect the market value of the Bonds in the Pennsylvania Trust or the ability
of the respective obligors to make payments of interest and principal due on
such Bonds.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations, including suits relating to the following matters: (i) the ACLU
has filed suit in federal court demanding additional funding for child welfare
services; the Commonwealth settled a similar suit in the Commonwealth Court of
Pennsylvania and is seeking the dismissal of the federal suit, inter alia,
because of that settlement. The district court has denied class certification
to the ACLU, and the parties have stipulated to a judgment against the
plaintiffs to allow plaintiffs to appeal the denial of a class certification
to the Third Circuit; (ii) in 1987, the Supreme Court of Pennsylvania held
that the statutory scheme for county funding of the judicial system to be in
conflict with the Constitution of the Commonwealth but stayed judgment pending
enactment by the legislature of funding consistent with the opinion and the
legislature has yet to consider legislation implementing the judgment; (iii)
several banks have filed suit against the Commonwealth contesting the
constitutionality of a law enacted in 1989 imposing a bank shares tax; in July
1994, the Commonwealth Court en banc upheld the constitutionality of the 1989
bank shares tax law but struck down a companion law to provide credits against
the bank shares tax for new banks; cross appeals from that decision to the
Pennsylvania Supreme Court have been filed; (iv) litigation has been filed in
both state and federal court by an association of rural and small schools and
several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case and the state case is in the pre-trial state (no available estimate of
potential liability); (v) the ACLU has brought a class action on behalf of
inmates challenging the conditions of confinement in thirteen of the
Commonwealth's correctional institutions; a proposed settlement agreement has
been submitted to the court and members of the class, but the court has not
yet set a date for hearing on the terms of the agreement (no available
estimate of potential cost of complying with the injunction sought but capital
and personnel costs might cost millions of dollars) and (vi) a consortium of
public interest law firms has filed a class action suit alleging that the
Commonwealth has not complied with a federal mandate to provide screening,
diagnostic and treatment services for all Medicaid-eligible children under 21;
the district court denied class certification and has scheduled the case for
trial (potentially liability estimated at between $9 million and $55 million);
and (vii) litigation has been filed in federal court by the Pennsylvania
Medical Society seeking payment of the full co-pay and deductible in excess of
the maximum fees set under the Commonwealth's medical assistance program for
outpatient services provided to medical assistance patients who were also
eligible for Medicare; the Commonwealth received a favorable decision in the
federal district court, but the Pennsylvania Medical Society won a reversal in
the federal circuit court (potential liability estimated at $50 million per
year).
The Commonwealth's general obligation bonds have been rated AA- by
Standard & Poor's and A1 by Moody's for more than the last five years.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit markets
and a long-term solution to the City's financial crisis is still being sought.
The City experienced a series of General Fund deficits for fiscal years 1988
through 1992.
The City has no legal authority to issue deficit reduction bonds on its
own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities in avoiding
defaults and eliminating deficits by encouraging the adoption of sound
budgetary practices and issuing bonds. In order for the Authority to issue
bonds on behalf of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority with certain
oversight powers with respect to the fiscal affairs of the City, and the
Authority approved a five-year financial plan prepared by the City. On June
16, 1992, the Authority issued a $474,555,000 bond issue on behalf of the
City. The Authority approved the latest update of the five-year financial plan
on May 2, 1994. The City has reported a surplus of approximately $15 million
for fiscal year ending June 30, 1994. In July 1993, the Authority issued
$643,430,000 of bonds to refund certain general obligation bonds of the City
and to fund additional capital projects. In September 1993, the Authority
issued $178,675,000 of bonds to advance refund certain of the bonds of the
City and to fund additional capital projects.
APPENDIX H
The following information is a summary of special factors affecting Ohio
Municipal Obligations. It does not purport to be a complete description and
is based on information from statements relating to securities offerings of
Ohio issuers.
Additional Discussion of Special Factors Relating to Ohio Municipal
Obligations
The Ohio Trust will invest substantially all of its net assets in Ohio
Obligations. The Ohio Trust is therefore susceptible to political, economic
and regulatory factors that may affect issuers of Ohio Obligations. The
following information constitutes only a brief summary of some of the complex
factors that may affect the financial situation of issuers in Ohio, and is not
applicable to "conduit" obligations on which the public issue itself has no
financial responsibility.
The creditworthiness of obligations issued by local Ohio issuers may be
unrelated to the creditworthiness of obligations issued by the State, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be specific factors that are applicable
in connection with investment in particular Ohio Obligations or in the
obligations of particular Ohio issuers, and it is possible the investment will
be in Ohio Obligations or in obligations of particular issuers as to which
such specific factors are applicable. However, the information set forth
below is intended only as a general summary and not a discussion of any such
specific factors that may affect any particular issuer or issue of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census Count of
10,847,000 indicating a 0.5% population increase from 1980.
The economy of Ohio, while diversifying more into the service and other
non-manufacturing areas, continues to rely in part on durable goods
manufacturing, which is largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general
economic activity in Ohio, as in many other industrially-developed states,
tends to be more cyclical than in some other states and in the nation as a
whole. Agriculture also is an important segment of the economy in the State,
and the State has instituted several programs to provide financial assistance
to farmers. The State's economy, has had varying effects on different
geographic areas of the State and the political subdivisions located within
those geographic areas.
In prior years, the State's overall unemployment rate is commonly
somewhat higher than the national average. In January 1993 and February 1993,
the unemployment rate was 8.2 and 7.8, respectively, compared to the national
rates 7.9 and 7.7 respectively. However, for both 1991 and 1992 the State
rate was below the national rate; the State rates were 6.4% and 7.2%, and the
national rates 6.7% and 7.4% respectively. The unemployment rate, and its
effects, vary among particular geographic areas of the State.
There can be no assurance that future state-wide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the portfolio of the Ohio Trust or the ability of the particular obligors
to make timely payments of debt service on (or lease payments relating to)
those obligations.
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.
Litigation filed on February 1, 1993 seeks to have a new tax on soft
drinks, included in those tax revisions, declared invalid and its collection
enjoined. The trial court's preliminary injunction has been stayed by the
Ohio Supreme Court on procedural grounds, and that tax is for now being
collected. OBM had estimated approximately $18,500,000 being collected from
that tax this fiscal year, representing less than 10% of the projected
additional tax revenues. Several bases for invalidity were asserted,
including a claim that the bill in which this and other elements of the tax
package ( as well as certain capital appropriations and financing
authorizations ) were included did not comply with a constitutional "one-
subject" procedural requirement.
Supplementing the general authorization for the Governor's spending
reduction orders described above and exercised several times in this biennium,
the biennial appropriations act authorizes the OBM Trustee to implement up to
1% fiscal year reduction in GRF amounts appropriated if on March 1 of either
fiscal year of the biennium receipts for that fiscal year are for any reason
more than $150,000,000 under estimates and the then estimated GRF ending fund
balance is less than $50,000,000. Expressly, excerpted from this cutback
authorization are debt service and lease rental appropriations. In light of
the other corrective actions described above, this supplemental spending
reduction authorization was not implemented in fiscal year 1992 and is not
expected to be implemented in fiscal year 1993.
The general appropriations process for the next biennium (beginning July 1,
1993) has commenced with the Governor's presentation of a proposed GRF budget
to the General Assembly. That budget document and the related appropriations
bill as introduced and passed by the House include all necessary GRF
appropriations for biennial State debt service and lease rental payments.
The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures
in revenues or to meet expenses not otherwise provided for, but limited in
amount to $750,000. The State is expressly precluded from assuming the debts
of any local government or corporation. (An exception in both cases is made
for any debt incurred to repel invasion, suppress insurrection, or defend the
State in war.)
By thirteen constitutional amendments (the last adopted in 1993), Ohio
voters have authorized the incurrence of State debt to which taxes or excesses
were pledged for payment. At January 31, 1994, $712.6 million (excluding
certain highway bonds payable primarily from highway use charges) of this debt
was outstanding or awaiting delivery. The only such State debt then still
authorized to be incurred are portions of the highway bonds and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($43.1 million outstanding); (b) $1.2 billion of
obligations authorized for local infrastructure improvements, no more than
$120 million may be issued in any calendar year ($645.2 million outstanding or
awaiting delivery, $480 million remaining to be issued); and (c) up to $200
million in general obligation bonds for parks and recreation purposes may be
outstanding at any one time ( no more than $50 million to be issued in any one
year, and none have yet been issued).
The Constitution also authorized the issuance, for certain purposes, of
State obligations, the owners of which are not given the right to have excises
or taxes levied to pay debt service. Those special obligations include bonds
and notes issued by, among others, the Ohio Public Facilities Commission and
the Ohio Building Authority. A total of $4.28 billion of those obligations
were outstanding at January 31, 1994.
A 1990 constitutional amendment authorized greater State and political
subdivision participation in the provision of individual and family housing,
including borrowing for this purpose. The General Assembly may authorize the
issuance of State obligations secured by a pledge of all or such portion as it
authorizes of State revenues or receipts, although the obligations may not be
supported by the State's full faith and credit.
State and local agencies issue revenue obligations that are payable from
revenues of revenue-producing facilities or categories of facilities, which
obligations are not "debt" within constitutional provisions or payable from
taxes. In general, lease payment obligations under lease-purchase agreements
of Ohio issuers (in connection with which certificates of participation may be
issued) are limited in duration to the issuer's fiscal period, and are
renewable only upon appropriations being made available for the subsequent
fiscal periods.
Local school districts in Ohio receive a major portion (on a statewide
basis, historically approximately 46%) of their operating moneys from State
subsidies ( known as the Foundation Program ), but are dependent on local ad
valorem property taxes and in, 88 districts, income taxes for significant
portions of their budgets. Litigation has recently been filed, similar to
that in other states, questioning the constitutionality of Ohio's system of
school funding. A small number of the State's 612 local school districts have
in any year required special assistance to avoid year-end deficits. A current
program ( Emergency School Advancement Fund ) provides for school district
cash-need borrowing directly from commercial lenders, with State diversion of
subsidy distributions to repayment if needed; 26 districts borrowed a total of
$41.8 million in fiscal year 1991 under this program, in fiscal year 1992,
borrowings totaled $68.6 million (including over $46.6 million by one
district);in fiscal year 1993, 43 districts borrowed approximately $94.5
million (including $75 million for one district) and in fiscal year 1994 loan
approvals totaled at January 31, 1994, $9.90 million for 16 districts.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations, and, with other local
governments, receive local government support and property tax relief monies
distributed by the State. Procedures have been established for those few
municipalities that have on occasion faced significant financial problems,
which include establishment of a joint State/local commission to monitor the
municipality's fiscal affairs, with a financial plan developed to eliminate
deficits and cure any defaults. Since inception in 1979, these procedures
have been applied to 23 cities and villages, in 18 of which the fiscal
situation has been resolved and the procedures terminated.
At present the State itself does not levy any ad valorem taxes on real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since
1934 limited the amount of the aggregate levy of ad valorem property taxes,
without a vote of the electors or municipal charter provision, to 1% of true
value in money, and statutes limit the amount of the aggregate levy without a
vote or charter provision to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes unlimited as to amount or rate.
Although revenue obligations of the State or its political subdivisions may be
payable from a specific project or source, including lease 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 PartB
Annual Semi-
Annual
Report 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, 1995 and
the Reports of Independent Accountants dated May 8, 1995 and May 15, 1995 are
incorporated by reference to the N-30D filed on June 16, 1995 as Accession #
0000950109-95-2345.
The Registrant's Semi-Annual Reports for the period ended September 30, 1995
are incorporated by reference to the N-30D filed on January 9, 1996 as
Accession # 0000091155-96-8.
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. filed herewith.
(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 (To be filed by amendment).
(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 filed herewith.
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 (a) 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 29th day of May, 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 May 29, 1996
(Heath B. McLendon) (Principal Executive Officer)
and Trustee
/s/ Jessica M. Bibliowicz President and Trustee May 29, 1996
(Jessica M. Bibliowicz)
Joseph H. Fleiss* Trustee
(Joseph H. Fleiss)
Donald R. Foley* Trustee
(Donald R. Foley)
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.R. Youngdahl *
(C.R. Youngdahl) Trustee
/s/Lewis E. Daidone Sr. Vice President
(Lewis E. Daidone) and Treasurer May 29, 1996
*By: /s/ Christina T. Sydor May 29, 1996
Christina T. Sydor
Pursuant to Power of Attorney
EXHIBIT INDEX
. Exhibit Page No.
5(t) Form of Amended Management Agreement for the Florida Portfolio,
Limited Term Portfolio and New York Portfolio
EXHIBIT 5(t)
FORM OF
MANAGEMENT AGREEMENT
between SMITH BARNEY MUNI FUNDS
and SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
AGREEMENT made this _____ day of __________________, 1995 by and between
Smith Barney Muni Funds, a Massachusetts Business Trust (the "Fund"), on
behalf of the Florida Portfolio* (the "Portfolio"), and Smith Barney Mutual
Funds Management Inc., a Delaware corporation (the "Manager").
1. The Manager, at its expense, undertakes to afford to the Fund the
advice and assistance of the Manager's organization with respect to the
selection, acquisition, holding and the disposal of securities; and advice and
recommendations with respect to other aspects of the business and affairs of
the Fund; and shall, subject to the Trustees of the Fund and in cooperation
with the officers of the Fund, administer the business and affairs of the
Portfolio. In acting hereunder the Manager shall be an independent contractor
and shall not be an agent of the Fund.
2. The Manager, at its expense, shall provide the Fund with office space
and equipment, shall furnish the Fund with bookkeeping, accounting and
administrative services and services relating to research, statistical work
and supervision of the Portfolio, and shall permit such of its directors,
officers and employees as may be elected as Trustees or officers of the Fund
to serve in the capacities to which they are elected. All services to be
furnished by the Manager under this agreement may be furnished through the
medium of any such directors, officers or employees or other affiliates of the
Manager. The investment policies, the administration of its business and
affairs and all other acts of the Fund are and shall at all times be subject
to the approval and direction of the Trustees of the Fund.
3. The Fund shall at all times keep the Manager fully informed with regard
to the securities owned by the Portfolio, its funds available or to become
available for investment, and generally as to the condition of its affairs.
The Fund shall furnish the Manager with a certified copy of all financial
statements of the Portfolio, and a signed copy of each report prepared by
independent public accountants and with such other information with regard to
its affairs as the Manager may, from time to time, reasonably request.
4. The Fund will pay all its expenses other than those expressly stated to
be payable by the Manager hereunder (or payable by the investment Manager
pursuant to a management agreement on behalf of any other portfolio of the
Fund). Expenses payable by the Fund shall include, but not be limited to,
interest, taxes and governmental fees, fees and commissions of every kind,
expenses of issue, repurchase or redemption of shares, 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), litigation and indemnification expenses and other
extraordinary expenses, insurance expense, costs of performing portfolio
valuations, association membership dues, all charges of custodians (including
sums as custodian and sums for keeping books, and for rendering other services
to the Fund), shareholder servicing agents, registrars, auditors and legal
counsel, expenses of preparing, printing and distributing all Prospectuses,
proxy material, reports and notices to shareholders, all expenses of
shareholders' and Trustees' meetings, out-of-pocket expenses of Trustees and
fees of Trustees who are not "interested persons" as defined in the Investment
Company Act of 1940 and all other costs incident to the Fund's existence.
Direct expenses of the Portfolio, including but limited to the management fee,
are charged to the Portfolio, and general trust expenses are allocated among
the portfolios of the Fund on the basis of relative net assets.
5. The services of the Manager and its directors, officers and employees,
to the Fund on behalf of the Portfolio are not to be deemed to be exclusive,
each of the foregoing being free to render services to others and engage in
other activities, whether similar or dissimilar in nature.
6. As compensation to the Manager, the Portfolio will pay the Manager a
daily management fee at the annual rate of .50% of the Portfolio's net assets.
Notwithstanding any of the above provisions, the Manager shall reduce its
fee to the extent that in any fiscal year the aggregate expenses with of the
Portfolio, exclusive of taxes, brokerage, interest, and extraordinary
expenses, such as litigation and indemnification expenses, exceed .70% of its
average daily net assets until this voluntary expense limitation shall
terminate by notice to shareholders of the termination and the Portfolio's
prospectus shall be supplemented to reflect any such termination.
7. The Manager assumes no responsibility under this agreement other than
to render the services called for hereunder in good faith and shall not be
responsible for any action of the Fund in following or declining to follow any
advice or recommendation of the Manager. In the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations
or duties hereunder on the part of the Manager, the Manager shall not be
subject to liability to the Fund or to any shareholder of the Fund for any act
or omission in the course of, or connected with, rendering services hereunder
or for any losses that may be sustained in the purchase, holding or sale of
any security.
8. This agreement shall terminate automatically in the event of its
assignment, the term "assignment" for this purpose having the meaning defined
in Section 2(a)(4) of the Investment Company Act of 1940.
9. This agreement may be terminated at any time, without the payment of
any penalty, (a) by the Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Portfolio, on 60 days' written notice
addressed to the Manager at its principal place of business; and (b) by the
Manager on 60 days' written notice addressed to the Fund at its principal
place of business.
10. The terms of this agreement shall be submitted for approval each year
by a majority of the Trustees of the Fund who are not parties to this
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party. In addition this agreement shall continue in effect
only so long as specifically approved annually by the Trustees of the Fund
(including such majority of the Trustees), or by vote of a majority of the
outstanding voting securities of the Portfolio, as defined in the Investment
Company Act of 1940 and Rules thereunder.
11. This agreement shall be governed by and construed in accordance with
the laws of the State of New York.
12. No Trustee, shareholder, officer, employee or agent of the Fund shall
be held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise, in
connection with the affairs of the Fund, but the Trust Property only shall be
liable.
13. This agreement shall become effective upon its approval by the
shareholders of the Portfolio in the manner prescribed by the Investment
Company Act of 1940 and Rules thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
s agreement to be
By By
Smith Barney Muni Funds
Attest:
Smith Barney Mutual Funds Management
Inc.
By By
*Or on behalf of the Limited Term Portfolio or the New York Portfolio,
as the case may be.
