File No. 2-99861
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 40
to the
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
and
POST-EFFECTIVE AMENDMENT NO. 41
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)
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective:
XXX immediately upon filing pursuant to paragraph (b)
______on (date) pursuant to paragraph (b) of Rule 485
______60 days after filing pursuant to paragraph (a)(i)
on (date) pursuant to paragraph (a)(i)
______75 days after filing pursuant to paragraph (a)(ii)
______on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
this post-effective amendment designates a new effective date for
a previously filed post-effective
amendment.
Title of Securities Being Registered: Shares of Beneficial Interest, par
value $0.001 per share.
CROSS REFERENCE SHEET
(as required by Rule 495(a))
Prospectus
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 Information
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
Limited
Term
Portfolio
July 29, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Prospectus July 29, 1998
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Smith Barney Muni Funds
Limited Term Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Limited Term Portfolio (the "Portfolio") is one of eight 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 20
years. The dollar-weighted average maturity of the Portfolio will normally be
not less than three nor more than 10 years. The Portfolio may invest without
limit in municipal obligations whose interest is a tax-preference item for
purposes of the Federal alternative minimum tax.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which 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 SAI 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
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Table of Contents
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Prospectus Summary 3
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Financial Highlights 8
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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 17
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Purchase of Shares 19
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Exchange Privilege 25
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Redemption of Shares 28
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Minimum Account Size 30
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Performance 31
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Management of the Fund 32
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Distribution 33
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Additional Information 34
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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
Portfolio or Smith Barney Inc. ("Smith Barney" or the "Distributor"). This
Prospectus does not constitute an offer by the Portfolio 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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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 SAI. 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 20 years. The dollar-weighted average maturity of the
Portfolio will normally be not less than three nor more than 10 years. The
Portfolio may invest without limit in municipal obligations whose interest is a
tax-preference item 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 L 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 at least $15,000,000. 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 of $500,000 or more 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 -- Alternative Purchase Arrangements
- -- No Initial Sales Charge."
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L 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 L 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, which would 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 $15,000,000. Class Y shares are sold at net asset
3
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Prospectus Summary (continued)
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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 duration 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 L shares, which have a lower upfront sales
charge but are subject to higher distribution fees than Class A shares, are
suitable for investors who are not investing or intending to invest an amount
which would receive a sales charge discount and who have a short-term or
undetermined time frame. Finally, investors should consider the effect of the
CDSC period in the context of their own investment time frame.
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 of $500,000 or more 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 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 L shares, purchasers eligible to
purchase Class A shares at net asset value should consider doing so.
Financial Consultants of Smith Barney Inc. ("Smith Barney" or the
"Distributor") may receive different compensation for selling different Classes
of shares. Investors should understand that the purpose of the CDSC on the Class
L shares is the same as that of an initial sales charge.
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."
4
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Prospectus Summary (continued)
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INVESTMENT MINIMUMS Investors in Class A and Class L 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
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum investment requirements for purchases of Portfolio shares through
the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A and Class L shares and the subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25, and on a
quarterly basis is $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 Mutual Management Corp. ("MMC" or the
"Manager"), formerly known as Smith Barney Mutual Funds Management Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Salomon 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
including Asset Management, 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. 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 at least
annually. See "Dividends, Distributions and Taxes."
5
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Prospectus Summary (continued)
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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."
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 the Portfolio's operating
expenses for its most recent fiscal year:
Limited Term Portfolio Class A Class L* Class Y
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Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 2.00% 1.00%* None
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower) None** 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees 0.50% 0.50% 0.50%
12b-1 fees*** 0.15 0.35 --
Other expenses 0.09 0.14 0.09****
---- ---- ----
Total Portfolio Operating Expenses 0.74% 0.99% 0.59%
==== ==== ====
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* Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.
** Purchases of Class A shares of $500,000 or more 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 of purchase.
*** Class L shares do not have a conversion feature and, therefore, are subject
to an ongoing distribution fee. As a result, long-term shareholders of Class L
shares may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.
**** For Class Y shares, "Other expenses" have been estimated because no Class Y
shares were outstanding for the fiscal year ended March 31, 1998.
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of
6
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Prospectus Summary (continued)
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the initial sales charge. The fee will vary to a maximum of 1.50%, depending on
the amount of the assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
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 L 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 L 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.
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."
Limited Term Portfolio 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................... $27 $43 $60 $110
Class L................... 30 41 64 130
Class Y................... 6 19 33 74
An investor would pay the
following expenses on the
same investment, assuming
the same annual return
and no redemption:
Class A................... $27 $43 $60 $110
Class L................... 20 41 64 130
Class Y................... 6 19 33 74
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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.
7
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Financial Highlights
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The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1998 appears in the Fund's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the SAI. As of March 31,
1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available for that class.
For a share of beneficial interest outstanding throughout each year:
Limited Term Portfolio Class A Shares
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Year Ended March 31, 1998 1997 1996 1995 1994(1) 1993
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Net Asset Value,
Beginning of Year $6.54 $6.61 $6.54 $6.55 $6.68 $6.45
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Income From Operations:
Net investment income (2) 0.34 0.34 0.36 0.36 0.37 0.39
Net realized and unrealized
gain (loss) 0.22 (0.06) 0.07 -- (0.13) 0.23
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Total Income from Operations 0.56 0.28 0.43 0.36 0.24 0.62
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Less Distributions From:
Net investment income (0.34) (0.35) (0.36) (0.37) (0.37) (0.39)
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Total Distributions (0.34) (0.35) (0.36) (0.37) (0.37) (0.39)
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Net Asset Value, End of Year $6.76 $6.54 $6.61 $6.54 $6.55 $6.68
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Total Return(P) 8.66% 4.30% 6.65% 5.69% 3.65% 9.82%
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Net Assets, End of Year
(millions) $257 $260 $278 $245 $282 $242
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Ratios to Average Net Assets:
Expenses (2) 0.74% 0.75% 0.75% 0.61% 0.53% 0.55%
Net Investment Income 5.14 5.16 5.43 5.61 5.53 5.90
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Portfolio Turnover Rate 58% 46% 26% 22% 25% 25%
================================================================================
(1) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(2) The Manager has waived all or a part of its fees for each of the years in
the four-year period ended March 31, 1992. If such fees were not waived, the
per share decrease of net investment income and the ratios of expenses to
average net assets would have been:
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
8
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Financial Highlights (continued)
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For a share of beneficial interest outstanding throughout each year:
Limited Term Portfolio* Class A Shares
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Year Ended March 31, 1992 1991 1990 1989**
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Net Asset Value,
Beginning of Year $6.38 $6.28 $6.20 $6.25
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Income From Operations:
Net investment income (1) 0.42 0.43 0.44 0.13
Net realized and unrealized
gain (loss) 0.07 0.07 0.10 (0.05)
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Total Income from Operations 0.49 0.50 0.54 0.08
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Less Distributions From:
Net investment income (0.42) (0.40) (0.46) (0.13)
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Total Distributions (0.42) (0.40) (0.46) (0.13)
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Net Asset Value, End of Year $6.45 $6.38 $6.28 $6.20
================================================================================
Total Return(P) 7.99% 8.23% 9.07% 1.09%++
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Net Assets, End of Year
(millions) $157 $65 $20 $5
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Ratios to Average Net Assets:
Expenses (1) 0.49% 0.33% 0.30% 0.30%+
Net Investment Income 6.42 6.77 6.98 6.58+
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Portfolio Turnover Rate 26% 15% 65% 14%
================================================================================
(1) The Manager has waived all or a part of its fees for each of the years in
the four-year period ended March 31, 1992. If such fees were not waived, the
per share decrease of net investment income and the ratios of expenses to
average net assets would have been:
Net Investment Income Expense Ratios
Per Share Decrease Without Fee Waivers
--------------------------------- ------------------------------
1992 1991 1990 1989 1992 1991 1990 1989
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Class A $0.003 $0.011 $0.018 $0.022 0.56% 0.30% 0.30% 0.30%+
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(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
* Table continued from p. 8.
** For the period from November 28, 1988 (inception date) to March 31, 1989.
9
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Financial Highlights (continued)
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For a share of beneficial interest outstanding throughout each year:
Class Y
Limited Term Portfolio Class L Shares (1) Shares*
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Year Ended March 31, 1998 1997 1996 1995 1994 1993(2) 1996(3)
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Net Asset Value,
Beginning of Year $6.54 $6.61 $6.54 $6.54 $6.68 $6.62 $6.56
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Income From Operations:
Net investment
income 0.33 0.33 0.35 0.35 0.35 0.10 0.37
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Net realized and
unrealized gain
(loss) 0.21 (0.06) 0.06 0.00 (0.14) 0.05 0.06
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Total Income from
Operations 0.54 0.27 0.41 0.35 0.21 0.15 0.43
================================================================================
Less Distributions From:
Net investment
income (0.32) (0.34) (0.34) (0.35) (0.35) (0.09) (0.37)
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Total distributions (0.32) (0.34) (0.34) (0.35) (0.35) (0.09) (0.37)
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Net Asset Value,
End of Year $6.76 $6.54 $6.61 $6.54 $6.54 $6.68 $6.62
================================================================================
Total Return(P) 8.36% 4.10% 6.45% 5.51% 3.15% 2.28%++ 6.63%++
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Net Assets,
End of Year
(millions) $31 $28 $29 $27 $27 $6 $0.2
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Ratios to Average
Net Assets:
Expenses 0.99% 0.97% 0.96% 0.89% 0.88% 0.88%+ 0.58%+
Net investment
income 4.89 4.94 5.22 5.34 5.10 5.35+ 5.56+
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Portfolio Turnover
Rate 58% 46% 26% 22% 25% 25% 26%
================================================================================
(1) On November 7, 1994 the former Class B Shares were renamed Class C Shares.
On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the period from January 5, 1993 (inception date) to March 31, 1993.
(3) For the period from April 4, 1995 (inception date) to March 31, 1996.
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
* As of April 11, 1996, there was complete redemption of Class Y Shares. As of
March 31, 1998, no Class Y Shares were outstanding and, accordingly, no
comparable information is available at this time for that class.
10
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Investment Objective and Management Policies
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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 20 years. The dollar-weighted average maturity of the Portfolio
will normally be not less than three nor more than 10 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.
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. Such
obligations are often issued to raise money for public projects that enhance the
quality of life including health facilities, housing, airports, schools,
highways and bridges. Please see the SAI for a more detailed discussion about
the different types of municipal obligations.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he or she is subject to that tax. Such
private activity bonds include bonds issued to finance such projects as certain
solid waste disposal facilities, student loan programs and water and sewage
projects. Because interest income on AMT-Subject Bonds is taxable to certain
investors, it is expected, although there can be no guarantee, that such
municipal obligations generally will provide somewhat higher yields than other
municipal obligations of comparable quality and maturity. There is no limitation
on the percent or amount of the Portfolio's assets that may be invested in
AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are rated within the four highest ratings categories by
an NRSRO, such as 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 Ratings Group
("S&P"); pre-refunded bonds escrowed by U.S. Treasury obligations are considered
AAA rated
11
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
(the highest credit rating) 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 in the fourth highest category (this grade, while regarded as having
an adequate capacity to pay interest and repay principal, is considered to be of
medium quality and has speculative characteristics; in addition, changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds) or in unrated municipal bonds if, based upon credit analysis by the
Manager, it is believed that such securities are at least of comparable quality
to those securities in which the Portfolio may invest. In determining the
suitability of an investment in an unrated municipal bond, the Manager will take
into consideration debt service coverage, the purpose of the financing, history
of the issuer, existence of other rated securities of the issuer and other
general conditions as may be relevant, including comparability to other issues.
After the Portfolio purchases a municipal bond, the issue may cease to be rated
or its rating may be reduced below the minimum required for purchase. Such an
event would not require the elimination of the issue from the Portfolio but the
Manager will consider such an event in determining whether the Portfolio should
continue to hold the security.
The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG I or MIG 2, VMIG I or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-I +, SP-I, SP-2, or A-1 or AA or better
by S&P or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
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
liquidate the investment on no more than 30-days' notice; variable-rate demand
instruments provide for automatic establishment of a new interest rate on set
dates; floating-rate demand instruments provide for automatic adjustment of
their interest rates whenever some other specified interest rate changes (e.g.,
the prime rate). The Portfolio may purchase participation interests in
variable-rate tax-exempt securities (such as industrial development bonds) owned
by banks. Participations are frequently backed by an irrevocable letter of
credit or guarantee of a bank that the Manager has determined meets the
prescribed quality standards for the Portfolio. Participation interests will be
purchased only if management believes interest income on such interests will be
tax exempt when distributed as dividends to shareholders.
12
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked market daily pursuant to
guidelines established by the Board of Trustees, 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 municipal obligations 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 borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.
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 SAI.
The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest
13
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
rates than debt obligations of comparable maturities which make periodic
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon securities
eliminate the reinvestment risk and lock in a rate of return to maturity.
The Portfolio may invest in municipal lease obligations, which may take
the form of leases, installment purchase contracts or conditional sales
contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by state and local governments
and authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality, they ordinarily are backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease obligation.
The leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
In each of the Portfolio'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 AMT.) The Portfolio may invest up to 20% of its assets in taxable
fixed-income securities issued or guaranteed by the full faith and credit of the
United States and may invest more than 20% of its assets in U.S. government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Fund's monies available for
investment exceed the municipal obligations available for purchase that meet the
Fund's rating, maturity and other investment criteria.
14
<PAGE>
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Manager and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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.
15
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 Portfolio and the value of the
portfolio securities would be affected. The Board of 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, since purchases and sales of
municipal bonds and other debt securities are traded through broker-dealers in
principal transactions, although the price usually includes an undisclosed
compensation to the dealer.
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. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.
- --------------------------------------------------------------------------------
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
asset values 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 are no readily obtainable market quotations (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 instru-
16
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Valuation of Shares (continued)
- --------------------------------------------------------------------------------
ments maturing within 60 days will be valued at cost plus (minus) amortized
discount (premium), if any, when amortized cost approximates 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 Board of Trustees.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Portfolio's net investment income are paid monthly, and
any realized capital gains are distributed at least annually.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.
Income dividends and capital 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 L 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 L 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 L and Class Y shares.
TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated
17
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
investment company. In each taxable year that the Portfolio qualifies, so long
as such qualification is in the best interests of its shareholders, the
Portfolio will pay no federal income tax on its net investment income and
long-term capital gain that is distributed to shareholders, provided the
Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months
or not for more than 12 months at disposition. Losses realized by a shareholder
on the dis-
18
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
position of shares owned for six months or less will be treated as a long-term
capital loss to the extent a capital gain dividend had been distributed on such
shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' federal income tax return.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers three Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge. Class Y shares are sold
without an initial sales charge or a CDSC and are available only to investors
investing a minimum of $15,000,000 (except for purchases of Class Y shares by
Smith Barney Concert Allocation Series Inc., for which there is no minimum
purchase amount). Until June 25, 1999, purchases of Class L shares by investors
who were holders of Class C shares of the Portfolio on June 12, 1998 will not be
subject to the 1% initial sales charge. 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 L or Class Y shares. Smith
Barney and other broker-dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.
Investors in Class A and Class L 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 at least $15,000,000. Subsequent investments of at least $50 may be made for
all Classes. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A and Class L shares and the subsequent investment
requirement for all
19
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Classes is $25. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a quarterly basis, the minimum initial investment
requirement for Class A and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
for Class A shares for employees of Travelers and its subsidiaries, including
Smith Barney, unitholders who invest distributions from a UIT sponsored by Smith
Barney, and Directors or Trustees of any Travelers-affiliated funds, including
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 the Distributor, 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 at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder 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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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 $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a 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 L shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."
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 and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES
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 Travelers-affiliated funds,
including the Smith Barney Mutual Funds (including retired Board members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the 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) purchases by
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
21
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
offered with a sales charge) and who wish to reinvest their redemption proceeds
in the Portfolio, provided the reinvestment is made within 60 calendar days of
the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) investments of distributions from a UIT
sponsored by Smith Barney; and (g) purchases by investors participating in a
Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at 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 other Smith Barney Mutual Funds offered with a sales charge, as
currently 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 made 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. The Distributor may also offer net asset
value purchase for aggregating related fiduciary accounts under such conditions
that it 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
22
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 the Distributor. 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 the Distributor.
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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
same Portfolio within 13 months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the 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.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES
The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is re-
23
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
allowed to dealers who sell Class L shares.
The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class L shares; and (b) Class A
shares that were purchased without an initial sales charge but subject to a
CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their account value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; or (c) CDSC Shares redeemed more than 12 months after their
purchase.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class L shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
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 L 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
24
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
of the value of the shareholder's shares at the time the withdrawal plan
commences (see "Automatic Cash Withdrawal Plan") provided, however, that
automatic cash withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for withdrawal plans
that were established prior to November 7, 1994; (c) redemptions of shares
within 12 months following the death or disability of the shareholder; (d)
involuntary redemptions; and (e) redemptions of shares to effect 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.
- --------------------------------------------------------------------------------
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.
Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
25
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- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* 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.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
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 -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
26
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation 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 shares of the Portfolio.
** Available for exchange with Class L shares of the Portfolio.
Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions may be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the 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. 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,
27
<PAGE>
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Exchange Privilege (continued)
- --------------------------------------------------------------------------------
investors should read the current prospectus describing the shares to be
acquired. The Portfolio reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------
The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on a day on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to 10
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, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must
28
<PAGE>
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 $10,000 must be guaranteed by an eligible guarantor institution such
as a domestic bank, savings and loan institution, domestic credit union, member
bank of the Federal Reserve System or member firm of a national securities
exchange. Written redemption requests of $10,000 or less do not require a
signature guarantee unless more than one such redemption request is made in any
10-day period. Redemption proceeds will be mailed to an investor's address of
record. 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
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 or
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 4:00
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
29
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 or her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/ Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 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 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
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Performance
- --------------------------------------------------------------------------------
From time to time the Fund may include the Portfolio's yield, taxable
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 L 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 30-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
30-day period is assumed to be earned each 30-day period for 12 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>
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Management of the Fund
- --------------------------------------------------------------------------------
TRUSTEES
Overall responsibility for management and supervision of the Portfolio
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 Distributor, the Manager, and the
Fund's custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Manager. The SAI contains background information regarding
each Trustee and executive officer of the Fund.
MANAGER
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.
MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
MMC 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 MMC a daily fee
based on the Portfolio's assets. The management agreement provides for a
management fee of 0.50% of the Portfolio's average daily net assets. MMC has
voluntarily agreed to waive its fee if in any fiscal year the aggregate expenses
of any Class of the Portfolio, exclusive of 12b-1 fees, taxes, brokerage,
interest, and extraordinary expenses, such as litigation costs, exceed 0.70% of
such Class' average daily net assets. The expense limitation shall be in effect
until it is terminated by notice to shareholders and by supplement to the
then-current prospectus. The management fee and expense limitation became
effective on December 18, 1995.
For the last fiscal year total expenses were 0.74% of the average daily
net assets for Class A shares and 0.99% of the average daily net assets for
Class L shares.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, upon consummation
of the merger, the surviving corporation would be a bank holding company subject
to regulation under
32
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
the Bank Holding Company Act of 1956 (the "BHCA"). The requirements of the BHCA,
the Glass-Steagall Act and certain other laws and regulations will then be
applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, a Managing Director of Smith Barney, has served as
Vice President of the Fund and portfolio manager of the Portfolio since January
1996 and manages the day-to-day operations of the Fund, including making all
investment decisions. Mr. McDermott also serves as the portfolio manager for
other tax-exempt bond funds sponsored by Smith Barney.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. 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.
- --------------------------------------------------------------------------------
Distribution
- --------------------------------------------------------------------------------
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 L 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
33
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Distribution (continued)
- --------------------------------------------------------------------------------
a distribution fee with respect to Class L 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 L shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of shares;
interest and/or carrying charges; and indirect and overhead costs of Smith
Barney associated with the sale of Portfolio shares, including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class L 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 L 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 Board of 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.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end 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 different series of shares, each representing shares in one of the
separate Portfolios. The assets of the Portfolio are segregated and separately
managed. Class A, Class L 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
34
<PAGE>
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Additional Information (continued)
- --------------------------------------------------------------------------------
service and distribution of Class A and Class L shares are borne solely by the
respective Class and each 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 Board of 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. 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 Board of Trustees may grant in their discretion. When issued for
payment as described in this Prospectus, the Fund's shares will be fully paid
and transferable (subject to the Portfolio's minimum account size). Shares are
redeemable as set forth under "Redemption of Shares" and are subject to
involuntary redemption as set forth under "Minimum Account Size."
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as Custodian of the Portfolio's
investments.
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. 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>
SMITHBARNEY
A Member of TravelersGroup[LOGO]
Smith Barney
Muni Funds
Limited Term
Portfolio
388 Greenwich Street
New York, New York 10013
FD 0664 7/98
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
New York
Portfolio
JULY 29, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus July 29, 1998
- --------------------------------------------------------------------------------
Smith Barney Muni Funds
New York Portfolio
388 Greenwich Street
New York, New York 10013
1 800-451-2010
The New York Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund").
The New York Portfolio seeks to pay its shareholders as high a level of
monthly income exempt from Federal income taxes and from New York State and City
personal income taxes as is consistent with prudent investing.
The Portfolio may invest without limit in municipal obligations whose
interest is a tax-preference for purposes of the Federal alternative minimum
tax.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 12
- --------------------------------------------------------------------------------
Valuation of Shares 18
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 19
- --------------------------------------------------------------------------------
Purchase of Shares 21
- --------------------------------------------------------------------------------
Exchange Privilege 28
- --------------------------------------------------------------------------------
Redemption of Shares 31
- --------------------------------------------------------------------------------
Minimum Account Size 34
- --------------------------------------------------------------------------------
Performance 34
- --------------------------------------------------------------------------------
Management of the Fund 35
- --------------------------------------------------------------------------------
Distribution 37
- --------------------------------------------------------------------------------
Additional Information 38
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
Smith Barney Inc. (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>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. 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 L
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 of at least $15,000,000. 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 of $500,000
or more 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
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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 L shares
within 12 months of purchase. The CDSC may be waived for certain redemptions.
The Class L 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 L 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, which would 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 $15,000,000. 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
in vestment 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 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, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.
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 L 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
L shares to investors with longer term investment outlooks.
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 will be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 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 L 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 different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
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 by 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. In
addition, certain investors, including certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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 $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The mini mum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. 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. It is not recommended that the Portfolio be used as
an investment 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. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
quarterly basis is $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 Mutual Management Corp. ("MMC" or the
"Manager"), formerly known as Smith Barney Mutual Funds Management, Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Salomon 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
including Asset Management, 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. 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 at least
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 rein vestments will become eligible for conversion to Class A
shares on a pro rata basis. 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 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 municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
laws affecting the tax exemption for interest on municipal obligations could
affect 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>
New York Portfolio Class A Class B Class L* 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 1.00%* None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) ...... None** 4.50% 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees ............................. 0.50% 0.50% 0.50% 0.50%
12b-1 fees*** ............................... 0.15 0.65 0.70 --
Other expenses**** .......................... 0.06 0.08 0.08 0.06
---- ---- ---- ----
Total Portfolio Operating Expenses .............. 0.71% 1.23% 1.28% 0.56%
==== ==== ==== ====
- -------------------------------------------------------------------------------------------------
</TABLE>
*Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.
**Purchases of Class A shares of $500,000 or more 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 of purchase.
***Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
****"Other expenses" for Class Y shares have been estimated because no
Class Y shares were outstanding for the fiscal year ended March 31, 1998.
Class A shares of the Portfolio purchased through the Smith Barney Asset
One Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
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
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L 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 L 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."
New York Portfolio 1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A .......... $47 $62 $78 $125
Class B .......... 58 69 78 134
Class L .......... 33 50 80 163
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:
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
Class A .......... $47 $62 $78 $125
Class B .......... 13 39 68 134
Class L .......... 23 50 80 163
Class Y .......... 6 18 31 70
- --------------------------------------------------------------------------------
*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, 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set forth below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the SAI. As of March 31,
1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available at this time for that class.
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
New York Portfolio Class A Shares
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended
March 31, 1998 1997 1996 1995(1) 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year $13.16 $13.19 $12.83 $12.83 $13.25 $12.33 $11.80 $11.67 $11.48 $11.25
- -----------------------------------------------------------------------------------------------------------------------------
Net investment
income 0.72 0.74 0.75 0.76 0.78 0.81 0.83 0.85 0.86 0.86
Net realized and
unrealized
gain (loss) 0.81 (0.03) 0.35 0.01* (0.41) 0.92 0.51 0.13 0.20 0.23
- -----------------------------------------------------------------------------------------------------------------------------
Total Income from
Operations 1.53 0.71 1.10 0.77 0.37 1.73 1.34 0.98 1.06 1.09
=============================================================================================================================
Less Distributions From:
Net investment
income (0.73) (0.74) (0.74) (0.77) (0.79) (0.81) (0.81) (0.85) (0.87) (0.86)
Net realized gains (0.05) -- -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.78) (0.74) (0.74) (0.77) (0.79) (0.81) (0.81) (0.85) (0.87) (0.86)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $13.91 $13.16 $13.19 $12.83 $12.83 $13.25 $12.33 $11.80 $11.67 $11.48
=============================================================================================================================
Total Return(P) 11.83% 5.48% 8.71% 6.32% 2.66% 14.48% 11.98% 8.74% 9.28% 10.04%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Year (millions) $554 $531 $558 $83 $70 $62 $40 $33 $28 $12
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses (2) 0.71% 0.75% 0.72% 0.63% 0.55% 0.55% 0.48% 0.28% 0.25% 0.24%
Net investment
income 5.28 5.58 5.84 6.00 5.79 6.32 6.86 7.31 7.10 7.48
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover
Rate 71% 53% 36% 30% 20% 22% 24% 70% 25% 56%
=============================================================================================================================
</TABLE>
(1) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(2) As a result of voluntary expense limitations, the expense ratio will not
exceed 0.85% for Class A Shares.
* Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
(P) Total returns do not reflect any sales loads or contingent deferred sales
charges.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
New York Portfolio Class B Shares
- --------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1998 1997 1996 1995(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $13.15 $13.18 $12.84 $11.96
- --------------------------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.65 0.67 0.67 0.31
Net realized and unrealized gain (loss) 0.80 (0.03) 0.35 0.86*
- --------------------------------------------------------------------------------------------------------------
Total Income from Operations 1.45 0.64 1.02 1.17
==============================================================================================================
Less Distributions From:
Net investment income (0.66) (0.67) (0.68) (0.29)
Net realized gains (0.05) -- -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.67) (0.68) (0.29)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.89 $13.15 $13.18 $12.84
==============================================================================================================
Total Return(P) 11.19% 4.96% 8.05% 9.92%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $195 $185 $181 $4
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 1.23% 1.27% 1.25% 1.27%+
Net investment income 4.76 5.06 5.45 5.76+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 71% 53% 36% 30%
==============================================================================================================
</TABLE>
(1) As a result of voluntary expense limitations, the ratio of expenses to
average net assets will not exceed 1.35% for Class B shares.
(2) For the period from November 11, 1994 (inception date) to March 31, 1995.
* Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
(P) Total returns do not reflect any sales loads or contingent deferred sales
charges.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
New York Portfolio Class L Shares(1)
- ------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1998 1997 1996 1995 1994 1993(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $13.14 $13.17 $12.83 $12.82 $13.24 $12.84
- ------------------------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.64 0.66 0.66 0.68 0.68 0.15
Net realized and unrealized gain (loss) 0.80 (0.02) 0.36 0.01* (0.40) 0.37
- ------------------------------------------------------------------------------------------------------------
Total Income from Operations 1.44 0.64 1.02 0.69 0.28 0.52
============================================================================================================
Less Distributions From:
Net investment income (0.65) (0.67) (0.68) (0.68) (0.70) (0.12)
Net realized gains (0.05) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.70) (0.67) (0.68) (0.68) (0.70) (0.12)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.88 $13.14 $13.17 $12.83 $12.82 $13.24
============================================================================================================
Total Return(P) 11.13% 4.91% 8.07% 5.66% 1.96% 4.04%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $11 $10 $9 $6 $5 $1
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.28% 1.32% 1.28% 1.28% 1.23% 1.23%+
Net investment income 4.71 5.01 5.02 5.38 4.98 5.37+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 71% 53% 36% 30% 20% 22%
============================================================================================================
</TABLE>
(1) On November 7, 1994, the former Class B shares were renamed Class C
shares. On June 12, 1998, the Class C shares were renamed Class L shares.
(2) For the period from January 8, 1993 (inception date) to March 31, 1993.
(3) As a result of voluntary expense limitations, the expense ratio will not
exceed 1.40% for Class C Shares.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Includes the per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at net asset value less
than the net asset value at the beginning of the period.
(P) Total returns do not reflect any sales loads or contingent deferred sales
charges.
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of that state as is consistent with
prudent investing. The Portfolio will seek to be fully invested in obligations
of that state and its political subdivisions, agencies and instrumentalities
that were, in the opinion of bond counsel to the issuer, exempt from such
state's as well as Federal income taxes at the time of their issuance. (For
certain shareholders, a portion of each Portfolio's income may be subject to the
alternative minimum tax ("AMT") on tax-exempt income discussed below.) Such
obligations are often issued to raise money for public projects that enhance the
quality of life including health facilities, housing, airports, schools,
highways and bridges. The Portfolio invests its assets in securities of ranging
maturities, without limitation, depending on market conditions. Typically, the
remaining maturity of municipal bonds will range between 5 and 30 years.
The two principal classifications of municipal obligations are "general
obligation" and "revenue". General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the Statement of Additional Information for a more detailed
discussion about the different types of municipal obligations.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he or she is subject to that tax. Such
private activity bonds include bonds issued to finance such projects as certain
solid waste disposal facilities, student loan programs, and water and sewage
projects. Because interest income on AMT-Subject Bonds is taxable to certain
investors, it is expected, although there can be no guarantee, that such
municipal obligations generally will provide somewhat higher yields than other
municipal obligations of comparable quality and maturity. There is no limitation
on the percent or amount of each Portfolio's assets that may be invested in
AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO"). Investment
grade bonds are rated within the four highest categories by an NRSRO, such as
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 Ratings Group ("S&P") or, if unrated,
determined to be of comparable quality by MMC; pre-refunded bonds escrowed by
U.S. Treasury obligations are considered AAA-rated (the highest
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Investment Objective and Management Policies (continued)
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rating) 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 in the
fourth highest category (this grade, while regarded as having an adequate
capacity to pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics; in addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds) or in unrated municipal bonds if, based upon credit analysis by the
Manager, it is believed that such securities are at least of comparable
quality to those securities in which the Portfolio may invest. In determining
the suitability of an investment in an unrated municipal bond, the Manager will
take into consideration debt service coverage, the purpose of the financing,
history of the issuer, existence of other rated securities of the issuer and
other general conditions as may be relevant, including comparability to other
issues. After the Portfolio purchases a municipal bond, the issue may cease to
be rated or its rating may be reduced below the minimum required for purchase.
Such an event would not require the elimination of the issue from the Portfolio
but the Manager will consider such an event in determining whether the Portfolio
should continue to hold the security.
The Portfolio's short-term municipal obligations will be limited to high
grade obligations (obligations that are secured by the full faith and credit of
the United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or Prime-1 or Aa
or better by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have
a rating within comparable categories by any other NRSRO, or obligations that
are unrated but determined by the Manager to be comparable). 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 liquidate 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.
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Investment Objective and Management Policies (continued)
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The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e., delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or liquid high
grade debt securities, marked-to-market daily pursuant to guidelines established
by the Board of Trustees, 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.
The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.
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 SAI.
The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest
14
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Investment Objective and Management Policies (continued)
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payments to be reinvested prior to maturity, zero coupon securities eliminate
the reinvestment risk and lock in a rate of return to maturity.
The Portfolio may invest in municipal lease obligations, which may take
the form of leases, installment purchase contracts or conditional sales
contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by state and local governments
and authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality, they ordinarily are backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease obligation.
The leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
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 period when the Fund's monies
available for investment exceed such state's municipal obligations available
15
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Investment Objective and Management Policies (continued)
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for purchase that meet the Fund's rating, maturity and other investment
criteria.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Manager and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by
the inadequate preparation of their computer systems for the year 2000. This
may adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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. 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
16
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Investment Objective and Management Policies (continued)
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obligations issued by other jurisdictions. A recurrence of the financial
difficulties previously experienced by certain issuers of New York obligations
could result in defaults or declines in the market values of those issuers'
existing obligations and, possibly, in the obligations of other issuers of New
York obligations. Although as of the date of this Prospectus, no issuers of New
York obligations are in default with respect to the payment of the municipal
obligations, the occurrence of any such default could affect adversely the
market values and marketability of all New York obligations and, consequently,
the net asset value of the New York Portfolio.
For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles. The City was required to close substantial budget gaps in recent
years in order to maintain balanced operating results, as required by laws of
the State. The City's ability to maintain balanced budgets in the future is
subject to numerous contingencies; therefore, even though the City has managed
to close substantial budget gaps in recent years in order to maintain balanced
operating results, there can be no assurance that the City will continue to
maintain a balanced budget as required by State law without additional tax or
other revenue increases or reduction in City services, which could adversely
affect the City's economic base. ("Appendix C" in the Statement of Additional
Information provides additional details.)
RISK AND INVESTMENT CONSIDERATIONS
Investors should realize that risk of loss is inherent in the ownership of
any securities and that the Portfolio's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. In
addition, 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.
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Investment Objective and Management Policies (continued)
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The Portfolio 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. The 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, up to 50% of the Portfolio's
total assets may be invested in as few as two single issuers. In the event of
decline of creditworthiness or default upon the obligations of one or more such
issuers exceeding 5%, an investment in either Portfolio will entail greater risk
than in a portfolio having a policy of "diversification" because a high
percentage of the Portfolio's assets may be invested in municipal obligations of
one or two issuers. Furthermore, a high percentage of investments among few
issuers may result in a greater degree of fluctuation in the market value of the
assets of the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the 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, since purchases and sales of municipal bonds and
other debt securities are traded through broker-dealers in principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer.
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. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year for each
of the last ten years.
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Valuation of Shares
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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
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Valuation of Shares (continued)
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day that the NYSE is open, by dividing the value of the Portfolio's net asset
values 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 in vestments 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
amortized cost approximates 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
Board of Trustees.
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Dividends, Distributions and Taxes
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DIVIDENDS AND DISTRIBUTIONS
Dividends from the Portfolio's net investment income are paid monthly, and
any realized capital gains are declared and distributed at least 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 L 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 to Class B and Class L 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 L and Class Y shares.
19
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Dividends, Distributions and Taxes (continued)
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TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in
the SAI, there may be other federal, state, local, or foreign tax applications
to consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt- interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
20
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Dividends, Distributions and Taxes (continued)
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Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months
or not for more than 12 months at disposition. Losses realized by a shareholder
on the disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' federal income tax return.
NEW YORK STATE AND CITY TAXES
New York resident shareholders will not be subject to New York State and
City personal income tax on exempt-interest dividends attributable to tax-exempt
obligations of the State of New York and its political subdivisions, as well as
certain other Federal obligations considered exempt for New York State and City
purposes. Exempt-interest dividends are not excluded in determining New York
State franchise or New York City business taxes on corporations and financial
institutions.
The foregoing is only a brief summary of some of the tax considerations
generally affecting the Portfolio and its shareholders who are New York
residents. Investors are urged to consult their tax advisors with specific
reference to their own tax situation.
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Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares are subject to a
CDSC payable upon
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Purchase of Shares (continued)
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certain redemptions. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except for purchases of Class Y shares by Smith Barney Concert Allocation
Series Inc., for which there is no minimum purchase amount). Until June 25,
1999, purchases of Class L shares by investors who were holders of Class C
shares of the Portfolio on June 12, 1998 will not be subject to the 1% initial
sales charge. 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. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Portfolio, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Smith
Barney and other broker/dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.
Investors in Class A, Class B and Class L 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 by making an initial investment of at least
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For share holders purchasing shares of the Portfolio through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements in Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, a unitholder who invests distributions
from a UIT sponsored by Smith Barney, and Trustees or Directors of any
Travelers-affiliated funds, including the Smith Barney Mutual Funds, and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the share holder's
account by the Fund's transfer agent, First Data. Share certificates are issued
only upon a shareholder's written request to First Data. It is not recommended
that the Portfolio be used as an investment for Keogh, IRA or other qualified
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
22
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 the
Distributor, payment for Portfolio shares is due on the third business day
("settlement date") 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 at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder 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 share holder'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 - $25,000 4.00% 4.17% 3.60%
$ 25,000 - 49,999 3.50 3.63 3.15
50,000 - 99,999 3.00 3.09 2.70
100,000 - 249,999 2.50 2.56 2.25
250,000 - 499,999 1.50 1.52 1.35
500,000 and over * * *
================================================================================
*Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a 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 L 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.
23
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES
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 of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board Members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger,
acquisition of assets or other wise; (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) purchases by
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) and who wish to reinvest their redemption proceeds in the Portfolio,
provided the reinvesment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith
Barney; and (g) purchases by investors participating in a Smith Barney fee based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently listed under "Exchange Privilege,"
then held by such person and applying the sales charge applicable to such
aggregate. In order to obtain such discount,
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
mini mum 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. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it 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 the Distributor. 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 the
Distributor.
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
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 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.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES
The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is re allowed to dealers who sell Class L shares.
The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their account value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital
appreciation of Portfolio assets; (b) rein vestment of dividends or capital gain
distributions; (c) with respect
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
to Class B shares, shares redeemed more than five years after their purchase; or
(d) with respect to Class L shares and Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.
Class L 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 CDSC for
redemptions of Class B shares by shareholders of the Portfolio:
Year Since Purchase
Payment Was Made CDSC
--------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
- -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be 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.
27
<PAGE>
- --------------------------------------------------------------------------------
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 to effect 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.
- --------------------------------------------------------------------------------
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. Ex changes of Class A, Class B and Class L shares are subject to
minimum investment
28
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made.
Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
29
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation 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 L and Class Y shares of the
Portfolio.
** Available for exchange with Class A and Class B 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 L shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
Class B Exchanges. In the event a Class B shareholder 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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
30
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to ex change all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. 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 share holder. 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. Redemption procedures
discussed below are also applicable for exchanging shares, and ex changes 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.
31
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
If a share holder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the share holder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested funds.
Redemption 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, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Boston, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. 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.
32
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
share holder is entitled to participate in this program, he or she should
contact First Data at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form,
including 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 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the share holder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 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
33
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. (If a shareholder has more than one account in the Portfolio, each
account must satisfy the minimum account size.) The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Portfolio may advertise its yield, taxable
equivalent yield, total return and average annual total return in
advertisements. In addition, in other types of sales literature the Portfolio
may include its distribution rate. These figures are computed separately for
Class A, Class B, Class L 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
investments in the Class over a thirty-day period ending at month end. This net
income is then annualized, i.e., the amount of income earned by the investments
during that 30-day period is assumed to be earned each 30-day period for
34
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
twelve periods and is expressed as a percentage of the investments. 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 gain 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
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Portfolio
rests with the Fund's Board of Trustees. The Board of Trustees approves 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 SAI
contains background information regarding each Trustee and executive officer of
the Fund.
MANAGER
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. MMC
was incorporated in 1968 under the laws of Delaware. MMC, Holdings and Smith
Barney are each located at 388 Greenwich Street, New York, New York 10013. As
35
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
MMC 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. The management agreement
provides for a management fee paid by Smith Barney Muni Funds on behalf of the
Portfolio of 0.50% of the Portfolio's average daily net assets. MMC has
voluntarily agreed to waive its fee if in any fiscal year the aggregate
expenses of any Class of the Portfolio exclusive of 12b-1 fees, taxes,
brokerage, interest and extraordinary expenses, such as litigation costs,
exceed 0.70% of such Class' average net asset values for that fiscal year. This
voluntary expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus. The management
fee and expense limitation became effective on December 18, 1995.
Total expenses for the Portfolio's average net assets for the last fiscal
year were: 0.71%, 1.23% and 1.28% for Class A, Class B and Class L shares,
respectively.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, upon consummation
of the merger, the surviving corporation would be a bank holding company subject
to regulation under the Bank Holding Company Act of 1956 (the "BHCA"). The
requirements of the BHCA, the Glass-Steagall Act and certain other laws and
regulations will then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
36
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
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 investment
operations of the Portfolio, including making all investment decisions. Mr.
Coffey also serves as the portfolio manager for five of the Fund's non-money
market portfolios.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. 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.
- --------------------------------------------------------------------------------
Distribution
- --------------------------------------------------------------------------------
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 L shares of the
Portfolio at the annual rate of 0.15% of the average daily net asset values
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class L shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net asset values attributable to these
Classes. Class B shares that automatically convert to Class A shares eight years
after the date of original purchase, will no longer be subject to a distribution
fee. The fees are used by Smith Barney to pay its Financial Consultants for
servicing share holder accounts and, in the case of Class B and Class L 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 L 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.
37
<PAGE>
- --------------------------------------------------------------------------------
Distribution (continued)
- --------------------------------------------------------------------------------
Payments under the Plan with respect to Class B and Class L 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 Board of 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.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end 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 different series of shares, each representing shares in one of the
separate portfolios. The assets of each portfolio are segregated and separately
managed. Class A, Class B, Class L 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 share holder service and distribution of Class A, Class
B and Class L 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 Board of
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 Board of Trustees may grant in its
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."
38
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
PNCBank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of each Portfolio's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply to
their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.
39
<PAGE>
SMITH BARNEY
A Member of TravelersGroup[LOGO]
Smith Barney
Muni Funds
New York Portfolio
388 Greenwich Street
New York, New York 10013
FD0604 7/98
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
Florida
Portfolio
JULY 29, 1998
Prospectus begins on page one
[LOGO] Smith Barney Muni Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus July 29, 1998
- --------------------------------------------------------------------------------
Smith Barney Muni Funds
Florida Portfolio
388 Greenwich Street
New York, NY 10013
(800) 451-2010
The Florida Portfolio (the "Portfolio") is one of eight 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 item 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
Addi-tional Information dated July 29, 1998, as amended or supplemented from
time to time (the "SAI"), which 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 11
- --------------------------------------------------------------------------------
Valuation of Shares 17
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 18
- --------------------------------------------------------------------------------
Purchase of Shares 21
- --------------------------------------------------------------------------------
Exchange Privilege 27
- --------------------------------------------------------------------------------
Redemption of Shares 30
- --------------------------------------------------------------------------------
Minimum Account Size 33
- --------------------------------------------------------------------------------
Performance 33
- --------------------------------------------------------------------------------
Management of the Fund 34
- --------------------------------------------------------------------------------
Distribution 36
- --------------------------------------------------------------------------------
Additional Information 37
- --------------------------------------------------------------------------------
================================================================================
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
Portfolio or Smith Barney Inc. (the "Distributor"). This Prospectus does not
constitute an offer by the Portfolio 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>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. 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 item
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 L
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 of at least $15,000,000. 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 of $500,000
or more 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 --
Alternative Purchase Arrangements -- 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
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."
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L 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 L 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, which would 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 $15,000,000. 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 duration 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 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, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.
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 L 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
L shares to investors with longer-term investment outlooks.
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
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
be immediately invested in the Portfolio. In addition, Class A share purchases
of $500,000 or more 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 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 L 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 different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
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 L 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
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum investment requirements for purchases of Portfolio shares through
the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as an investment 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. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25, and on
a quarterly basis is $50. See "Purchase of Shares."
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management, Inc., serves as the
Portfolio's investment manager. MMC provides investment advisory and management
services to various investment companies comprising the Smith Barney Mutual
Funds. MMC is a wholly owned subsidiary of Salomon 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
including Asset Management, 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. 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 at least
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."
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 municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect 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."
6
<PAGE>
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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 the Portfolio's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
Florida Portfolio Class A Class B Class L* 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 1.00%* None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower).................................. None** 4.50% 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees.............................. 0.50% 0.50% 0.50% 0.50%
12b-1 Fees***................................ 0.15 0.65 0.70 --
Other Expenses............................... 0.11 0.13 0.13 0.11****
Total Portfolio Operating Expenses............. 0.76% 1.28% 1.33% 0.61%
- ----------------------------------------------------------------------------------------
</TABLE>
*Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.
**Purchases of Class A shares of $500,000 or more 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 of purchase.
***Upon conversion of Class B shares to Class A shares such shares will no
longer be subject to a distribution fee. Class L shares do not have a conversion
feature and, therefore, are subject to an ongoing distribution fee. As a result,
long-term shareholders of Class L shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
****For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1998.
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
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 L 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 L
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 L 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>
Florida Portfolio 1 Year 3 Years 5 Years 10 Years*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A.................................................... $47 $63 $81 $130
Class B.................................................... 58 71 80 140
Class L.................................................... 33 52 82 169
Class Y.................................................... 6 20 34 76
An investor would pay the following expenses on the same
investment, assuming the same annual return and no
redemption:
Class A.................................................... $47 $63 $81 $130
Class B.................................................... 13 41 70 140
Class L.................................................... 23 52 82 169
Class Y.................................................... 6 20 34 76
- ----------------------------------------------------------------------------------------------------
</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.
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
<PAGE>
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Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the SAI. As of March 31,
1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available at this time for that class.
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Florida Portfolio Class A Shares
- -------------------------------------------------------------------------------------------
Year Ended March 31, 1998 1997 1996(1) 1995(2) 1994 1993 1992(3)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $13.16 $13.24 $12.89 $12.82 $13.21 $12.32 $12.00
- -------------------------------------------------------------------------------------------
Net investment income (4) 0.72 0.73 0.74 0.75 0.77 0.79 0.73
Net realized and
unrealized gain (loss) 0.72 (0.03) 0.35 0.08# (0.39) 0.91 0.29
- -------------------------------------------------------------------------------------------
Total Income from Operations 1.44 0.70 1.09 0.83 0.38 1.70 1.02
===========================================================================================
Less Distributions From:
Net investment income (0.73) (0.73) (0.74) (0.76) (0.77) (0.80) (0.70)
Net realized gains (0.13) (0.05) -- -- -- (0.01) --
- ------------------------------------------------------------------------------------------
Total Distributions (0.86) (0.78) (0.74) (0.76) (0.77) (0.81) (0.70)
- ------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $13.74 $13.16 $13.24 $12.89 $12.82 $13.21 $12.32
==========================================================================================
Total Return (P) 11.15% 5.44% 8.65% 6.77% 2.75% 14.21% 8.70%++
- ------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $143 $127 $117 $108 $105 $102 $68
- ------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses (4) (5) 0.76% 0.85% 0.70% 0.61% 0.54% 0.46% 0.23%+
Net investment income 5.28 5.56 5.62 5.97 5.71 6.15 6.70+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 59% 62% 47% 43% 20% 26% 42%
==========================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average share
method rather than the undistributed net investment income method because
it more accurately reflects the per share data for the year.
(2) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(3) For the period from April 2, 1991 (inception date) to March 31, 1992.
(4) The Manager waived all or part of its fees for the year ended March 31,
1993. If such fees were not waived, the decrease in net investment income
and the expense ratio would have been $0.01 and 0.56%, respectively.
(5) As a result of voluntary expense limitations, the ratio of expenses to
average net assets will not exceed 0.85%.
# Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value at
the beginning of the period.
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total returns are not annualized as it may not be representative of the
total return for the year.
+ Annualized.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Florida Portfolio Class B Shares Class L Shares(3)
- -------------------------------------------------------------------------------------------------------------
Year Ended
March 31, 1998 1997 1996(1) 1995(2) 1998 1997 1996(1) 1995 1994 1993(4)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $13.14 $13.23 $12.89 $11.91 $13.14 $13.22 $12.89 $12.81 $13.20 $12.86
- -------------------------------------------------------------------------------------------------------------
Income from
Operations:
Net investment
income 0.65 0.65 0.68 0.30 0.64 0.65 0.66 0.67 0.68 0.19
Net realized and
unrealized gain
(loss) 0.72 0.01 0.35 0.97 0.72 (0.01) 0.35 0.08 (0.39) 0.33
- -------------------------------------------------------------------------------------------------------------
Total from
Operations 1.37 0.64 1.03 1.27 1.36 0.64 1.01 0.75 0.29 0.52
=============================================================================================================
Less Distributions
From:
Net investment
income (0.65) (0.68) (0.69) (0.29) (0.63) (0.67) (0.68) (0.67) (0.68) (0.18)
Net realized gains (0.13) (0.05) -- -- (0.13) (0.13) -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total
Distributions (0.78 (0.73) (0.69) (0.29) (0.76) (0.72) (0.68) (0.67) (0.68) (0.18)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $13.73 $13.14 $13.23 $12.89 $13.74 $13.14 $13.22 $12.89 $12.81 $13.20
=============================================================================================================
Total Return(P) 10.59% 4.91% 8.09% 10.77%++ 10.51% 4.94% 7.96% 6.12% 2.05% 4.05%++
- -------------------------------------------------------------------------------------------------------------
Net Assets,
End of Year
(millions) $59 $51 $46 $2 $9 $7 $3 $3 $2 $1
- -------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses (5) 1.28% 1.35% 1.20% 1.20%+ 1.33% 1.40% 1.28% 1.25% 1.24% 1.24%+
Net investment
income 4.76 4.93 5.00 5.57+ 4.71 4.84 5.04 5.40 4.95 5.21+
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover
Rate 59% 62% 47% 43% 59% 62% 47% 43% 20% 26%
=============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average share
method rather than the undistributed net investment income method because
it more accurately reflects the per share data for the year.
(2) For the period from November 16, 1994 (inception date) to March 31, 1995.
(3) On November 7, 1994 the former Class B shares were renamed Class C shares.
On June 12, 1998, the Class C shares were renaed Class L shares.
(4) For the period from January 5, 1993 (inception date) to March 31, 1993.
(5) As a result of voluntary expense limitations, the ratio of expenses to
average net assets will not exceed 1.35% and 1.40%, respectively.
# Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total return is not annualized as the result may not be representative of
the total return for the year.
+ Annualized.
10
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Florida Portfolio seeks as high a level of income exempt from Federal
income taxes as is consistent with prudent investing. The Portfolio invests
primarily in obligations that are issued by the State of Florida and its
political subdivisions, agencies and instrumentalities, the interest from which
is, in the opinion of bond counsel for the various issuers, exempt from Federal
income taxes at the time of their issuance. For certain shareholders, a portion
of the Portfolio's income may be subject to the alternative minimum tax ("AMT")
on tax-exempt income discussed below. Such obligations often are issued to raise
money for public projects that enhance the quality of life, including health
facilities, housing, airports, schools, highways and bridges. The Portfolio will
seek generally to select investments which will enable its shares to be exempt
from the Florida intangibles tax.
The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the Statement of Additional Information for a more detailed
discussion about the different types of municipal obligations.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he is subject to that tax. Such private
activity bonds include bonds issued to finance such projects as certain solid
waste disposal facilities, student loan programs and water and sewage projects.
Because interest income on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal obligations
generally will provide some-what higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are those rated within the four highest categories by an
NRSRO, such as rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or,
if unrated, determined to be of comparable quality by MMC; pre-refunded bonds
escrowed by U.S. Treasury obligations are considered AAA-rated (the highest
rating) 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 in the
fourth
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
highest category (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium quality and has
speculative characteristics; in addition, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds) or in
unrated municipal bonds if, based upon credit analysis by the Manager, it is
believed that such securities are at least of comparable quality to those
securities in which the Portfolio may invest. In determining the suitability of
an investment in an unrated municipal bond, the Manager will take into
consideration debt service coverage, the purpose of the financing, history of
the issuer, existence of other rated securities of the issuer and other general
conditions as may be relevant, including comparability to other issues. After
the Portfolio purchases a municipal bond, the issue may cease to be rated or its
rating may be reduced below the minimum required for purchase. Such an event
would not require the elimination of the issue from the Portfolio but the
Manager will consider such an event in determining whether the Portfolio should
continue to hold the security.
The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-1 +, SP-1, SP-2, or A-1 or AA or better
by S&P or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
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 liquidate
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 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
12
<PAGE>
- --------------------------------------------------------------------------------
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 debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, 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 municipal obligations 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 borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.
The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 331/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures 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 SAI.
The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate the reinvestment risk and lock in a
rate of return to maturity.
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Portfolio may invest in municipal lease obligations, which may take
the form of leases, installment purchase contracts or conditional sales
contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by state and local governments
and authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality, they ordinarily are backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease obligation.
The leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
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 AMT). 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.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on the
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Manager and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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. Manufacturing, primarily high technology, electrical and
electronic equipment industries and financial services are rapidly growing and
diversifying elements of Florida's economy. Agriculture, once sharing with
tourism the role of dominant economic sector, is now only one of several
important elements.
Florida's rapid growth is straining resources, but is also having some
positive results. In many cases, the expansion of local governments is creating
greater economic depth and diversity. For example, numerous insurance companies
have located in Jacksonville over the past ten years, making the city a leading
insurance center. During the same period, Miami's financial services sector has
expanded significantly, primarily in international banking and international
trade. Many other Florida cities and counties have also succeeded in their
economic development efforts, as evidenced by the significant business
investment throughout the state.
Florida has taken the lead among U.S. states with a long-term
comprehensive growth management plan for local governments. The plan should
enhance economic development by keeping growth in line with developing resources
and costs. The growth initiative affects population, infrastructure, employment,
education, transportation, and water supply -- all vital elements of economic
stability.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Additional information regarding the state is included in the Statement of
Additional Information.
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, it
will invest in municipal obligations with an emphasis on income rather than
stability of net asset values.
The Portfolio is registered as a "non-diversified" company under the
Investment Company Act of 1940, as amended (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 of 1986, as amended (the "Code") which 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,
up to 50% of the Portfolio's total assets may be invested in as few as two
single issuers. In the event of a decline in the creditworthiness of, or default
upon, the obligations of one or more such issuers exceeding 5%, an investment in
the Portfolio may 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
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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, since purchases and sales of municipal bonds
and other debt securities are traded through broker-dealers in principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer.
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. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.
- --------------------------------------------------------------------------------
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 asset values
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 are no readily obtainable market quotations (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
amortized cost approximates 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
Board of Trustees.
17
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Portfolio's net investment income are paid monthly, and
any realized capital gains are declared and distributed at least annually.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.
Income dividends and capital gains distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data") should notify First Data in writing at least
five business days prior to the payment date to permit the change to be entered
in the shareholder's account.
The per share dividends on Class B and Class L 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 to Class B and Class L 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 L and Class Y shares.
TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not
18
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
subject to regular federal income taxes, although they may be considered taxable
for certain state and local income (or intangible) tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months
or not for more than 12 months at disposition. Losses realized by a shareholder
on the disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security
19
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
or employer identification number). Withholding from taxable dividends and
capital gain distributions also is required for shareholders who otherwise are
subject to backup withholding. Any tax withheld as a result of backup
withholding does not constitute an additional tax, and may be claimed as a
credit on the shareholders' federal income tax return.
Florida Taxes
Florida currently does not impose a personal 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 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 the tax considerations generally
affecting the Portfolio and its shareholders who are Florida residents.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
20
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares 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 $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. 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 L or Class Y shares.
Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee.
Investors in Class A, Class B and Class L 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 at least $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For shareholders purchasing shares of the Portfolio
through the Portfolio's Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $25. For
shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
in Class A for employees of Travelers and its subsidiaries, including Smith
Barney, and their spouses and children, unitholders who invest distributions
from a UIT sponsored by Smith Barney, a unitholder who invests distributions
from a UIT sponsored by Smith Barney, and Trustees or Directors of any
Travelers-affiliated funds, including 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 an investment for Keogh, IRA or other qualified
retirement plans.
21
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 the Distributor, 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 at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder 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:
<TABLE>
<CAPTION>
===========================================================================================
Sales Charge Dealer's
% of % of Amount Reallowance as % of
Amount of Investment Offering Price Invested Offering Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 * * *
===========================================================================================
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a 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 L shares is waived. See "Deferred Sales Charge Alternatives"
and "Waivers of CDSC."
22
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS - CLASS A SHARES
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 of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the 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) purchases by
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) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares
23
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
of the Portfolio and other Smith Barney Mutual Funds offered with a sales
charge, as currently 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 made 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. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it 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 the Distributor. 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 the
Distributor.
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 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.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES
The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.
The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their account 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 L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class L 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 CDSC for
redemptions of Class B shares by shareholders of the Portfolio:
<TABLE>
<CAPTION>
Year Since Purchase
Payment Was Made CDSC
---------------------------------------------------
<S> <C>
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
---------------------------------------------------
</TABLE>
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. See "Prospectus Summary -- Alternative Purchase Arrangements
- -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be 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 pur-
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
poses, 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 five
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 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect 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.
- --------------------------------------------------------------------------------
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 L shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.
27
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
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 -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
28
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Allocation Concert Series Inc. -- Balanced Portfolio
Smith Barney Allocation Concert Series Inc. -- Conservative Portfolio
Smith Barney Allocation Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Allocation Concert Series Inc. -- High Growth Portfolio
Smith Barney Allocation 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 L and Class Y shares of the
Portfolio.
** Available for exchange with Class A and Class B 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 L shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
Class B Exchanges. In the event a Class B shareholder 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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective class in any of the funds identified above may do so without
imposition of any charge.
29
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the 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. 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,
30
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 10 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, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. 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
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
31
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 or
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 4:00
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 or her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
32
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Redemption of Shares (continued)
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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 days' prior notice to shareholders.
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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.
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Performance
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From time to time the Portfolio may include its yield, taxable 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 L 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 30-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 30-day period is
assumed to be earned each 30-day period for 12 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
33
<PAGE>
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Performance (continued)
- --------------------------------------------------------------------------------
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.
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Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Portfolio
rests with the Fund's Board of Trustees. The Board of Trustees approves 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 SAI
contains background information regarding each Trustee and executive officer of
the Fund.
MANAGER
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.
MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
34
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
MMC 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. The management agreement
provides for an annual management fee at the rate of 0.50% of the Portfolio's
average daily net assets. MMC has voluntarily agreed to waive its fee if in any
fiscal year the aggregate expenses of any Class of the Portfolio exclusive of
12b-1 fees, taxes, brokerage, interest and extraordinary expenses, such as
litigation costs, exceed 0.70% of such Class' average net asset value for that
fiscal year. This voluntary expense limitation will remain in effect until
terminated by notice to shareholders and by supplement to the then-current
prospectus. The management fee and expense limitation became effective on
December 18, 1995.
For the fiscal year ended March 31, 1998, total expenses were 0.76% of the
average daily net asset value for Class A shares; 1.28% of the average daily net
asset value for Class B shares; and 1.33% of the average daily net asset value
for Class L shares.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, upon consummation
of the merger, the surviving corporation would be a bank holding company subject
to regulation under the Bank Holding Company Act of 1956 (the "BHCA"). The
requirements of the BHCA, the Glass-Steagall Act and certain other laws and
regulations will then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
35
<PAGE>
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
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 investment operations of the
Portfolio, including making all investment decisions. Mr. Coffey also serves as
the portfolio manager for five of the Fund's non-money market portfolios.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. 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.
- --------------------------------------------------------------------------------
Distribution
- --------------------------------------------------------------------------------
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 L shares of the
Portfolio at the annual rate of 0.15% of the average daily net asset values
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class L shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net asset values 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 L 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 L shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of
36
<PAGE>
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Distribution (continued)
- --------------------------------------------------------------------------------
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 L 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 Board of 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.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end 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 different series of shares, each representing shares in one of the
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 L 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 L shares are borne solely by the respective Class and
each 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 particular
Class. It is the intention of the Fund not to hold annual meetings of
shareholders. The Board of 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
37
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
rights as the Board of Trustees may grant in its 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.
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. 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>
SMITHBARNEY
A Member of TravelersGroup[Logo]
Smith Barney
Muni Funds
Florida Portfolio
388 Greenwich Street
New York, New York 10013
FD 0605 7/98
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
National
Portfolio
July 29, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Prospectus July 29, 1998
- --------------------------------------------------------------------------------
Smith Barney Muni Funds
National Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The National Portfolio (the "Portfolio") is one of eight 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
seeks to achieve its objective by investing its assets in securities of varying
maturities, without limitation, depending on market conditions. Typically, the
remaining maturity of municipal bonds will range between 5 and 30 years. The
Portfolio may invest without limit in municipal obligations whose interest is a
tax-preference item for purposes of the Federal alternative minimum tax.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which 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 SAI 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
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Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
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 17
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Purchase of Shares 19
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Exchange Privilege 26
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Redemption of Shares 29
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Minimum Account Size 31
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Performance 31
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Management of the Fund 32
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Distribution 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
Portfolio or Smith Barney Inc. ("Smith Barney" or the "Distributor"). This
Prospectus does not constitute an offer by the Portfolio 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>
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Propectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. 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 seeks to achieve its objective by investing its
assets in securities of varying maturities, without limitation, depending on
market conditions. Typically, the remaining maturity of municipal bonds will
range between 5 and 30 years. The Portfolio may invest without limit in
municipal obligations whose interest is a tax-preference item 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 L
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 of at least $15,000,000. 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 of $500,000
or more 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 --
Alternative Purchase Arrangements -- 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
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 --
3
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Prospectus Summary (continued)
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Deferred Sales Charge Alternatives."
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L 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 L 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, which would 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 $15,000,000. 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 duration 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 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, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a
substantive sales charge discount and who have a short-term or undetermined time
frame.
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 L 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
L shares to investors with longer-term investment outlooks.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares
4
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 of $500,000 or more 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 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 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 L shares, purchasers eligible to purchase Class A shares at net asset
value or at a reduced sales charge should consider doing so.
Financial Consultants of Smith Barney Inc. ("Smith Barney" or the
"Distributor") may receive different compensation for selling different Classes
of shares. Investors should understand that the purpose of the CDSC on the Class
B and Class L shares is the same as that of an initial sales charge.
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 L 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 $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. There is no
minimum investment requirement in Class A shares for unit holders 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. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25, and on
a quarterly basis is $50. See "Purchase of Shares."
5
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management Inc., serves as the
Portfolio's investment manager. MMC provides investment advisory and management
services to various investment companies comprising the Smith Barney Mutual
Funds. MMC is a wholly owned subsidiary of Salomon 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
including Asset Management, 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. 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 at least
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."
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. The market value of municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect 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."
6
<PAGE>
- --------------------------------------------------------------------------------
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 the Portfolio's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
National Portfolio Class A Class B Class L* 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 1.00%* 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 ......................... 0.45% 0.45% 0.45% 0.45%
12b-1 fees*** ........................... 0.15 0.65 0.70 --
Other expenses .......................... 0.06 0.19 0.20 0.10****
Total Portfolio Operating Expenses ...... 0.66% 1.29% 1.35% 0.55%
- ----------------------------------------------------------------------------------------
</TABLE>
* Class L shares were previously named Class C shares. For shareholders
who owned Class C shares of the Portfolio, Class L shares may be purchased
without incurring the 1% initial sales charge until June 25, 1999.
** Purchases of Class A shares of $500,000 or more 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 of purchase.
*** Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
**** "Other expenses" for Class Y shares have been estimated because no
Class Y shares were outstanding during the fiscal year ended March 31, 1998.
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
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 changes, depending on the amount purchased and, in
the case of Class B, Class L 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,
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
consisting of a 0.50% distribution fee and a 0.15% service fee. With respect to
Class L 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>
National Portfolio 1 Year 3 Years 5 Years 10 Years*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A ................................................. $46 $60 $75 $119
Class B ................................................. 58 71 81 138
Class L ................................................. 34 52 83 171
Class Y ................................................. 6 18 31 69
An investor would pay the following expenses on the same
investment, assuming the same annual return and no redemption:
Class A ................................................. $46 $60 $75 $119
Class B ................................................. 13 41 71 138
Class L ................................................. 24 52 83 171
Class Y ................................................. 6 18 31 69
- ----------------------------------------------------------------------------------------------------
</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.
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>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI.
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
National Portfolio Class A Shares
- -----------------------------------------------------------------------------------------------
Year Ended
March 31, 1998 1997 1996 1995 1994(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year $13.60 $13.67 $13.32 $13.35 $13.81
- -----------------------------------------------------------------------------------------------
Net investment
income(2) 0.79 0.81 0.81 0.82 0.85
Net realized and
unrealized
gain (loss) 0.73 (0.09) 0.35 (0.01) (0.39)
- -----------------------------------------------------------------------------------------------
Total Income from
Operations 1.52 0.72 1.16 0.81 0.46
===============================================================================================
Less Distributions From:
Net investment
income (0.80) (0.79) (0.81) (0.84) (0.86)
Net realized gains (0.16) -- -- -- (0.06)
- -----------------------------------------------------------------------------------------------
Total Distributions (0.96) (0.79) (0.81) (0.84) (0.92)
- -----------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $14.16 $13.60 $13.67 $13.32 $13.35
===============================================================================================
Total Return(P) 11.47% 5.41% 8.83% 6.38% 3.17%
- -----------------------------------------------------------------------------------------------
Net Assets,
End of Year
(millions) $371 $351 $378 $401 $413
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.66% 0.70% 0.70% 0.60% 0.52%
Net investment
income 5.61 5.92 5.88 6.30 6.05
- -----------------------------------------------------------------------------------------------
Portfolio Turnover
Rate 87% 31% 27% 54% 42%
===============================================================================================
<CAPTION>
National Portfolio Class A Shares
- -----------------------------------------------------------------------------------------------
Year Ended
March 31, 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Year $12.95 $12.49 $12.24 $12.11 $11.82
- -----------------------------------------------------------------------------------------------
Net investment
income(2) 0.88 0.90 0.91 0.92 0.95
Net realized and
unrealized
gain (loss) 0.87 0.46 0.17 0.19 0.30
- -----------------------------------------------------------------------------------------------
Total Income from
Operations 1.75 1.36 1.08 1.11 1.25
===============================================================================================
Less Distributions From:
Net investment
income (0.89) (0.90) (0.83) (0.98) (0.96)
Net realized gains -- -- -- -- --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.89) (0.90) (0.83) (0.98) (0.96)
- -----------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $13.81 $12.95 $12.49 $12.24 $12.11
===============================================================================================
Total Return(P) 13.96% 11.21% 9.13% 9.60% 10.93%
- -----------------------------------------------------------------------------------------------
Net Assets,
End of Year
(millions) $383 $261 $200 $160 $109
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.53% 0.50% 0.39% 0.35% 0.30%
Net investment
income 6.58 6.88 7.40 7.43 7.92
- -----------------------------------------------------------------------------------------------
Portfolio Turnover
Rate 53% 95% 103% 56% 82%
===============================================================================================
</TABLE>
(1) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(2) The Manager has waived all or a part of its fees for each of the years in
the four-year period ended March 31, 1992. If such fees were not waived,
the per share decrease of net investment income and the ratios of expenses
to average net assets would have been:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios
Per Share Decrease Without Fee Waivers
------------------------------------------- -------------------------------------------
1992 1991 1990 1989 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $.002 $.013 $.019 $.032 0.52% 0.49% 0.50% 0.54%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout the year:
<TABLE>
<CAPTION>
National Portfolio Class B Shares Class L Shares*
- -----------------------------------------------------------------------------------------------------
Year Ended March 31, 1998 1997 1996 1995 (1) 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 13.61 $ 13.67 $ 13.33 $ 12.41 $ 13.59
- -----------------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.70 0.74 0.73 0.33 0.69
Net realized and unrealized
gain (loss) 0.74 (0.08) 0.35 0.91 0.74
- -----------------------------------------------------------------------------------------------------
Total Income from Operations 1.44 0.66 1.08 1.24 1.43
=====================================================================================================
Less Distributions From:
Net Investment Income (0.73) (0.72) (0.74) (0.32) (0.70)
Net Realized Gains (0.16) -- -- -- (0.16)
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.89) (0.72) (0.74) (0.32) (0.86)
- -----------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $ 14.16 $ 13.61 $ 13.67 $ 13.33 $ 14.16
=====================================================================================================
Total Return(P) 10.80% 4.95% 8.26% 10.11%++ 10.71%
- -----------------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $ 20 $ 13 $ 12 $ 7 $ 16
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.29% 1.20% 1.19% 1.19%+ 1.35%
Net Investment Income 4.95 5.42 5.37 5.75+ 4.91
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 87% 31% 27% 54% 87%
=====================================================================================================
<CAPTION>
National Portfolio Class L Shares*
- -----------------------------------------------------------------------------------------------
Year Ended March 31, 1997 1996 1995 1994 1993(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 13.65 $ 13.32 $ 13.33 $ 13.80 $ 13.47
- -----------------------------------------------------------------------------------------------
Income from Operations:
Net investment income 0.73 0.73 0.74 0.76 0.22
Net realized and unrealized
gain (loss) (0.08) 0.34 (0.01) (0.40) 0.31
- -----------------------------------------------------------------------------------------------
Total Income from Operations 0.65 1.07 0.73 0.36 0.53
===============================================================================================
Less Distributions From:
Net Investment Income (0.71) (0.74) (0.74) (0.77) (0.20)
Net Realized Gains -- -- -- (0.06) --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.71) (0.74) (0.74) (0.83) (0.20)
- -----------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $ 13.59 $ 13.65 $ 13.32 $ 13.33 $ 13.80
===============================================================================================
Total Return(P) 4.90% 8.13% 5.80% 2.40% 3.98%++
- -----------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $ 15 $ 17 $ 19 $ 18 $ 6
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.27% 1.27% 1.23% 1.22% 1.20%+
Net Investment Income 5.35 5.31 5.69 5.29 5.68+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31% 27% 54% 42% 53%
===============================================================================================
</TABLE>
(1) For the period from November 7, 1994 (inception date) to March 31, 1995.
(2) For the period from January 5, 1993 (inception date) to March 31, 1993.
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
* On November 7, 1994 the former Class B shares were renamed Class C shares.
On June 12, 1998, Class C shares were renamed Class L shares.
10
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Portfolio seeks as high a level of income exempt from Federal income
taxes as is consistent with prudent investing. The Portfolio invests its assets
in a diversified portfolio of municipal securities of varying maturities,
without limitation, depending on market conditions. Typically, the remaining
maturity of municipal bonds will range between 5 and 30 years.
The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source. Such
obligations are often issued to raise money for public projects that enhance the
quality of life including health facilities, housing, airports, schools,
highways and bridges. Please see the Statement of Additional Information for a
more detailed discussion about the different types of municipal obligations.
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.
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 within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are rated within the four highest ratings categories by
an NRSRO, such as 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 Ratings Group
("S&P"); pre-refunded bonds escrowed by U.S. Treasury obligations are considered
AAA rated (the highest
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
credit rating) 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 in
the fourth highest category (this grade, while regarded as having an adequate
capacity to pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics; in addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds) or in unrated municipal bonds if, based upon credit analysis by the
Manager, it is believed that such securities are at least of comparable quality
to those securities in which the Portfolio may invest. In determining the
suitability of an investment in an unrated municipal bond, the Manager will take
into consideration debt service coverage, the purpose of the financing, history
of the issuer, existence of other rated securities of the issuer and other
general conditions as may be relevant, including comparability to other issues.
After the Portfolio purchases a municipal bond, the issue may cease to be rated
or its rating may be reduced below the minimum required for purchase. Such an
event would not require the elimination of the issue from the Portfolio but the
Manager will consider such an event in determining whether the Portfolio should
continue to hold the security.
The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG I or MIG 2, VMIG I or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-I +, SP-I, SP-2, or A-1 or AA or better
by S&P, or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
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
liquidate the investment on no more than 30 days' notice; variable-rate demand
instruments provide for automatic establishment of a new interest rate on set
dates; floating-rate demand instruments provide for automatic adjustment of
their interest rates whenever some other specified interest rate changes (e.g.,
the prime rate). The Portfolio may purchase participation interests in
variable-rate tax exempt securities (such as industrial development bonds) owned
by banks. Participations are frequently backed by an irrevocable letter of
credit or guarantee of a bank that the Manager has determined meets the
prescribed quality standards for the Portfolio. Participation interests will be
purchased only if management believes interest income on such interests will be
tax exempt when distributed as dividends to shareholders.
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked market daily pursuant to
guidelines established by the Board of Trustees, 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 borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.
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 SAI.
The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
rates than debt obligations of comparable maturities which make periodic
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon securities
eliminate the reinvestment risk and lock in a rate of return to maturity.
The Portfolio may invest in municipal lease obligations, which may take
the form of leases, installment purchase contracts or conditional sales
contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by state and local governments
and authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality, they ordinarily are backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease obligation.
The leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
In each of the Portfolio'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 AMT.) The Portfolio may invest up to 20% of its assets in taxable
fixed-income securities issued or guaranteed by the full faith and credit of the
United States and may invest more than 20% of its assets in U.S. government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Fund's monies available for
investment exceed the municipal obligations available for purchase that meet the
Fund's rating, maturity and other investment criteria.
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to share holders by Smith Barney, depend on
the smooth functioning of their computer systems. Many computer software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Manager and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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, it
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
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 Portfolio and the value of the portfolio securities would
be affected. The Board of Trustees would then reevaluate the Portfolio's
investment objective and management 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, since purchases and sales of
municipal bonds and other debt securities are traded through broker-dealers in
principal transactions, although the price usually includes an undisclosed
compensation to the dealer.
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. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year for the
last 10 years.
- --------------------------------------------------------------------------------
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
asset values 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 are no readily obtain able market quotations (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
amortized cost approximates fair value. Securities and other
16
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
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 Board of Trustees.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Portfolio's net investment income are paid monthly, and
any realized capital gains are distributed at least annually.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.
Income dividends and capital gains distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"), should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.
The per share dividends on Class B and Class L 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 to Class B and Class L 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 L and Class Y shares.
TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in
the SAI, there may be other federal, state, local, or foreign tax applications
to consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal
17
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
income tax on its net investment income and long-term capital gain that is
distributed to shareholders, provided the Portfolio distributes at least 90% of
its net investment income and net short-term capital gains for the taxable year.
The Portfolio also intends to satisfy conditions that will enable it to pay
"exempt-interest dividends" to shareholders. Exempt-interest dividends are
generally not subject to regular federal income taxes, although they may be
considered taxable for certain state and local income (or intangible) tax
purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months
or not for more than 12 months at disposition. Losses realized by a shareholder
on the disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.
18
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' federal income tax return.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares 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 $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. 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 L or Class Y shares.
Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee.
Investors in Class A, Class B and Class L 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 at least $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For shareholders purchasing shares of the Portfolio
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the
19
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of Travelers
and its subsidiaries, including Smith Barney, a unit holder who invests
distributions from a UIT sponsored by Smith Barney, and Directors or Trustees of
any Travelers-affiliated funds, including 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 the Distributor, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through pre-authorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder 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:
20
<PAGE>
- --------------------------------------------------------------------------------
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 of $500,000 or more 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 compensate 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 L shares is waived. See "Deferred Sales Charge Alternatives"
and "Waivers of CDSC."
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 and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES
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 of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger,
acquisition of assets or other wise; (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) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney
21
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Mutual Funds that are sold with a sales charge) and who wish to reinvest their
redemption proceeds in the Portfolio, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by
registered investment advisory subsidiaries of Travelers; (f) investments of
distributions from a UIT sponsored by Smith Barney; and (g) purchases by
investors participating in a Smith Barney fee-based arrangement. In order to
obtain such discounts, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently 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 made 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. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it 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
22
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 the Distributor. 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 the Distributor.
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 Port folio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13-month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13-month
period starting up to 90 days before the date of execution of a 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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within 13 months from the date of the Letter. If a total investment of
$15,000,000 is not made within the 13-month period, all Class Y shares purchased
to date will be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.15%) and expenses applicable to the
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.
23
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES
The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.
The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their account 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 L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class L 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
CDSC for redemptions of Class B shares by shareholders of the Portfolio:
Year Since Purchase
Payment Was Made CDSC
- --------------------------------------------------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- --------------------------------------------------------------------------------
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class B Dividend Shares owned by the shareholder as the ratio of 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. See "Prospectus Summary -- Alternative Purchase Arrangements
- -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the Class B and Class L shares
exchanged were initially acquired in one of the other applicable 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 five
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 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect 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.
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by 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, Class B and Class L shares are subject to the
minimum investment requirements and all shares are subject to other
requirements of the fund into which exchanges are made.
Fund Name
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
26
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
* 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 Municipal High Income Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation 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 L and Class Y shares of the
Portfolio.
** Available for exchange with Class A and Class B 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 L shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
27
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Exchange Privilege (continued)
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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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions may be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the 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. Redemption procedures
discussed below are also applicable for exchanging shares, and ex changes 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.
28
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Redemption of Shares
- --------------------------------------------------------------------------------
The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
If a share holder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the 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/National Portfolio
Class A, B, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless
29
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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
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 share
holder'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 or
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 4:00
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. Redemption 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 or her address of record or wired to a bank account predesignated
by the share holder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the
30
<PAGE>
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 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 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 the Portfolio account is
less than $500. If a shareholder has more than one account in this Portfolio,
each account must satisfy the minimum account size. The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Portfolio may include its yield, taxable 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 B, Class L and Class Y
31
<PAGE>
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Performance (continued)
- --------------------------------------------------------------------------------
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 30-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 30-day period is assumed to be earned each
30-day period for 12 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
rein vested 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 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 Portfolio
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 Distributor, the Manager, and the
Fund's custodian and transfer agent. The day-to-day operations of the Portfolio
are delegated to the Manager. The SAI contains background information regarding
each Trustee and executive officer of the Fund.
32
<PAGE>
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
MANAGER
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.
MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
MMC 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 super vision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay MMC a daily fee based
on the Portfolio's assets. For the Fund's last fiscal year the effective rate of
the management fee was 0.45% of the Port folio's average net assets. For the
last fiscal year total operating expenses were 0.66% of the average daily net
assets for Class A shares; 1.29% of the average daily net assets for Class B
shares; and 1.35% of the average daily net assets for Class L shares. MMC has
voluntarily agreed to waive its fee if in any fiscal year the aggregate
expenses of any Class of the Portfolio exclusive of 12b-1 fees, taxes,
brokerage, interest and extraordinary expenses, such as litigation costs,
exceed 0.65% of such Class' average net asset values for that fiscal year. This
voluntary expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, upon consummation
of the merger, the surviving corporation would be a bank holding company subject
to regulation under the Bank Holding Company Act of 1956 (the "BHCA"). The
requirements of the BHCA, the Glass-Steagall Act and certain other laws and
regulations will then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination
33
<PAGE>
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
of investment advisory, shareholder servicing and administrative activities by
subsidiaries of bank holding companies. If Smith Barney and the Manager, or
their affiliates, were to be prevented from acting as the manager or a
shareholder service agent, the Fund would seek alternative means for obtaining
these services. The Fund does not expect that shareholders would suffer any
adverse financial consequences as a result of any such occurrence.
PORTFOLIO MANAGEMENT
Peter M. Coffey, a Managing Director of Smith Barney, serves as Vice
President of the Fund and portfolio manager of the Portfolio since its inception
(August 20, 1986) and manages the day-to-day operations of the Portfolio,
including making all investment decisions. Mr. Coffey also serves as the
portfolio manager for five 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, 1998
is included in the Annual Report dated March 31, 1998. 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.
- --------------------------------------------------------------------------------
Distribution
- --------------------------------------------------------------------------------
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 L 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 L shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net asset values 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 L 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
34
<PAGE>
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Distribution (continued)
- --------------------------------------------------------------------------------
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 L 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 L 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 Board of 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.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the
Fund. Therefore, in connection with the anticipated merger of Travelers and
Citicorp and as a consequence of the anticipated applicability of the BHCA and
the Glass-Steagall Act, the Fund plans to retain the services of a new entity
(which is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end 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 different series of shares, each representing shares in one of the
separate portfolios. The assets of each Portfolio are segregated and separately
managed. Class A, Class B, Class L 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 L 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 Board of 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
35
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Additional Information (continued)
- --------------------------------------------------------------------------------
and the Fund will assist shareholders in calling such a meeting 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 Board
of Trustees may grant in their discretion. When issued for payment as described
in this Prospectus, the Fund's shares will be fully paid and transferable
(subject to the Portfolio's minimum account size). Shares are redeemable as set
forth under "Redemption of Shares" and are subject to involuntary redemption as
set forth under "Minimum Account Size."
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Portfolio's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the 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. 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.
36
<PAGE>
SMITHBARNEY
A Member of TravelersGroup[LOGO]
Smith Barney
Muni Funds
National Portfolio
388 Greenwich Street
New York, New York 10013
FD 0663 7/98
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
Georgia
Portfolio
JULY 29, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Prospectus July 29, 1998
- --------------------------------------------------------------------------------
Smith Barney Muni Funds
Georgia Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The Georgia Portfolio (the "Portfolio") is one of eight 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 and Georgia personal income taxes as is consistent with
prudent investing. The Portfolio will invest primarily in obligations issued by
the State of Georgia and its political subdivisions, agencies and
instrumentalities. The Portfolio may invest without limit in municipal
obligations whose interest is a tax-preference item for purposes of the Federal
alternative minimum tax.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
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Table of Contents
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Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
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Investment Objective and Management Policies 11
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Valuation of Shares 17
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Dividends, Distributions and Taxes 17
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Purchase of Shares 20
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Exchange Privilege 27
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Redemption of Shares 30
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Minimum Account Size 33
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Performance 33
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Management of the Fund 34
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Distribution 35
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Additional Information 36
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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
Portfolio or Smith Barney Inc. (the "Distributor"). This Prospectus does not
constitute an offer by the Portfolio or the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
================================================================================
2
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Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. 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 and Georgia personal income
taxes as is consistent with prudent investing. The Portfolio will invest
primarily in obligations issued by the State of Georgia and its political
subdivisions, agencies and instrumentalities. The Portfolio may invest without
limit in municipal obligations whose interest is a tax-preference item 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 L
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 of at least $15,000,000. 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 of $500,000
or more 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 --
Alternative Purchase Arrangements -- 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
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."
3
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L 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 L 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, which would 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 $15,000,000. 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 duration 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
share holders 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 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, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.
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 L 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
L shares to investors with longer-term investment outlooks.
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 of
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
$500,000 or more 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 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 L 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 different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
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 L 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 $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum initial investment requirement for purchases of
Portfolio shares through the Systematic Investment Plan are described below. It
is not recommended that the Portfolio be used as an investment 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. The minimum
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25, and on
a quarterly basis is $50. See "Purchase of Shares"
REDEMPTION OF SHARES Shares may be redeemed on each day the New
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
York Stock Exchange, Inc. ("NYSE") is open for business. See "Purchase of
Shares" and "Redemption of Shares."
MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. ("MMC" or the
"Manager"), formerly known as Smith Barney Mutual Funds Management, Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Salomon 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 including Asset Management, 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. 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 at
least 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 rein vestments will become eligible for conversion to Class A
shares on a pro rata basis. 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 Portfolio's concentration
in Georgia obligations involves certain additional risks that should be care
fully considered by an investor. 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 municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect 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."
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
Georgia Portfolio Class A Class B Class L* 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 1.00%* 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 (after fee waiver) .... 0.40% 0.40% 0.40% 0.40%
12b-1 fees**** ........................ 0.15 0.65 0.70 --
Other expenses ........................ 0.23 0.25 0.24 0.23*****
---- ---- ---- ----
Total Portfolio Operating Expenses ...... 0.78% 1.30% 1.34% 0.63%
==== ==== ==== ====
- ---------------------------------------------------------------------------------------------
</TABLE>
*Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.
**Purchases of Class A shares of $500,000 or more 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 of purchase.
***"Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Management fees were waived to a
greater extent during the last fiscal year. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets. Absent the fee waiver, total expenses would be incurred at the
rates of 0.83%, 1.35%, 1.39% and 0.68% for Class A, Class B, Class L and Class Y
shares, respectively.
****Upon conversion of Class B shares to Class A shares such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
*****For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1998.
Class A shares of the Portfolio purchased through thE Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.5%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
7
<PAGE>
- --------------------------------------------------------------------------------
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 L 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 L 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>
Georgia Portfolio 1 Year 3 Years 5 Years 10 Years*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A .......................................... $48 $64 $82 $133
Class B .......................................... 58 71 81 142
Class L .......................................... 34 52 83 170
Class Y .......................................... 6 20 35 79
An investor would pay the following expenses on the same
investment, assuming the same annual return and no
redemption:
Class A .......................................... $48 $64 $82 $133
Class B .......................................... 13 41 71 142
Class L .......................................... 24 52 83 170
Class Y .......................................... 6 20 35 79
- ---------------------------------------------------------------------------------------------------
</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.
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>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Portfolio's annual
report dated March 31, 1998. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into the SAI.
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Georgia Portfolio Class A Shares
- --------------------------------------------------------------------------------
Year Ended March 31, 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.48 $12.50 $12.10 $12.00
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.67 0.69 0.70 0.62
Net realized and unrealized gain 1.03 0.04 0.45 0.10
- --------------------------------------------------------------------------------
Total Income from Operations 1.70 0.73 1.15 0.72
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.67) (0.67) (0.70) (0.62)
Net realized gains (0.08) (0.08) (0.05) --
- --------------------------------------------------------------------------------
Total Distributions (0.75) (0.75) (0.75) (0.62)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $13.43 $12.48 $12.50 $12.10
- --------------------------------------------------------------------------------
Total Return(P) 13.85% 5.95% 9.67% 6.29%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (millions) $21 $14 $10 $9
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2)(3) 0.50% 0.48% 0.38% 0.28%+
Net investment income 5.10 5.49 5.57 5.43+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 81% 63% 34%
================================================================================
</TABLE>
(1) For the period from April 4, 1994 (inception date) to March 31, 1995.
(2) The Manager has waived all or part of its fees for the years ended March
31, 1998, 1997 and 1996 and the period ended March 31, 1995. In addition,
the Manager has reimbursed expenses of $56,755 and $42,317 for the year
ended March 31, 1996 and the period ended March 31, 1995, respectively. If
such fees were not waived and expenses not reimbursed, the per share
decrease of net investment income and the ratios of expenses to average
net assets would have been:
Expense Ratios
Net Investment Income Without Expense Reimbursements
Per Share Decreases and Fee Waivers
----------------------------- ------------------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ----- ----- ----- ----- ----- ----- -----
Class A $0.04 $0.04 $0.11 $0.12 0.83% 0.90% 1.23% 1.20%+
(3) As a result of voluntary expense limitations, expense ratio would not
exceed 0.80% for Class A shares.
# Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Georgia Portfolio Class B Shares(1) Class L Shares(2)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1998 1997 1996 1995(3) 1998 1997 1996 1995(4)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.47 $12.50 $12.11 $12.27 $12.46 $12.49 $12.09 $12.06
- ------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (5) 0.61 0.62 0.64 0.49 0.60 0.62 0.63 0.55
Net realized and unrealized gain (loss) 1.03 0.04 0.45 (0.16)# 1.02 0.03 0.46 0.04#
- ------------------------------------------------------------------------------------------------------------------------------
Total Income from Operations 1.64 0.66 1.09 0.33 1.62 0.65 1.09 0.59
- ------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.61) (0.65) (0.49) (0.59) (0.60) (0.64) (0.56)
Net realized gains (0.08) (0.08) (0.05) -- (0.08) (0.08) (0.05) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.69) (0.70) (0.49) (0.67) (0.68) (0.69) (0.56)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.43 $12.47 $12.50 $12.11 $13.41 $12.46 $12.49 $12.09
- ------------------------------------------------------------------------------------------------------------------------------
Total Return(P) 13.39% 5.33% 9.08% 2.88%++ 13.23% 5.28% 9.12% 5.11%++
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $11 $7 $5 $3 $5 $3 $3 $1
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (5)(6) 1.02% 1.00% 0.92% 0.85%+ 1.06% 1.04% 0.97% 0.90%+
Net investment income 4.58 4.97 5.20 5.37+ 4.54 4.93 5.18 5.22+
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 81% 63% 34% 36% 81% 63% 34%
==============================================================================================================================
</TABLE>
(1) On November 7, 1994, the former Class E shares were renamed Class B
shares.
(2) On November 7, 1994, the former Class B shares were renamed Class C
shares. On June 12, 1998, the Class C shares were renamed Class L shares.
(3) For the period from June 15, 1994 (inception date) to March 31, 1995.
(4) For the period from April 14, 1994 (inception date) to March 31, 1995.
(5) The Manager has waived all or part of its fees for the years ended March
31, 1998, 1997 and 1996 and the period ended March 31, 1995. In addition,
the Manager has reimbursed expenses of $56,755 and $42,317 for the year
ended March 31, 1996 and the period ended March 31, 1995, respectively. If
such fees were not waived and expenses not reimbursed, the per share
decrease of net investment income and the ratios of expenses to average
net assets would have been:
Expense Ratios
Net Investment Income Without Expense Reimbursements
Per Share Decreases and Fee Waivers
----------------------------- ------------------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ----- ----- ----- ----- ----- ----- -----
Class B $0.04 $0.05 $0.10 $0.11 1.35% 1.42% 1.77% 1.82%+
Class C 0.04 0.05 0.10 0.12 1.39 1.46 1.82 1.85+
(6) As a result of voluntary expense limitations, expense ratios would not
exceed 1.30% and 1.35% for Class B and L shares, respectively.
# Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
(P) Total returns do not reflect sales loads or contingent deferred sales
charges.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
10
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of the State of Georgia as is
consistent with prudent investing. The Portfolio will invest primarily in
obligations of the State of Georgia and its political subdivisions, agencies and
instrumentalities, the interest from which is, in the opinion of bond counsel
for the various issuers, exempt from state as well as 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 often issued to raise
money for public projects that enhance the quality of life including health
facilities, housing, airports, schools, highways and bridges. The Portfolio
invests its assets in securities of ranging maturities, without limitation,
depending on market conditions. Typically, the remaining maturity of municipal
bonds will range between 5 and 30 years.
The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the Statement of Additional Information for a more detailed
discussion about the different types of municipal obligations.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he is subject to that tax. Such private
activity bonds include bonds issued to finance such projects as certain solid
waste disposal facilities, student loan programs and water and sewage projects.
Because interest income on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal obligations
generally will provide some what higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are rated within the four highest categories by an NRSRO,
such as 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 Ratings Group ("S&P") or,
if unrated, determined to be of comparable quality by MMC; pre-refunded bonds
escrowed by U.S. Treasury obligations are considered AAA rated (the highest
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
rating) 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 in the
fourth highest category (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) or in unrated municipal bonds if,
based upon credit analysis by the Manager, it is believed that such securities
are at least of comparable quality to those securities in which the Portfolio
may invest. In determining the suitability of an investment in an unrated
municipal bond, the Manager will take into consideration debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer and other general conditions as may be relevant,
including comparability to other issues. After the Portfolio purchases a
municipal bond, the issue may cease to be rated or its rating may be reduced
below the minimum required for purchase. Such an event would not require the
elimination of the issue from the Portfolio but the Manager will consider such
an event in determining whether the Portfolio should continue to hold the
security.
The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better
by S&P or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
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 liquidate
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 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
12
<PAGE>
- --------------------------------------------------------------------------------
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 debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, 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 a Portfolio will only purchase municipal obligations 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 Port
folio'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 borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.
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.
The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less that its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic distribu-
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
tions of interest. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
the reinvestment risk and lock in a rate of return to maturity.
The Portfolio may invest in municipal lease obligations, which may take
the form of leases, installment purchase contracts or conditional sales
contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by state and local governments
and authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality, they ordinarily are backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease obligation.
The leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
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 AMT). It is also a
fundamental policy that, under normal market conditions, the Portfolio will
invest at least 65% of its assets in municipal obligations the interest on which
is also exempt from the personal income taxes of the State of Georgia in the
opinion of bond counsel to the issuers. The Portfolio may invest up to 20% of
its assets in taxable fixed-income securities, but only in obligations issued or
guaranteed by the full faith and credit of the United States, and may invest
more than 20% of its assets in U.S. government securities during periods when in
the Manager's opinion a temporary defensive posture is warranted, including any
period when the Portfolio's monies available for investment exceed the
municipal obligations available for purchase that meet the
14
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Portfolio's rating, maturity and other investment criteria. To the extent the
Portfolio is so invested, the investment objective may not be achieved.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Manager and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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 Port-
15
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
folio'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 value.
The Portfolio is registered as a "non-diversified" company under the
Investment Company Act of 1940, as amended (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 of 1986, as amended (the "Code") which 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,
up to 50% of the Portfolio's total assets may be invested in as few as two
single issuers. In the event of decline in credit worthiness of, or default
upon, the obligations of one or more such issuers exceeding 5%, an investment
in the Portfolio may 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.
RISK FACTORS AFFECTING GEORGIA
The Portfolio's ability to achieve its investment objective is dependent
upon the ability of the issuers of Georgia obligations to meet their continuing
obligations for the payment of principal and interest. The Portfolio's
concentration in Georgia obligations involves certain additional risks that
should be considered carefully by investors. Certain Georgia constitutional and
statutory limitations with respect to indebtedness incurred by Georgia's
governmental entities, departments and agencies could result in certain adverse
consequences affecting Georgia's obligations and may have the effect of
impairing the ability of certain issuers of Georgia obligations to pay principal
and interest on their obligations.
Additional information regarding the state is included in the Statement of
Additional Information.
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
16
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
obtained. Usually, no brokerage commissions, as such, are paid by the Portfolio,
since purchases and sales of municipal bonds and other debt securities are
traded through broker-dealers in principal transactions, although the price paid
usually includes an undisclosed compensation to the dealer.
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. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.
- --------------------------------------------------------------------------------
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 asset values
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 are no readily obtainable market quotations (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
amortized cost approximates 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
Board of Trustees.
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Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Portfolio's net investment income are generally
declared and paid monthly, and any realized capital gains are declared and
distributed at least annually.
17
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 L 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 to Class B and Class L shares.
The per share dividends on Class A shares of the Port folio 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 L and Class Y
shares.
TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in
the SAI, there may be other federal, state, local, or foreign tax applications
to consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item
18
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
for purposes of the Federal corporate alternative minimum tax. Exempt-interest
dividends derived from the interest earned on private activity bonds will not be
exempt from federal income tax for those shareholders who are "substantial
users" (or persons related to "substantial users") of the facilities financed by
these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months
or not for more than 12 months at disposition. Losses realized by a shareholder
on the disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' federal income tax return.
19
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
GEORGIA TAXES
Exempt-interest dividends and distributions by the Portfolio to a Georgia
resident that are attributable to interest on Georgia municipal obligations or
direct obligations of the United States and its territories and possessions will
not be subject to the State of Georgia income tax. Dividends or other
distributions by the Portfolio which are attributable to other sources,
including all distributions that qualify as capital gains dividends for Federal
income tax purposes, will be subject to the State of Georgia income tax at the
applicable rate.
Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the Portfolio'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 gains
dividends.
The foregoing is only a brief summary of the tax considerations generally
affecting the Portfolio and its shareholders who are Georgia residents.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
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Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares 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 $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. 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 L or Class Y shares.
Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a
20
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
maintenance fee.
Investors in Class A, Class B and Class L 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 at least $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For shareholders purchasing shares of the Portfolio
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the Portfolio through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment requirement for Class A, Class
B and Class L shares and the subsequent investment requirement for all Classes
is $50.00. There are no mini mum investment requirements in Class A for
employees of Travelers and its subsidiaries, including Smith Barney, a
unitholder who invests distributions from a UIT sponsored by Smith Barney, and
Trustees or Directors of any Travelers-affiliated funds, including 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 an investment 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 the Distributor, 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 at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio
21
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 share
holder'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 $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 - 449,999 1.50 1.52 1.35
500,000 and over* * * *
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a 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 L 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 and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES
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 of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other
22
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
benefit plan for such persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such sales are made upon the
assurance of the purchaser that the purchase is made for investment purposes and
that the securities will not be resold except through redemption or repurchase;
(b) offers of Class A shares to any other investment company to effect the
combination of such company with the Portfolio by merger, acquisition of assets
or other wise; (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) purchases by
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 sold with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently 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
mini mum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth under
"Initial Sales Charge Alternative -- Class A Shares," and will be based upon the
aggregate
23
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
made 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. The Distributor may
also offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that it 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 of the Portfolio 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 the Distributor. 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 the
Distributor.
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 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
24
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 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.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES
The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is re allowed to dealers who sell Class L shares.
The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their account 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 L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class L 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 deter mining 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
25
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- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Barney statement month. The following table sets forth the CDSC for redemptions
of Class B shares by shareholders of the Portfolio:
Year Since Purchase
Payment Was Made CDSC
- --------------------------------------------------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- --------------------------------------------------------------------------------
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
- -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be 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 five
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.
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 share holder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994; (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
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.
- --------------------------------------------------------------------------------
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 L shares are subject to
minimum investment requirements and all shares are subject to other
requirements of the fund into which exchanges are made.
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
27
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney Muni Funds -- Florida 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 -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
28
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation 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 L and Class Y shares of the
Portfolio.
** Available for exchange with Class A and Class B 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 L shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
Class B Exchanges. In the event a Class B shareholder 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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
Class A and Class Y Exchanges. class A and Class Y shareholders of the
Portfolio who wish to ex change all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the 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
29
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and ex changes 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 share holder'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 Finan-
30
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
cial Consultant, Introducing Broker or dealer in the selling group, or by
submitting a written request for redemption to:
Smith Barney Muni Funds/Georgia Portfolio
Class A, B, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. 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
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 share
holder'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
31
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 or 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 4:00
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 or her address of record or wired to a bank account predesignated
by the share holder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/ Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 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
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 days' prior notice to shareholders.
32
<PAGE>
- --------------------------------------------------------------------------------
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 this Portfolio, each
account must satisfy the minimum account size. The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Fund may include a Portfolio's yield, taxable
equivalent yield, total return and average annual total return in
advertisements. 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 B, Class L 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 30-day period ending at month end. This net
income is then annualized, i.e., the amount of income earned by the investment
during that 30-day period is assumed to be earned each 30-day period for 12
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
its shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
33
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Portfolio
rests with the Fund's Board of Trustees. The Board of Trustees approves 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 Port folio's investment manager. The SAI
contains background information regarding each Trustee and executive officer of
the Fund.
MANAGER
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.
MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
MMC 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. For the services provided,
the management agreement provides that the Fund will pay MMC an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets. MMC
waived a portion of its management fee for the Portfolio for the fiscal year
ended March 31, 1998, and the effective rate of the management fee was 0.12%.
For the past fiscal year, total operating expenses were 0.50% of the average
daily net assets for Class A shares; 1.02% of the average daily net assets for
Class B shares; and 1.06% of the average daily net assets for Class L shares.
MMC has voluntarily agreed to waive its fee if in any fiscal year the aggregate
expenses of any Class of the Portfolio exclusive of 12b-1 fees, taxes,
brokerage, interest and extraordinary expenses, such as litigation costs,
exceed 0.65% of such Class' average net asset values for that fiscal year. This
voluntary expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus. In addition, as
noted above, the Manager has waived its fees on a voluntary basis in amounts
greater than that required under the foregoing voluntary expense limitation.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, upon consummation
of the merger, the
34
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
surviving corporation would be a bank holding company subject to regulation
under the Bank Holding Company Act of 1956 (the "BHCA"). The requirements of
the BHCA, the Glass-Steagall Act and certain other laws and regulations will
then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
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 it commenced
operations (April 4, 1994) and manages the day-to-day investment operations of
the Portfolio, including making all investment decisions. Mr. Coffey also serves
as the portfolio manager for five of the Fund's non-money market portfolios.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. 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.
- --------------------------------------------------------------------------------
Distribution
- --------------------------------------------------------------------------------
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 L shares of the
Portfolio at the annual rate of 0.15% of
35
<PAGE>
- --------------------------------------------------------------------------------
Distribution (continued)
- --------------------------------------------------------------------------------
the average daily net asset values attributable to these Classes. Smith Barney
is also paid a distribution fee with respect to Class B and Class L shares at
the annual rate of 0.50% and 0.55%, respectively, of the average daily net asset
values 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 L 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 L 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 L 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 Board of 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.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
There fore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end 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 different series of shares, each representing shares in one of the
separate
36
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
portfolios. The assets of each portfolio are segregated and separately managed.
Class A, Class B, Class L and Class Y shares of each portfolio 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
expenses related to the share holder service and distribution of Class A, Class
B and Class L 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 pertains to that Class. It is the
intention of the Fund not to hold annual meetings of share holders. The Board
of 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
out standing shares for purposes of voting on removal of a Trustee or Trustees.
Share holders 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 Board of Trustees may grant
in its 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.
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. 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 TravelersGroup[LOGO]
Smith Barney
Muni Funds
Georgia Portfolio
388 Greenwich Street
New York, New York 10013
FD 0771 7/98
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
Pennsylvania
Portfolio
JULY 29, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Prospectus July 29, 1998
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Smith Barney Muni Funds
Pennsylvania Portfolio
388 Greenwich Street
New York, New York 10013
1 800-451-2010
The Pennsylvania Portfolio (the "Portfolio") is one of eight 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 and Pennsylvania personal income taxes as is consistent
with prudent investing. The Portfolio will invest primarily in obligations
issued by the Commonwealth of Pennsylvania and its political subdivisions,
agencies and instrumentalities. The Portfolio may invest without limit in
municipal obligations whose interest is a tax-preference item for purposes of
the Federal alternative minimum tax.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
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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 17
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Dividends, Distributions and Taxes 18
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Purchase of Shares 20
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Exchange Privilege 27
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Redemption of Shares 30
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Minimum Account Size 33
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Performance 33
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Management of the Fund 34
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Distribution 35
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Additional Information 36
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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
Smith Barney Inc. (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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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 SAI. 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 and Pennsylvania personal
income taxes as is consistent with prudent investing. The Portfolio will invest
primarily in obligations issued by the Commonwealth of Pennsylvania and its
political subdivisions, agencies and instrumentalities. The Portfolio may invest
without limit in municipal obligations whose interest is a tax-preference item
for purposes of the Federal alternative minimum 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 L
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 of at least $15,000,000. 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 of $500,000
or more 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
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."
3
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Prospectus Summary (continued)
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Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1% of the purchase price. 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 L
shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L 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 L 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, which would 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 $15,000,000. 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 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, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.
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 L 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
L shares to investors with longer term investment outlooks.
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 will be immediately invested in the Portfolio. In addition, Class A share
purchases of
4
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Prospectus Summary (continued)
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$500,000 or more 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 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 L 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 different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
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 by 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. In
addition, certain investors, including certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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 $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. 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 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
an investment 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. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
5
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Prospectus Summary (continued)
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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 Mutual Management Corp. ("MMC" or the
"Manager") formerly known as Smith Barney Mutual Funds Management, Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC 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
including Asset Management, 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. 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 at least
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."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The Portfolio's concentration
in Pennsylvania obligations involves certain additional risks that should be
considered carefully by an investor. 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 municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect 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."
6
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Prospectus Summary (continued)
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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>
Pennsylvania Portfolio Class A Class B Class L* Class Y
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<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) ................ 4.00% None 1.00%* 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 (after fee waiver) ................... 0.40% 0.40% 0.40% 0.40%
12b-1 fees**** ....................................... 0.15 0.65 0.70 --
Other expenses ....................................... 0.16 0.18 0.18 0.16*****
---- ---- ---- ----
Total Portfolio Operating Expenses ...................... 0.71% 1.23% 1.20% 0.56%
==== ==== ==== ====
</TABLE>
*Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.
**Purchases of Class A shares of $500,000 or more 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 of purchase.
***"Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Management fees were waived to a
greater extent during the last fiscal year. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets. Absent the fee waiver, total expenses would be incurred at the
rates of 0.76%, 1.28%, 1.25% and 0.61% for Class A, Class B, Class L and Class Y
shares, respectively.
****Upon conversion of Class B shares to Class A shares such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
*****For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1998.
Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
7
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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 L 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 L 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>
Pennsylvania Portfolio 1 Year 3 Years 5 Years 10 Years*
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<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the
end of each time period:
Class A................................... $47 $62 $78 $125
Class B................................... 58 69 78 134
Class L................................... 32 48 75 154
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................................... $47 $62 $78 $125
Class B................................... 13 39 68 134
Class L................................... 22 48 75 154
Class Y................................... 6 18 31 70
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</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.
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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Financial Highlights
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The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual report
dated March 31, 1998. The information set forth below should be read in
conjunction with the financial statements and related notes that also appear in
the Portfolio's Annual Report to Shareholders, which is incorporated by
reference into the SAI. As of March 31, 1998, no Class Y shares were outstanding
and, accordingly, no comparable information is available at this time for that
Class.
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------------------- ---------------------------------------------
Pennsylvania Portfolio 1998 1997 1996(1) 1995(2)(3) 1998 1997 1996(1) 1995(4)(5)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 12.66 $ 12.62 $ 12.40 $ 12.00 $ 12.64 $ 12.61 $ 12.39 $ 12.35
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Income From Operations:
Net investment income (6) 0.73 0.71 0.70 0.67 0.65 0.65 0.64 0.51
Net realized and unrealized gain 0.95 0.04 0.29 0.35* 0.96 0.03 0.29 0.01*
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Total Income From Operations 1.68 0.75 0.99 1.02 1.61 0.68 0.93 0.52
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Less Distributions From:
Net investment income (0.69) (0.71) (0.72) (0.62) (0.62) (0.65) (0.66) (0.48)
Net realized gains (0.11) -- (0.05) -- (0.11) -- (0.05) --
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Total Distributions (0.80) (0.71) (0.77) (0.62) (0.73) (0.65) (0.71) (0.48)
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Net Asset Value, End of Year $ 13.54 $ 12.66 $ 12.62 $ 12.40 $ 13.52 $ 12.64 $ 12.61 $ 12.39
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Total Return 13.52% 6.11% 8.08% 8.82%++ 12.97% 5.56% 7.61% 4.48%++
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Net Assets,
End of Year (millions) $ 16 $ 15 $ 12 $ 8 $ 19 $ 16 $ 13 $ 5
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Ratios to Average Net Assets:
Expenses (6) 0.37% 0.37% 0.38% 0.29%+ 0.89% 0.88% 0.88% 0.82%+
Net investment income 5.46 5.66 5.57 5.76+ 4.94 5.15 5.07 5.31+
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Portfolio Turnover Rate 81% 122% 88% 38% 81% 122% 88% 38%
=================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method because
it more accurately reflects the per share data for the period.
(2) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(3) For the period from April 4, 1994 (inception date) to March 31, 1995.
(4) On November 7, 1994, the former Class E shares were renamed Class B
shares.
(5) For the period from June 20, 1994 (inception date) to March 31, 1995.
(6) The manager has waived all or a portion of its fees for the years ended
March 31, 1998, 1997 and 1996 and the period ended March 31, 1995. In
addition, the Manager reimbursed expenses of $23,433 and $32,063 for the
year ended March 31, 1996 and the period ended March 31,1995,
respectively. If such fees were not waived and expenses not reimbursed,
the effect on net investment income and expense ratios would have been as
follows:
Expense Ratios
Net Investment Income Without Fee Waivers and/or
Per Share Decreases Expense Reimbursements#
----------------------------- -----------------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ----- ----- ----- ----- ----- ----- -----
Class A $0.05 $0.06 $0.07 $0.09 0.79% 0.82% 0.93% 1.03%+
Class B 0.05 0.06 0.07 0.08 1.31 1.33 1.44 1.58+
* Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
# As a result of voluntary expense limitations, expense ratios would not
exceed 0.80% and 1.30% for Class A and B shares, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
9
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Financial Highlights (continued)
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For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Class L Shares(2)
-------------------------------------------
Pennsylvania Portfolio 1998 1997 1996(1) 1995(3)
================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.64 $ 12.61 $ 12.39 $ 12.00
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Income From Operations:
Net investment income (4) 0.64 0.64 0.64 0.59
Net realized and unrealized gain 0.96 0.04 0.29 0.36*
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Total Income From Operations 1.60 0.68 0.93 0.95
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Less Distributions From:
Net investment income (0.62) (0.65) (0.66) (0.56)
Net realized gains (0.11) -- (0.05) --
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Total Distributions (0.73) (0.65) (0.71) (0.56)
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Net Asset Value, End of Year $ 13.51 $ 12.64 $ 12.61 $ 12.39
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Total Return 12.84% 5.51% 7.56% 8.14%++
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Net Assets, End of Year (millions) $ 8 $ 6 $ 5 $ 3
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Ratios to Average Net Assets:
Expenses (4) 0.94% 0.94% 0.94% 0.86%+
Net investment income 4.89 5.09 5.00 5.04+
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Portfolio Turnover Rate 81% 122% 88% 38%
================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) On November 7, 1994, the former Class B shares were renamed Class C
shares. On June 12, 1998, the Class C shares were renamed Class L shares.
(3) For the period from April 5, 1994 (inception date) to March 31, 1995.
(4) The manager has waived all or a portion of its fees for the years ended
March 31, 1998, 1997 and 1996 and the period ended March 31, 1995. In
addition, the Manager reimbursed expenses of $23,433 and $32,063 for the
year ended March 31, 1996 and the period ended March 31,1995,
respectively. If such fees were not waived and expenses not reimbursed,
the effect on net investment income and expense ratios would have been as
follows:
Expense Ratios
Net Investment Income Without Fee Waivers and/or
Per Share Decreases Expense Reimbursements#
----------------------------- -----------------------------
1998 1997 1996 1995 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
Class L $0.05 $0.06 $0.07 $0.09 1.36% 1.39% 1.49% 1.56%+
* Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
# As a result of voluntary expense limitations, expense ratios would not
exceed 1.35% for Class C shares.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
10
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Investment Objective and Management Policies
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The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of the Commonwealth of Pennsylvania, as
is consistent with prudent investing. The Portfolio will invest primarily in
obligations of the Commonwealth of Pennsylvania and its political subdivisions,
agencies and instrumentalities, the interest from which is, in the opinion of
bond counsel for the various issuers, exempt from the state's as well as 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 often issued to
raise money for public projects that enhance the quality of life including
health facilities, housing, airports, schools, highways and bridges. The
Portfolio invests its assets in securities of ranging maturities, without
limitation, depending on market conditions. Typically, the remaining maturity of
municipal bonds will range between 5 and 30 years.
The two principal classifications of municipal obligations are "general
obligation" and "revenue". General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases from
the proceeds of a special excise tax or other specific revenue source. Please
see the Statement of Additional Information for a more detailed discussion about
the different types of municipal obligations.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he 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 within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO"). Investment
grade bonds are rated within the four highest categories by an NRSRO, such as
those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc. ("Moody's")
and AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or, if
unrated, determined to be comparable quality by MMC; pre-refunded bonds
11
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
escrowed by U.S. Treasury obligations are considered AAA rated (the highest
rating) 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 in the
fourth highest category (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) 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 U.S. Government Securities 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 a rating within
comparable categories by any other NRSRO, or obligations that are unrated but
determined by the Manager to be comparable). 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 liquidate 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 15% of the value of its net assets
in
12
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
illiquid securities, including those for which there is no established market.
The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, 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 a Portfolio will only purchase municipal obligations 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 borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of Portfolio securities
transactions.
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 SAI.
The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic
13
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon securities
eliminate the reinvestment risk and lock in a rate of return to maturity.
The Portfolio may invest in municipal lease obligations, which may take
the form of leases, installment purchase contracts or conditional sales
contracts, or certificates of participation with respect to such contracts or
leases. Municipal lease obligations are issued by state and local governments
and authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality, they ordinarily are backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease obligation.
The leases underlying certain municipal obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material damage
or destruction of the leased property, there is substantial interference with
the lessee's use or occupancy of such property. This "abatement risk" may be
reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reserve funds or the provision of credit
enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
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 assets in municipal obligations the interest on
which is also exempt from the personal income taxes of the Commonwealth of
Pennsylvania in the opinion of bond counsel to the issuers. The Portfolio may
invest up to 20% of its assets in taxable fixed-income securities, but only in
obligations issued or guaranteed by the full faith and credit of the United
States, and may invest more than 20% of its assets in U.S. Government securities
during periods when in the Manager's opinion a temporary defensive posture is
warranted, including any period when the Portfolio's monies available for
investment exceed the municipal obligations available for purchase that meet the
14
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Portfolio's rating, maturity and other investment criteria. To the extent the
Portfolio is so invested, the investment objective may not be achieved.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Manager and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Manager has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
RISK AND INVESTMENT CONSIDERATIONS
Investors should realize that risk of loss is inherent in the ownership of
any securities and that the Portfolio's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. In
addition, 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
15
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 value.
The Portfolio 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 (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, up to 50% of the Portfolio's total
assets may 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 may 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.
RISK FACTORS AFFECTING PENNSYLVANIA
Potential purchasers of shares of the Portfolio should consider the fact
that the 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.
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 municipal obligations in the Portfolio or the ability of
the respective obligors to make payments of interest and principal due on such
municipal obligations.
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Additional information regarding the Commonwealth is included in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND TURNOVER
The 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, since purchases and sales of municipal bonds and
other debt securities are traded through broker-dealers in principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer.
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. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.
- --------------------------------------------------------------------------------
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 asset values
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
amortized cost approximates 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
Board of Trustees.
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Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Portfolio's net investment income are paid monthly, and
any realized capital gain are declared and distributed at least 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 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 L 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
L 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 L and Class Y
shares.
TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
certain "private-activity" bonds will be treated as a specific tax preference
item to be included in a shareholder's alternative minimum tax computation. All
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Exempt-interest dividends derived from the interest earned on private activity
bonds will not be exempt from federal income tax for those shareholders who are
"substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months
or not for more than 12 months at disposition. Losses realized by a shareholder
on the disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' federal income tax return.
19
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Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
PENNSYLVANIA TAXES
Exempt-interest dividends distributed by the Pennsylvania Portfolio will
not be subject to the Pennsylvania personal income tax, the corporate net income
tax or to the Philadelphia school district investment income tax to the extent
that the dividends are attributable to interest received by the Portfolio from
its investments in Pennsylvania municipal obligations and U.S. Government
obligations, including obligations issued by U.S. possessions. For Pennsylvania
personal income tax purposes, capital gain distributions are treated as ordinary
dividends and are taxed at ordinary income tax rates.
Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the fund's ability to diversify geographically. Each
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 tax considerations
generally affecting each Portfolio and its shareholders who are Pennsylvania
residents. 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 and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares 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 $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. 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. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Portfolio, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Smith
Barney and other broker/
20
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PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at First Data are not subject to a maintenance
fee.
Investors in Class A, Class B and Class L 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 by making an initial investment of at least
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements in Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, a unitholder who invests distributions
from a UIT sponsored by Smith Barney, and Trustees or Directors of any
Travelers-affiliated funds, including 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 an investment 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 the Distributor, payment for Portfolio
shares is due on the third business day (the "settlement date") 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 at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution
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PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
indicated by the shareholder 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:
================================================================================
Dealers'
Sales Charge Reallowance
% of % of as % of
Amount of Investment Offering Price Amount 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 of $500,000 or more 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 L 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 and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES
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 of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board Members
and employees); the immediate families of such persons (including the surviving
spouse
22
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PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
of a deceased Board Member or employee); and to a pension, profit-sharing or
other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the 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) purchases by
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 sold with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently, 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
23
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PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
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. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it 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 the Distributor. 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 the
Distributor.
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 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
24
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PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
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 $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 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.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES
The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.
The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" including any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their account 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 L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class L 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
25
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PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
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 CDSC for redemptions
of Class B shares by shareholde of the Portfolio:
Year Since Purchase
Payment Was Made CDSC
----------------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
----------------------------------------------
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will be converted at that time such
proportion of his or her 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. See "Prospectus Summary -- Alternative Purchase
Arrangements -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be 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
26
<PAGE>
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
- --------------------------------------------------------------------------------
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 to effect 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.
- --------------------------------------------------------------------------------
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 L shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.
Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
27
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, inc. -- Pacific Portfolio
28
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation 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 L and Class Y shares of the
Portfolio.
** Available for exchange with Class A and Class B 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 L shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
Class B Exchanges. In the event a Class B shareholder 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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. 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
29
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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. 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 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
30
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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/Pennsylvania Portfolio
Class A, B, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Boston, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. 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.
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, including 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 4:00
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.
31
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven (7) days' prior notice to shareholders.
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.
32
<PAGE>
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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 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 advertise its yield, taxable
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 L 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
investments in the Class over a thirty-day period ending at month end. This net
income is then annualized, i.e., the amount of income earned by the investments
during that 30-day period is assumed to be earned each 30-day period for twelve
periods and is expressed as a percentage of the investments. 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 gain
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 analyzing 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.
33
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Portfolio
rests with the Fund's Board of Trustees. The Board of Trustees approves 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 SAI
contains background information regarding each Trustee and executive officer of
the Fund.
MANAGER
Mutual Management Corp. ("MMC" 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.
MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
MMC 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. For the services provided,
the management agreement provides that the Fund will pay MMC an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets. MMC
waived a portion of its management fee for the Portfolio for the fiscal year
March 31, 1998, and the effective rate of the management fee was 0.04%. For the
past fiscal year, total operating expenses were 0.37% of the average daily
assets for Class A shares; 0.89% of the average daily net assets for Class B
shares; and 0.94% of the average daily net assets for Class L shares. MMC has
voluntarily agreed to waive its fee if in any fiscal year the aggregate expenses
of any Class of the Portfolio exclusive of 12b-1 fees, taxes, brokerage,
interest and extraordinary expenses, such as litigation costs, exceed 0.65% of
such Class' average net asset values for that fiscal year. This voluntary
expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus. In addition, as
noted above, the Manager has waived its fees on a voluntary basis in amounts
greater than that required under the foregoing voluntary expense limitation.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application
34
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
to become a bank holding company so that, upon consummation of the merger, the
surviving corporation would be a bank holding company subject to regulation
under the Bank Holding Company Act of 1956 (the "BHCA"). The requirements of the
BHCA, the Glass-Steagall Act and certain other laws and regulations will then be
applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
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 it commenced
operations (April 4, 1994) and manages the day-to-day investment operations of
the Portfolio including making all investment decisions. Mr. Coffey also serves
as the portfolio manager for five 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, 1998
is included in the Annual Report dated March 31, 1998. 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.
- --------------------------------------------------------------------------------
Distribution
- --------------------------------------------------------------------------------
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 L shares of the
Portfolio at the annual rate
35
<PAGE>
- --------------------------------------------------------------------------------
Distribution (continued)
- --------------------------------------------------------------------------------
of 0.15% of the average daily net asset values attributable to these Classes.
Smith Barney is also paid a distribution fee with respect to Class B and Class L
shares at the annual rate of 0.50% and 0.55%, respectively, of the average daily
net asset values 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 L 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 L 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 L 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 Board of 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.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end 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 different series of shares, each representing shares in one of the
separate
36
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
portfolios. The assets of each Portfolio are segregated and separately managed.
Class A, Class B, Class L and Class Y shares of each Portfolio 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
expenses related to the shareholder service and distribution of Class A, Class B
and Class L 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 pertains to that class. It is the intention
of the Fund not to hold annual meetings of shareholders. The Board of 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 Board of 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.
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. 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
Pennsylvania
Portfolio
388 Greenwich Street
New York, New York 10013
FD0772 7/98
<PAGE>
SMITH BARNEY MUNI FUNDS
California Money Market Portfolio
JULY 29, 1998
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PROSPECTUS July 29, 1998
Smith Barney Muni Funds
California Money Market Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The California Money Market Portfolio (the "Portfolio") is one of eight
investment portfolios that currently comprise Smith Barney Muni Funds (the
"Fund"). The Portfolio seeks to provide its shareholders with income exempt
from both Federal income taxes (other than the alternative minimum tax) and
California personal income taxes from a portfolio of high quality short-term
California municipal obligations selected for liquidity and stability of prin-
cipal.
The Portfolio may invest a significant percentage of its assets in issuers
located in the State of California and therefore an investment in the Portfolio
may be riskier than an investment in other types of money market funds.
SHARES OF THE PORTFOLIO ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from
time to time (the "SAI"), 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 Addi-
tional 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 10
- -------------------------------------------------
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES 11
- -------------------------------------------------
PURCHASE OF SHARES 13
- -------------------------------------------------
REDEMPTION OF SHARES 15
- -------------------------------------------------
EXCHANGE PRIVILEGE 18
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 21
- -------------------------------------------------
YIELD INFORMATION 21
- -------------------------------------------------
MANAGEMENT OF THE FUND 22
- -------------------------------------------------
DISTRIBUTION 23
- -------------------------------------------------
ADDITIONAL INFORMATION 24
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
Portfolio or Smith Barney Inc. (the "Distributor"). This Prospectus does not
constitute an offer by the Portfolio 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>
FEE TABLE
The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Portfolio based,
unless otherwise noted, on its operating expenses for its most recent fiscal
year:
<TABLE>
<CAPTION>
CALIFORNIA MONEY MARKET PORTFOLIO CLASS A CLASS Y
- ----------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases None None
Contingent Deferred Sales Charge None* None
- ----------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.50% 0.50%
12b-1 fees 0.10% --
Other expenses 0.03% 0.04%
- ----------------------------------------------------------
TOTAL PORTFOLIO OPERATING EXPENSES 0.63% 0.54%
- ----------------------------------------------------------
</TABLE>
* Class A shares acquired as part of an exchange privilege transaction, which
were originally acquired in one of the other Smith Barney Mutual Funds at
net asset value subject to a contingent deferred sales charge ("CDSC"),
remain subject to the original fund's CDSC while held in the Portfolio.
Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.
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 indi-
rectly. 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," "Management of the Fund," and "Distribution."
<TABLE>
<CAPTION>
CALIFORNIA MONEY MARKET PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A $ 6 $20 $35 $79
Class Y $ 6 $17 $30 $68
- -------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report for the five-year period ended March 31, 1998
thereon appears in the Portfolio's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI.
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS Y
CLASS A SHARES SHARES
--------------------------------------------------------------- ---------------
CALIFORNIA MONEY MARKET
PORTFOLIO 1998 1997 1996 1995 1994 1993 1992 1991(1) 1998 1997(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS:
Net investment
income(3) 0.029 0.028 0.032 0.026 0.018 0.021 0.035 0.044 0.031 0.020
- -------------------------------------------------------------------------------------------------------------
Total Income from
Investment Operations 0.029 0.028 0.032 0.026 0.018 0.021 0.035 0.044 0.031 0.020
- -------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.029) (0.028) (0.032) (0.026) (0.018) (0.021) (0.035) (0.044) (0.031) (0.020)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.029) (0.028) (0.032) (0.026) (0.018) (0.021) (0.035) (0.044) (0.031) (0.020)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $ 1.00 $1.00 $ 1.00 $ 1.00 $ 1.00 $1.00
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN 2.98% 2.79% 3.22% 2.66% 1.84% 2.05% 3.51% 4.49%++ 3.09% 2.04%++
- -------------------------------------------------------------------------------------------------------------
NET ASSETS, END
OF YEAR (MILLIONS) $1,789 $1,400 $1,346 $ 953 $ 190 $ 160 $ 167 $ 136 $3 $8
- -------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses (3) 0.63% 0.67% 0.64% 0.61% 0.64% 0.67% 0.60% 0.46%+ 0.54% 0.56%+
Net investment income 2.92 2.75 3.15 3.02 1.82 2.05 3.46 4.73+ 3.01 2.77+
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from May 10, 1990 (inception date) to March 31, 1991.
(2) For the period from July 9, 1996 (inception date) to March 31, 1997.
(3) The Manager has waived all or part of its fees for the period ended March
31, 1991 and the two-year period ended March 31, 1996. If such fees were
not waived, the per share decreases in net investment income and the
ratios of expenses to average net assets would be as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
CLASS IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
A ----------------------------------------------
1996 1995 1991 1996 1995 1991
-------- ---------------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
$.000* $.002 $.001 0.65% 0.63% 0.60%+
</TABLE>
++Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
* Amount represents less than $.001.
4
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Portfolio seeks to provide income exempt from both Federal income taxes
and California personal income taxes from a portfolio of high quality short-
term municipal obligations selected for liquidity and stability of principal.
The Portfolio seeks to be fully invested in obligations that are issued by the
State of California and its political subdivisions, agencies and instrumental-
ities, the interest from which in the opinion of counsel for the various
issuers, is exempt from California as well as Federal income taxes. (For cer-
tain shareholders, a portion of the Portfolio's income may be subject to the
alternative minimum tax.) The Portfolio operates as a money market fund, and
utilizes certain investment policies so that, to the extent reasonably possi-
ble, its price per share will not change from $1.00, although no assurance can
be given that this goal will be achieved on a continuous basis. For example,
the Portfolio will not purchase a security which, after giving effect to any
demand features, has a remaining maturity of greater than 13 months, or main-
tain a dollar-weighted average portfolio maturity in excess of 90 days.
Except for temporary defensive purposes, it is a fundamental policy that at
least 80% of the Portfolio's assets will be invested in securities that pro-
duce income that is exempt from Federal income taxes (other than the alterna-
tive minimum tax) and from California personal income taxes in the opinion of
bond counsel for the various issuers.
Opinions relating to the validity of municipal obligations and to the exemp-
tion of interest thereon from Federal income taxes and from California per-
sonal income taxes are rendered by bond counsel to the respective issuers at
the time of issuance. Neither the Portfolio nor its investment adviser, Mutual
Management Corp. ("MMC" or the "Manager"), will review the proceedings relat-
ing to the issuance of municipal obligations or the basis for such opinions.
The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases
from the proceeds of a special excise tax or other specific revenue source.
Please see the SAI for a more detailed discussion about the different types of
municipal obligations.
The Portfolio's investments are limited to United States dollar-denominated
instruments that the Fund's Board of Trustees or its delegates determine pres-
ent minimal credit risks and that (i) are secured by the full faith and credit
of the United States or (ii) are "Eligible Securities," as defined by the
Investment Company Act of 1940 (the "1940 Act"), at the time of acquisition by
the Portfolio. The term "Eligible Securities" includes securities rated by the
"Requisite NRSROs" in one of the two highest short-term rating categories,
securities of issuers that have received such ratings with respect to other
short-term debt securities and compara-
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ble unrated securities. "Requisite NRSROs" means any nationally recognized sta-
tistical rating organizations ("NRSROs") that have issued ratings with respect
to a security or class of debt obligations of an issuer. Currently, there are
five NRSROs: Standard & Poor's Ratings Group, Moody's Investors Service, Inc.,
Fitch IBCA, Inc., Duff and Phelps Inc. and Thomson BankWatch. The Portfolio may
also invest in unrated securities if they are of comparable quality as deter-
mined by the Manager in accordance with criteria established by the Fund's
Board of Trustees.
Municipal obligations, which are issued by states, municipalities and their
agencies, may include municipal bonds and notes. Among the types of obligations
in which the Portfolio may invest are floating or variable rate instruments
subject to demand features ("demand instruments"); tax-exempt commercial paper;
and notes such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax and
Revenue Anticipation Notes and Bond Anticipation Notes. Demand instruments usu-
ally have an indicated maturity of more than 13 months but have a demand fea-
ture (or "put") that entitles the holder to receive the principal amount of the
underlying security and may be exercised either (a) at any time on no more than
30 days' notice; or (b) at specified intervals not exceeding one year and upon
no more than 30 days' notice. Demand features generally consist of a letter of
credit issued by a domestic or foreign bank. A variable rate instrument pro-
vides for adjustment of its interest rate on set dates and upon such adjustment
can reasonably be expected to have a market value that approximates its amor-
tized cost; a floating rate instrument provides for adjustment of its interest
rate whenever a specific interest rate (e.g., the prime rate) changes and at
any time can reasonably be expected to have a market value that approximates
its amortized cost.
The Portfolio may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Portfolio's dividends are derived from interest
on these bonds. These private activity bonds are included in the term "munici-
pal obligations" for purposes of determining compliance with the 80% test
described above. Dividends derived from interest income on all municipal obli-
gations are a component of the "current earnings" adjustment item for purposes
of the Federal corporate alternative minimum tax.
The Portfolio may invest up to 20% of the value of its assets in one or more
of the three principal types of derivative product structures described below.
Derivative products are typically structured by a bank, broker-dealer or other
financial institution. A derivative product generally consists of a trust or
partnership through which the Portfolio holds an interest in one or more under-
lying bonds coupled with a conditional right to sell ("put") the Portfolio's
interest in the underlying bonds at par plus accrued interest to a financial
institution (a "Liquidity Provider"). Typical-
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ly, a derivative product is structured as a trust or partnership which pro-
vides for pass-through tax-exempt income. There are currently three principal
types of derivative structures: (1) "Tender Option Bonds," which are instru-
ments which grant the holder thereof the right to put an underlying bond at
par plus accrued interest at specified intervals to a Liquidity Provider; (2)
"Swap Products," in which the trust or partnership swaps the payments due on
an underlying bond with a swap counterparty who agrees to pay a floating
municipal money market interest rate; and (3) "Partnerships," which allocate
to the partners income, expenses, capital gains and losses in accordance with
a governing partnership agreement.
Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
that could adversely impact the performance of the Portfolio. For example, the
tax-exempt treatment of the interest paid to holders of derivative products is
premised on the legal conclusion that the holders of such derivative products
have an ownership interest in the underlying bonds. While the Portfolio
receives an opinion of legal counsel to the effect that the income from each
derivative product is tax-exempt to the same extent as the underlying bond,
the Internal Revenue Service (the "IRS") has not issued a ruling on this sub-
ject. Were the IRS to issue an adverse ruling, there is a risk that the inter-
est paid on such derivative products would be deemed taxable.
The Portfolio intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Portfolio's
investment objective and policies. The Portfolio will not use such instruments
to leverage securities. Hence, derivative products' contributions to the over-
all market risk characteristics of a Portfolio will not materially alter its
risk profile and will be fully representative of the Portfolio's maturity
guidelines.
The Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, which may include certain derivative products and will
include any repurchase transactions that do not mature within seven days.
Please see the SAI for a more detailed discussion about the different types
of municipal obligations. The Portfolio cannot change its investment objective
and fundamental policies without the vote of a "majority of the outstanding
voting securities" as defined under the 1940 Act. (See "Voting Rights" in the
SAI.)
RISK AND PORTFOLIO MANAGEMENT
There can be no assurance that the Portfolio will achieve its investment
objective. The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in pur-
chasing municipal obligations whose issuers have the continuing ability to
meet their obligations for
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 money market, of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal obligations with longer matu-
rities tend to produce higher yields and are generally subject to potentially
greater price fluctuations than obligations with shorter maturities.
The Portfolio's concentration in California obligations involves certain
additional risks that should be considered carefully by investors. Certain Cal-
ifornia constitutional amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter initiatives could result
in certain adverse consequences affecting California obligations. In particu-
lar, there are risks resulting from certain recent amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, and these may have the effect of impairing
the ability of certain issuers of California obligations to pay principal and
interest on their obligations. See the Statement of Additional Information for
a more detailed description of these and other risks relating to the Portfo-
lio's investments in California obligations.
When-Issued Purchase Commitments. New issues of municipal obligations are
often offered 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 on the securities are fixed at the time the
buyer enters into the commitment, although no interest accrues with respect to
a when-issued security prior to its stated delivery date. The Portfolio will
only make commitments to purchase such securities with the intention of actu-
ally acquiring the securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Portfolio consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the Man-
ager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, will be maintained with PNC
Bank, National Association (the "Custodian") and monitored on a daily basis so
that the market value of the account will equal or exceed the amount of such
commitments by the Portfolio.
Securities purchased on a when-issued basis are subject to changes in market
value prior to delivery based not only upon the public's perception of the
creditworthiness of the issuer but also changes in the level of interest rates,
i.e., appreciating when interest rates decline and depreciating when interest
rates rise. Therefore, if in order to achieve higher interest income the Port-
folio remains substantially fully invested at the same time that it has pur-
chased securities on a when-issued basis,
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
there will be a greater possibility that the market value of the Portfolio's
assets will vary from $1.00 per share. See "Determination of Net Asset Value."
There will also be a greater potential for the realization of capital gains,
which are not exempt from Federal or state income taxes.
Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by com-
mitment a dealer agrees to purchase, at the Portfolio's option, specified
municipal obligations at a specified price. The Portfolio intends to enter into
stand-by commitments only with banks and broker-dealers that, in the opinion of
the Manager, present minimal credit risks. In evaluating the creditworthiness
of the issuer of a stand-by commitment, the Manager will review periodically
the issuer's assets, liabilities, contingent claims and other relevant finan-
cial information. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
Other Factors to be Considered. Investors purchasing municipal obligations of
their state of residence, or a fund comprised of such obligations, should rec-
ognize that the benefits of the exemption from state and local taxes, in addi-
tion to the exemption from Federal taxes, necessarily limits the fund's ability
to diversify geographically.
The Portfolio anticipates being as fully invested as practicable in Califor-
nia municipal obligations and generally expects to invest the proceeds received
from the sale of shares in California municipal obligations as soon as reasona-
bly possible, which is generally within one day. At no time will more than 20%
of the Portfolio's net assets be invested in taxable investments except when
the Portfolio has adopted a temporary defensive investment policy.
The Portfolio may engage in short-term trading to attempt to take advantage
of short-term market variations or may dispose of a portfolio security prior to
its maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions. In such cases, the Portfolio may realize a gain or
loss.
The Fund is registered as a "non-diversified" company under 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; however Rule 2a-7 imposes diversifica-
tion requirements that the Portfolio intends to meet. The Portfolio intends to
comply with Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") which limits the aggregate value of all holdings (except U.S. govern-
ment and cash items, as defined in the Code) that exceed 5% of the Portfolio's
total assets to an aggregate amount of 50% of such assets. Also, holdings of a
single 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, up to 50% of the Portfolio's total assets may be invested
in as few as two single issuers. In the event of decline
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
in creditworthiness of, or default upon, the obligations of one or more such
issuers exceeding 5%, an investment in the Portfolio may entail greater risk
than in a portfolio having a policy of diversification because a high percent-
age of the Portfolio's assets may be invested in municipal obligations of one
or two issuers.
Because the Portfolio invests in securities backed by banks and other finan-
cial institutions, changes in the credit quality of these institutions could
cause losses to the Portfolio and affect its share price.
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 Portfolio and the value of the Port-
folio securities would be affected. The Board of Trustees would then reevalu-
ate the Portfolio's investment objective and policies.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on
the smooth functioning of their computer systems. Many computer software sys-
tems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. The Manager and
Smith Barney have advised the Fund that they have been reviewing all of their
computer systems and actively working on necessary changes to their systems to
prepare for the year 2000 and expect that their systems will be compliant
before that date. In addition, the Manager has been advised by the Fund's cus-
todian, transfer agent and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be
no assurance that the Manager, Smith Barney or any other service provider will
be successful, or that interaction with other non-complying computer systems
will not impair Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
VALUATION OF SHARES
The Portfolio's net asset value per share is determined as of the close of
regular trading on each day that the New York Stock Exchange ("NYSE") is open
by dividing the net asset values attributable to each class (i.e., the value
of its assets
10
<PAGE>
VALUATION OF SHARES (CONTINUED)
less liabilities) by the total number of its shares of the class outstanding.
The Portfolio may also determine net asset value per share on days when the
NYSE is not open, but when the settlement of securities may otherwise occur.
As noted above, the Portfolio employs the "amortized cost method" of valuing
portfolio securities and intends to use its best efforts to continue to main-
tain a constant net asset value of $1.00 per share.
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
DIVIDENDS AND AUTOMATIC REINVESTMENT
The Portfolio declares dividends daily from its net investment income on
each day the NYSE is open. Net investment income includes interest accrued and
discount earned and is less premium amortized and expenses accrued (the amount
of discount or premium on portfolio investments is fixed at the time of pur-
chase). Unless the shareholder has elected to receive monthly distributions of
income, such dividends will automatically be reinvested in Portfolio shares of
the same Class at net asset value. If a shareholder redeems an account in full
between payment dates, all dividends declared up to and including the date of
liquidation will be paid with the proceeds from the redemption of shares. The
per share dividends of Class A shares of the Portfolio may be less than the
per share dividends of the Class Y shares, principally as a result of the
service fee applicable to Class A shares.
TAXES
The following is a summary of the material federal tax considerations
affecting the Portfolio and the Portfolio's shareholders, please refer to the
SAI for further discussion. In addition to the considerations described below
and in the SAI, there may be other federal, state, local or foreign tax appli-
cations to consider. Because taxes are a complex matter, prospective share-
holders are urged to consult their tax advisors for more detailed information
with respect to the tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under Subchapter
M of the Internal Revenue Code (the "Code") for tax treatment as a separate
regulated investment company. In each taxable year that the Portfolio quali-
fies, so long as such qualification is in the best interests of its sharehold-
ers, the Portfolio will pay no federal income tax on its net investment income
and long-term capital gain that is distributed to shareholders, provided the
Portfolio distributes at least 90% of its net investment income and net short-
term capital gains for the taxable year. The Portfolio also intends to satisfy
conditions that will enable it to pay "exempt-interest dividends" to its
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although, may be considered taxable for certain state
and local income (or intangible) tax purposes.
11
<PAGE>
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
Exempt-interest dividends attributable to interest received by the Portfolio
on certain "private-activity" bonds will be treated as a specific tax prefer-
ence item to be included in a shareholder's alternative minimum tax computa-
tion. All exempt-interest dividends will be a component of the "current earn-
ings" adjustment item for purposes of the federal corporate alternative minimum
tax. Exempt-interest dividends derived from the interest earned on private
activity bonds will not be exempt from federal income tax for those sharehold-
ers who are "substantial users" (or persons related to "substantial users") of
the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be sub-
ject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to purchase
or carry Portfolio shares is not deductible for federal income tax purposes to
the extent related to the exempt-interest dividends received on such shares.
Dividends paid by the Portfolio from interest income on taxable investments,
net realized short-term securities gains, and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds
are subject to federal income tax as ordinary income. Distributions, if any,
from net realized long-term securities gains, derived from the sale of bonds
held by the Portfolio for more than one year, are taxable as long-term capital
gains, regardless of the length of time a shareholder has owned Portfolio
shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Portfolio
shares. None of the dividends paid by the Portfolio will qualify for the corpo-
rate dividends received deduction. The Fund will inform shareholders of the
source and tax status of all distributions promptly after the close of each
calendar year.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption, for
those shareholders who do not provide the Fund with a correct taxpayer identi-
fication number (social security or employer identification number). Withhold-
ing from taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and
may be claimed as a credit on the shareholders' federal income tax return.
California State Taxes. California shareholders will not be subject to Cali-
fornia state personal income tax on Portfolio dividends to the extent that such
distribu-
12
<PAGE>
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
tions qualify as exempt-interest dividends under the Code and California law
and provided that, at the close of each quarter of the Portfolio's taxable
year, at least 50% of the Portfolio's total assets are invested in municipal
obligations of California issuers. To the extent that distributions are derived
from taxable income, including long or short-term capital gains, such distribu-
tions will not be exempt from California state personal income tax. Dividends
on the Portfolio are not excluded in determining California state franchise
taxes on corporations and financial institutions.
PURCHASE OF SHARES
Purchases of Portfolio shares may be made through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"), with a broker that clears secu-
rities transactions through Smith Barney on a fully disclosed basis (an "Intro-
ducing Broker") or an investment dealer in the selling group. No maintenance
fee will be charged by the Portfolio in connection with a brokerage account
through which an investor purchases or holds shares.
Class A and Class Y shares of the Portfolio are available for purchase
directly by investors. Investors in Class A may open an account by making an
initial investment of at least $1,000 for each Portfolio account. Investors in
Class Y may open an account by making an initial investment of at least
$15,000,000. Subsequent investments of at least $50 may be made for either
Class. There are no minimum investment requirements in Class A for employees of
Travelers Group Inc. ("Travelers") and its subsidiaries, including Smith Bar-
ney, and Trustees or Directors of any Travelers-affiliated funds, including the
Smith Barney Mutual Funds, and their spouses and children. The Portfolio
reserves the right to waive or change minimums, to decline any order to pur-
chase its shares and to suspend the offering of shares from time to time. Share
certificates are issued only upon a shareholder's written request to the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data").
For investors who maintain a brokerage account with Smith Barney, Smith Bar-
ney has advised the Portfolio that depending on the type of securities account,
its clients' free credit balances (i.e., immediately available funds) will be
invested automatically in full shares of the Portfolio either on a daily or
weekly basis. In addition to this "sweep" service, shareholders who open a
Smith Barney FMA PLUSSM account, which is a full service investment account,
will also be able to take advantage of, among other things: a free Individual
Retirement Account, free dividend reinvestment, unlimited checking, 100 free
ATM withdrawals each year, free gain/loss analysis and online computer access
to account information. Smith Barney clients should contact their Financial
Consultant for more complete information. A complete record of Portfolio divi-
dends, purchases and redemptions will be included on such shareholders' regular
Smith Barney statements.
13
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A purchase
order becomes effective when the Fund, Smith Barney or an Introducing Broker
receives, or converts the purchase amount into, Federal funds (i.e., monies of
member banks within the Federal Reserve System held on deposit at a Federal
Reserve Bank). When orders for the purchase of Portfolio shares are paid for in
Federal funds, or are placed by an investor with sufficient Federal funds or
cash balance in the investor's brokerage account with Smith Barney or the
Introducing Broker, the order becomes effective on the day of receipt if
received prior to the close of regular trading on the NYSE on any day the Port-
folio calculates its net asset value. See "Valuation of Shares." Purchase
orders received after the close of regular trading on the NYSE on any business
day are effective as of the time the net asset value is next determined. When
orders for the purchase of Portfolio shares are paid for other than in Federal
funds, Smith Barney or the Introducing Broker, acting on behalf of the invest-
or, will complete the conversion into, or itself advance, Federal funds, and
the order will become effective on the day following its receipt by the Fund,
Smith Barney or the Introducing Broker. Shares purchased directly through First
Data begin to accrue income dividends on the day that the purchase order
becomes effective. All other shares begin to accrue income dividends on the
next business day following the day that the purchase order becomes effective.
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 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. For share-
holders purchasing shares of the Portfolio through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A
shares and the minimum subsequent investment requirement for both Classes is
$25. For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A shares and the minimum subsequent investment requirement for
both Classes is $50. 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.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
LETTER OF INTENT
Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a 13-month period. Such investors must make an initial minimum
pur-
14
<PAGE>
PURCHASE OF SHARES (CONTINUED)
chase of $5,000,000 in Class Y shares of the Portfolio and agree to purchase a
total of $15,000,000 of Class Y shares of the Portfolio within 13 months from
the date of the Letter. If a total investment of $15,000,000 is not made within
the 13-month period, all Class Y shares purchased to date will be converted
into Class A shares, and will be subject to all fees (including a service fee
of 0.10%) 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.
REDEMPTION OF SHARES
Shareholders may redeem their shares without charge on any day the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form before the close of regular trading on the NYSE are
priced at the net asset value as next determined on that day. Redemption
requests received after the close of regular trading are priced at the net
asset value next determined.
The Portfolio normally transmits redemption proceeds on the business day fol-
lowing receipt of a redemption request but, in any event, payment will be made
within three business days thereafter, exclusive of days on which the NYSE is
closed and the settlement of securities does not otherwise occur, or as permit-
ted 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. A shareholder who pays for Portfolio shares by personal check
will be credited with the proceeds of a redemption of those shares only after
the purchase check has been collected, which may take up to ten days or more. A
shareholder who anticipates the need for more immediate access to his or her
investment should purchase shares with Federal funds, by bank wire or with a
certified or cashier's check.
Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Portfolio will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account with Smith Bar-
ney or the Introducing Broker. One example of how an automatic redemption may
occur involves the purchase of securities. If a shareholder purchases securi-
ties but does not pay for them by the settlement date, the number of Portfolio
shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three business days after the trade date.
Class A shares that are subject to a CDSC (see "Redemption of Shares--Contin-
gent Deferred Sales Charge") are not eligible for such automatic redemption and
will only be redeemed upon specific request. If the shareholder does not
request redemption of such
15
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
shares, the shareholder's account with Smith Barney or the Introducing Broker
may be margined to satisfy debit balances if sufficient Portfolio shares that
are not subject to any applicable CDSC are unavailable. No fee is currently
charged with respect to these automatic transactions. Shareholders not wishing
to participate in these arrangements should notify a Smith Barney Financial
Consultant.
Redemption requests must be made through Smith Barney, an Introducing Broker
or the securities dealer through whom the shares were purchased. A shareholder
desiring to redeem shares represented by certificates also must present the
certificates to Smith Barney or the Introducing Broker endorsed for transfer
(or accompanied by an endorsed stock power), signed exactly as the shares are
registered. Redemption requests involving shares represented by certificates
will not be deemed received until the certificates are received by First Data
in proper form.
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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates 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 $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or'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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund 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 guaran-
tee 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 or her initial invest-
ment in the Fund.
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
16
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions 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 days' prior notice to shareholders.
CONTINGENT DEFERRED SALES CHARGE
Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, such Class A shares that
are redeemed within 12 months of the date of purchase of the original fund may
be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on
17
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
increases in net asset value above the initial purchase price in the original
fund. In addition, no charge will be assessed on shares derived from reinvest-
ment of dividends or capital gain distributions.
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 reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares have been held will be
calculated from the date the shares were initially acquired in one of the other
Smith Barney Mutual Funds and such 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 purpos-
es, 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 CDSC on Class A shares will be waived on (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) involuntary redemptions; and (d) redemptions
of shares to effect 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.
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 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 may apply.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
18
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Taxable Fixed-Income Funds
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc.--Short-Term High-Grade Bond Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York 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
19
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Global--International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series, Inc.--Global Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
Money Market Funds
Smith Barney Money Funds, Inc.--Cash Portfolio
Smith Barney Money Funds, Inc.--Government Portfolio
*Smith Barney Money Funds, Inc.--Retirement Portfolio
Smith Barney Muni Funds--New York Money Market Portfolio
Smith Barney Municipal Money Market Fund, Inc.
- -------------------------------------------------------------------------------
* Available for exchange with Class A shares of the Portfolio.
Class A Exchanges. Class A shares of the Portfolio will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares
of another fund of the Smith Barney Mutual Funds sold with a sales charge.
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. Excessive exchange
transactions may be detrimental to the Portfolio's performance and its share-
holders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other share-
holders. In this event the Fund may, at its discretion, decide to limit addi-
tional purchases and/or exchanges by the shareholder. Upon such a determina-
tion, the Fund will provide notice in writing or by telephone to the share-
holder 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
20
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in deter-
mining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined plus any applicable sales
charge. Redemption procedures discussed above are also applicable for exchang-
ing shares, and exchanges will be made upon receipt of all supporting docu-
ments 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.
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 account is
less than $500. If a shareholder has more than one account in the Portfolio,
each account must satisfy the minimum account size. 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.
YIELD INFORMATION
From time to time the Portfolio may advertise its yield, effective yield and
taxable equivalent yield. These figures are computed separately for Class A
and Class Y shares of the Portfolio. These yield figures will be based on his-
torical earnings and are not intended to indicate future performance. The
yield of the Portfolio refers to the net investment income generated by an
investment in the 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 the Portfolio is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the com-
pounding 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 the Portfolio.
21
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Trustees. The Board of Trustees approves 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 Fund are delegated to the Fund's investment manager. The SAI contains
background information regarding each Trustee and executive officer of the
Fund.
MANAGER
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. MMC
is a subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney (the "Distributor"). Holdings is a wholly owned sub-
sidiary of Travelers Group, Inc., which is a financial services holding com-
pany engaged, through its subsidiaries, principally in four business segments:
Investment Services including Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services. MMC, Hold-
ings and Smith Barney are each located at 388 Greenwich Street, New York, New
York 10013. MMC renders investment advice to investment companies that had
aggregate assets under management as of March 31, 1998 of approximately $100.5
billion.
MMC provides the Fund with investment management services, executive and
other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping, account-
ing, administrative services and services relating to research, statistical
work and supervision of the Portfolio. For the services provided, the Portfo-
lio pays MMC a daily fee calculated at the annual rate of 0.50% of the Portfo-
lio's average net assets. For the last fiscal year the total expenses for
Class A shares were 0.63% of average net assets. MMC has agreed to waive its
fee to the extent that it is necessary if in any fiscal year the aggregate
expenses of a Class exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed 0.70% of its average
daily net assets for that fiscal year. The 0.70% expense limitation shall be
in effect until it is terminated by notice to shareholders and by supplement
to the then-current prospectus.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also sub-
ject to approval by the stockholders of each of Travelers and Citicorp. Trav-
elers has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under
22
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
the Bank Holding Company Act of 1956 (the "BHCA"). The requirements of the
BHCA, the Glass-Steagall Act and certain other laws and regulations will then
be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law follow-
ing the merger of Travelers and Citicorp will have a material adverse effect
on its ability to continue to provide the Fund with the same level of invest-
ment advisory services that it currently receives. Smith Barney and the Man-
ager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not under-
writing and would be consistent with the Glass-Steagall Act and other relevant
federal and state laws. However, there is little controlling precedent regard-
ing the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding compa-
nies. If Smith Barney and the Manager, or their affiliates, were to be pre-
vented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
The term "Smith Barney" in the title of the Fund and Portfolio has been
adopted by permission of Smith Barney and is subject to the right of Smith
Barney to elect that the Fund and Portfolio stop using the term in any form or
combination of its name.
DISTRIBUTION
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 an annual service fee with respect to Class A shares of the Portfolio at
the annual rate of 0.10% of the average daily net assets of Class A shares.
The fee is used by Smith Barney to pay its Financial Consultants for servicing
Class A shareholder accounts for as long as a shareholder remains a holder of
the Class. The service fee is also spent by Smith Barney on the following
types of expenses: (1) the pro rata share of other employment costs of such
financial consultants (e.g., FICA, employee benefits, etc.); (2) employment
expenses of home office personnel primarily responsible for providing service
to Class A shareholders and (3) the pro rata share of branch office fixed
expenses (including branch overhead allocations). Shareholder servicing
expenses incurred by Smith Barney but not reimbursed by Class A in any year
will not be a continuing liability of the Class in subsequent years.
Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
23
<PAGE>
DISTRIBUTION (CONTINUED)
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the
Fund. Therefore, in connection with the anticipated merger of Travelers and
Citicorp and as a consequence of the anticipated applicability of the BHCA and
the Glass-Steagall Act, the Fund plans to retain the services of a new entity
(which is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
ADDITIONAL INFORMATION
The Fund, an open-end management investment company, is organized as a "Mas-
sachusetts 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 different series of shares, each representing shares in separate
portfolios. The assets of each portfolio are segregated and separately managed.
Each share of a portfolio represents an equal proportionate interest in the net
assets of that portfolio with each other share of the same portfolio and is
entitled to such dividends and distributions out of the net income of that
portfolio as are declared in the discretion of the Board of Trustees. Share-
holders are entitled to one vote for each share held and will vote by individ-
ual portfolio except as otherwise permitted by the 1940 Act. It is the inten-
tion of the Fund not to hold annual meetings of shareholders. The Board of
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. 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 Board of Trustees may grant in its
discretion. Shares are redeemable as set forth under "Redemption of Shares" and
are subject to involuntary liquidation as set forth under "Minimum Account
Size."
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Portfolio's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
The Fund sends shareholders of the Portfolio 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. Shareholders who do not want this consol-
idation to apply to their account should contact their Smith Barney Financial
Consultants or the Fund's transfer agent.
24
<PAGE>
SMITH BARNEY
----------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
MUNI FUNDS
CALIFORNIA
MONEY MARKET
PORTFOLIO
388 Greenwich Street
New York, New York 10013
FD 0773 7/98
<PAGE>
P R O S P E C T U S
SMITH BARNEY MUNI FUNDS
New York Money Market Portfolio
JULY 29, 1998
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PROSPECTUS July 29, 1998
Smith Barney Muni Funds
New York Money Market Portfolio
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The New York Money Market Portfolio (the "Portfolio") is one of eight invest-
ment portfolios that currently comprise Smith Barney Muni Funds (the "Fund").
The Portfolio seeks to provide its shareholders with income exempt from both
Federal income taxes (other than the alternative minimum tax) and New York
State and City personal income taxes from a portfolio of high quality short-
term New York municipal obligations selected for liquidity and stability of
principal.
The Portfolio may invest a significant percentage of its assets in issuers
located in the State of New York and therefore an investment in the Portfolio
may be riskier than an investment in other types of money market funds.
SHARES OF THE PORTFOLIO ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from
time to time (the "SAI"), 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 Addi-
tional 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
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- -------------------------------------------------
VALUATION OF SHARES 11
- -------------------------------------------------
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES 12
- -------------------------------------------------
PURCHASE OF SHARES 13
- -------------------------------------------------
REDEMPTION OF SHARES 16
- -------------------------------------------------
EXCHANGE PRIVILEGE 19
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 22
- -------------------------------------------------
YIELD INFORMATION 22
- -------------------------------------------------
MANAGEMENT OF THE FUND 22
- -------------------------------------------------
DISTRIBUTION 24
- -------------------------------------------------
ADDITIONAL INFORMATION 24
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
Portfolio or Smith Barney Inc. (the "Distributor") the Distributor. This
Prospectus does not constitute an offer by the Portfolio 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>
FEE TABLE
The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Portfolio based,
unless otherwise noted, on its operating expenses for its most recent fiscal
year:
<TABLE>
<CAPTION>
NEW YORK MONEY MARKET PORTFOLIO CLASS A CLASS Y
- -------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases None None
Contingent Deferred Sales Charge None* None
- -------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.50% 0.50%
12b-1 fees 0.10% None
Other expenses 0.05% 0.05%**
- -------------------------------------------------------------
TOTAL PORTFOLIO OPERATING EXPENSES 0.65% 0.55%
- -------------------------------------------------------------
</TABLE>
* Class A shares acquired as part of an exchange privilege transaction, which
were originally acquired in one of the other Smith Barney Mutual Funds at
net asset value subject to a contingent deferred sales charge ("CDSC"),
remain subject to the original fund's CDSC while held in the Portfolio.
** The expenses of Class Y are estimated based on expenses incurred by Class A
shares because there were no Class Y shares outstanding during the fiscal
year ended March 31, 1998.
Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.
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 indirect-
ly. 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," "Management of the Fund" and "Distribution."
<TABLE>
<CAPTION>
NEW YORK MONEY MARKET PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A $ 7 $21 $36 $81
Class Y $ 6 $18 $31 $69
- -------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon appears in the Portfolio's annual
report dated March 31, 1998. The information set out below should be read in
conjunction with the financial statements and related notes that also appear
in the Portfolio's Annual Report to Shareholders, which is incorporated by
reference into the SAI.
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
NEW YORK MONEY MARKET
PORTFOLIO 1998 1997 1996 1995 1994 1993(1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(2) 0.030 0.028 0.038 0.025 0.018 0.010
- --------------------------------------------------------------------------------------
Total Income from
Investment Operations 0.030 0.028 0.038 0.025 0.018 0.010
- --------------------------------------------------------------------------------------
LESS:
Dividends from net
investment income (0.030) (0.028) (0.038) (0.025) (0.018) (0.010)
- --------------------------------------------------------------------------------------
Total Distributions (0.030) (0.028) (0.038) (0.025) (0.018) (0.010)
- --------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------
TOTAL RETURN 3.04% 2.85% 3.17% 2.49% 1.77% 1.01%++
- --------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $1,161,000 $937,115 $882,492 $708,391 $82,459 $59,510
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(2) 0.65% 0.67% 0.67% 0.68% 0.60% 0.56%+
Net investment income 2.99 2.80 3.11 2.94 1.73 1.84+
- --------------------------------------------------------------------------------------
</TABLE>
(1) For the period from September 17, 1992 (inception date) to March 31, 1993.
(2) The manager has waived all or part of its fees for the year ended March
31, 1994 and the period ended March 31, 1993. If such fees were not
waived, the per share decrease of net investment income would have been
$0.001 and $0.001, for the year ended March 31, 1994 and the period ended
March 31, 1993, respectively, and the ratio of expenses to average net
assets would have been 0.67% and 0.69%, respectively.
++Total return is not annualized, as the result may not be representative of
the total return for the year.
+ Annualized.
4
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The New York Money Market Portfolio seeks to provide 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 municipal obligations selected for
liquidity and stability of principal. The Portfolio will seek to be fully
invested in obligations that are issued by the State of New York and its polit-
ical subdivisions, agencies and instrumentalities, the interest from which, in
the opinion of counsel for the various issuers, is exempt from New York State
and City as well as Federal income taxes. (For certain shareholders, a portion
of the Portfolio's income may be subject to the alternative minimum tax.) The
Portfolio operates as a money market fund, and utilizes certain investment pol-
icies so that, to the extent reasonably possible, its price per share will not
change from $1.00, although no assurance can be given that this goal will be
achieved on a continuous basis. For example the Portfolio will not purchase a
security which, after giving effect to any demand features, has a remaining
maturity of greater than 13 months, or maintain a dollar-weighted average port-
folio maturity in excess of 90 days.
Except for temporary defensive purposes, it is a fundamental policy that at
least 80% of the Portfolio's assets will be invested in securities that produce
income that is exempt from Federal income taxes (other than the alternative
minimum tax) and from New York State and City personal income taxes in the
opinion of bond counsel for the various issuers.
Opinions relating to the validity of municipal obligations and to the exemp-
tion of interest thereon from Federal income taxes and from New York State and
New York City personal income taxes are rendered by bond counsel to the respec-
tive issuers at the time of issuance. Neither the Portfolio nor its investment
adviser, Mutual Management Corp. ("MMC" or the "Manager"), will review the pro-
ceedings relating to the issuance of municipal obligations or the basis for
such opinions.
The two principal classifications of municipal obligations are "general obli-
gation" and "revenue." General obligations are secured by a municipal issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source. Please see
the SAI for a more detailed discussion about the different types of municipal
obligations.
The Portfolio's investments are limited to United States dollar-denominated
instruments that the Fund's Board of Trustees or its delegates determine
present minimal credit risks and that (i) are secured by the full faith and
credit of the United States or (ii) are "Eligible Securities," as defined by
the Investment Company Act of 1940, as amended (the "1940 Act"), at the time of
acquisition by
5
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the Portfolio. The term "Eligible Securities" includes securities rated by the
"Requisite NRSROs" in one of the two highest short-term rating categories,
securities of issuers that have received such ratings with respect to other
short-term debt securities and comparable unrated securities. "Requisite
NRSROs" means any nationally recognized statistical rating organizations
("NRSROs") that have issued ratings with respect to a security or class of debt
obligations of an issuer. Currently, there are five NRSROs: Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Fitch IBCA, Inc., Duff and
Phelps Inc., and Thomson BankWatch. The Portfolio may also invest in unrated
securities if they are of comparable quality as determined by the Manager in
accordance with criteria established by the Fund's Board of Trustees.
Municipal obligations, which are issued by states, municipalities and their
agencies, may include municipal bonds and notes. Among the types of obligations
in which the Portfolio may invest are floating or variable rate instruments
subject to demand features ("demand instruments"); tax-exempt commercial paper;
and notes such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax and
Revenue Anticipation Notes and Bond Anticipation Notes. Demand instruments usu-
ally have an indicated maturity of more than 13 months but have a demand fea-
ture ("put") that entitles the holder to receive the principal amount of the
underlying security and may be exercised either (a) at any time on no more than
30 days' notice; or (b) at specified intervals not exceeding one year and upon
no more than 30 days' notice. Demand features generally consist of a letter of
credit issued by a domestic or foreign bank. A variable rate instrument pro-
vides for adjustment of its interest rate on set dates and upon such adjustment
can reasonably be expected to have a market value that approximates its amor-
tized cost; a floating rate instrument provides for adjustment of its interest
rate whenever a specific interest rate (e.g., the prime rate) changes and at
any time can reasonably be expected to have a market value that approximates
its amortized cost.
The Portfolio may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Portfolio's dividends are derived from interest
on these bonds. These private activity bonds are included in the term "munici-
pal obligations" for purposes of determining compliance with the 80% test
described above. Dividends derived from interest income on all municipal obli-
gations are a component of the "current earnings" adjustment item for purposes
of the Federal corporate alternative minimum tax.
The Portfolio may invest up to 20% of the value of its assets in one or more
of the three principal types of derivative product structures described below.
Deriva-
6
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tive products are typically structured by a bank, broker-dealer or other
financial institution. A derivative product generally consists of a trust or
partnership through which the Portfolio holds an interest in one or more
underlying bonds coupled with a conditional right to sell ("put") the Portfo-
lio's interest in the underlying bonds at par plus accrued interest to a
financial institution (a "Liquidity Provider"). Typically, a derivative prod-
uct is structured as a trust or partnership which provides for pass-through
tax-exempt income. There are currently three principal types of derivative
structures: (1) "Tender Option Bonds," which are instruments which grant the
holder thereof the right to put an underlying bond at par plus accrued inter-
est at specified intervals to a Liquidity Provider; (2) "Swap Products," in
which the trust or partnership swaps the payments due on an underlying bond
with a swap counterparty who agrees to pay a floating municipal money market
interest rate; and (3) "Partnerships," which allocate to the partners income,
expenses, capital gains and losses in accordance with a governing partnership
agreement.
Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
that could adversely impact the performance of the Portfolio. For example, the
tax-exempt treatment of the interest paid to holders of derivative products is
premised on the legal conclusion that the holders of such derivative products
have an ownership interest in the underlying bonds. While the Portfolio
receives an opinion of legal counsel to the effect that the income from each
derivative product is tax-exempt to the same extent as the underlying bond,
the Internal Revenue Service (the "IRS") has not issued a ruling on this sub-
ject. Were the IRS to issue an adverse ruling, there is a risk that the inter-
est paid on such derivative products would be deemed taxable.
The Portfolio intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Portfolio's
investment objective and policies. The Portfolio will not use such instruments
to leverage securities. Hence, derivative products' contributions to the over-
all market risk characteristics of a Portfolio will not materially alter its
risk profile and will be fully representative of the Portfolio's maturity
guidelines.
The Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, which may include certain derivative products and will
include any repurchase transactions that do not mature within seven days.
Please see the SAI for a more detailed discussion about the different types
of municipal obligations. The Portfolio cannot change its investment objective
and fundamental policies without the vote of a "majority of the outstanding
voting securities" as defined under the 1940 Act. (See "Voting Rights" in the
SAI.)
7
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
RISK AND PORTFOLIO MANAGEMENT
There can be no assurance that the Portfolio will achieve its investment
objective. The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in pur-
chasing municipal obligations whose issuers have the continuing ability to meet
their obligations for the payment of interest and principal when due. The abil-
ity to achieve a high level of income is dependent on the yields of the securi-
ties in the portfolio. Yields on municipal obligations are the product of a
variety of factors, including the general conditions of the money market, of
the municipal bond and municipal note markets, the size of a particular offer-
ing, the maturity of the obligation and the rating of the issue. Municipal
obligations with longer maturities tend to produce higher yields and are gener-
ally subject to potentially greater price fluctuations than obligations with
shorter maturities.
The Portfolio's concentration in New York State and New York City obligations
involves certain additional risks that should be considered carefully by
investors. In certain prior fiscal years, the State has failed to enact a bud-
get 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 statu-
tory 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. Because the State, the City, the State's other political
subdivisions and the State Authorities, all of which borrow money, are or are
perceived in the marketplace to be financially interdependent, any financial
difficulty experienced by one can adversely affect the market value and market-
ability of obligations issued by others. The State's credit is presently
involved with the indebtedness of the Authorities because of the State's guar-
antee or other support. This indebtedness is a substantial amount. The Authori-
ties are likely to require further financial assistance from the State. 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
recent local recovery can be attributed to the continued improvement in the
U.S. economy, but a great deal of
8
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles. The City was required to close substantial budget gaps in recent
years in order to maintain balanced operating results as required by laws of
the State. See the Statement of Additional Information for a more detailed
description of these and other risks relating to the Portfolio's investments
in New York obligations.
Investors purchasing municipal obligations of their state of residence, or a
fund comprised of such obligations, should recognize that the benefits of the
exemption from state and local taxes, in addition to the exemption from Fed-
eral taxes, necessarily limits the fund's ability to diversify geographically.
When-Issued Purchase Commitments. New issues of municipal obligations are
often offered 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 on the securities are fixed at the time the
buyer enters into the commitment, although no interest accrues with respect to
a when-issued security prior to its stated delivery date. The Portfolio will
only make commitments to purchase such securities with the intention of actu-
ally acquiring the securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Portfolio consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfo-
lio's purchase commitments, provided such securities have been determined by
the Manager to be liquid and unencumbered and are marked to market daily pur-
suant to guidelines established by the Board of Trustees, will be maintained
with PNC Bank, National Association (the "Custodian") and monitored on a daily
basis so that the market value of the account will equal or exceed the amount
of such commitments by the Portfolio.
Securities purchased on a "when-issued" basis are subject to changes in mar-
ket value prior to delivery based not only upon the public's perception of the
creditworthiness of the issuer but also changes in the level of interest
rates, i.e., appreciating when interest rates decline and depreciating when
interest rates rise. Therefore,
if in order to achieve higher interest income the 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 the Portfolio's assets will vary from $1.00 per share. (See
"Determination of Net Asset Value.") And there will be a greater potential for
the realization of capital gains, which are not exempt from Federal or state
income taxes.
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by com-
mitment a dealer agrees to purchase, at the Portfolio's option, specified
municipal obligations at a specified price. The Portfolio intends to enter into
stand-by commitments only with banks and broker-dealers that, in the opinion of
the Manager, present minimal credit risks. In evaluating the creditworthiness
of the issuer of a stand-by commitment, the Manager will review periodically
the issuer's assets, liabilities, contingent claims and other relevant finan-
cial information. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
Other Factors to be Considered. The Portfolio anticipates being as fully
invested as practicable in New York municipal obligations and generally expects
to invest the proceeds received from the sale of shares in New York municipal
obligations as soon as reasonably possible, which is generally within one day.
At no time will more than 20% of the Portfolio's net assets be invested in tax-
able investments except when the Portfolio has adopted a temporary defensive
investment policy.
The Portfolio may engage in short-term trading to attempt to take advantage
of short-term market variations or may dispose of a portfolio security prior to
its maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions. In such cases, the Portfolio may realize a gain or
loss.
The Portfolio is registered as a "non-diversified" company under 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; however Rule 2a-7 imposes diversifica-
tion requirements that the Portfolio intends to meet. The Portfolio intends to
comply with Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") which limits the aggregate value of all holdings (except U.S. govern-
ment and cash items, as defined in the Code) that exceed 5% of the Portfolio's
total assets to an aggregate amount of 50% of such assets. Also, holdings of a
single 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, up to 50% of the Portfolio's total assets may be invested
in as few as two single issuers. In the event of a decline in creditworthiness
of, or default upon, the obligations of one or more such issuers exceeding 5%,
an investment in the Portfolio may entail greater risk than in a portfolio hav-
ing a policy of diversification because a high percentage of the Portfolio's
assets may be invested in municipal obligations of one or two issuers.
Because the Portfolio invests in securities backed by banks and other finan-
cial institutions, changes in the credit quality of these institutions could
cause losses to the Portfolio and affect its share price.
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Portfolio and the value of the Port-
folio securities would be affected. The Board of Trustees would then reevalu-
ate the Portfolio's investment objective and policies.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, depend on
the smooth functioning of their computer systems. Many computer software sys-
tems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. The Manager and
Smith Barney have advised the Fund that they have been reviewing all of their
computer systems and actively working on necessary changes to their systems to
prepare for the year 2000 and expect that their systems will be compliant
before that date. In addition, the Manager has been advised by the Fund's cus-
todian, transfer agent and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be
no assurance that the Manager, Smith Barney or any other service provider will
be successful, or that interaction with other non-complying computer systems
will not impair Fund or shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.
VALUATION OF SHARES
The Portfolio's net asset value per share is determined as of the close of
regular trading on each day that the New York Stock Exchange ("NYSE") is open
by dividing the net asset values attributable to each class (i.e., the value
of its assets less liabilities) by the total number of its shares of the class
outstanding. The Portfolio may also determine net asset value per share on
days when the NYSE is not open, but when the settlement of securities may oth-
erwise occur. As noted above, the Portfolio employs the "amortized cost meth-
od" of valuing portfolio securities and intends to use its best efforts to
continue to maintain a constant net asset value of $1.00 per share.
11
<PAGE>
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
DIVIDENDS AND AUTOMATIC REINVESTMENT
The Portfolio declares dividends daily from its net investment income on each
day the NYSE is open. Net investment income includes interest accrued and dis-
count earned and is less premium amortized and expenses accrued (the amount of
discount or premium on portfolio investments is fixed at the time of purchase).
Unless the shareholder has elected to receive monthly distributions of income,
such dividends will automatically be reinvested in Portfolio shares of the same
Class at net asset value. If a shareholder redeems an account in full between
payment dates, all dividends declared up to and including the date of liquida-
tion will be paid with the proceeds from the redemption of 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.
TAXES
The following is a summary of the material federal tax considerations affect-
ing the Portfolio and the Portfolio's shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in
the SAI, there may be other federal, state, local or foreign tax applications
to consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under Subchapter
M of the Internal Revenue Code (the "Code") for tax treatment as a separate
regulated investment company. In each taxable year that the Portfolio quali-
fies, so long as such qualification is in the best interests of its sharehold-
ers, the Portfolio will pay no federal income tax on its net investment income
and long-term capital gain that is distributed to shareholders, provided the
Portfolio distributes at least 90% of its net investment income and net short-
term capital gains for the taxable year. The Portfolio also intends to satisfy
conditions that will enable it to pay "exempt-interest dividends" to its share-
holders. Exempt-interest dividends are generally not subject to regular federal
income taxes, although, may be considered taxable for certain state and local
income (or intangible) tax purposes. New York resident shareholders will not be
subject to New York State and City personal income tax on exempt-interest divi-
dends attributable to tax-exempt obligations of the State of New York and its
political subdivisions, as well as certain other Federal obligations considered
exempt for New York State and City purposes. Exempt-interest dividends are not
excluded in determining New York State franchise of New York City business
taxes on corporations and financial institutions.
Exempt-interest dividends attributable to interest received by the Portfolio
on certain "private-activity" bonds will be treated as a specific tax prefer-
ence item to be included in a shareholder's alternative minimum tax computa-
tion. All exempt-
12
<PAGE>
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
interest dividends will be a component of the "current earnings" adjustment
item for purposes of the federal corporate alternative minimum tax. Exempt-
interest dividends derived from the interest earned on private activity bonds
will not be exempt from federal income tax for those shareholders who are "sub-
stantial users" (or persons related to "substantial users") of the facilities
financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be sub-
ject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to purchase
or carry Portfolio shares is not deductible for federal income purposes to the
extent related to the exempt-interest dividends received on such shares.
Dividends paid by the Portfolio from interest income on taxable investments,
net realized short-term securities gains, and all or a portion of any gains
from the sale or other disposition of certain market discount bonds are subject
to federal income tax as ordinary income. Distributions, if any, from net real-
ized long-term securities gains, derived from the sale of bonds held by the
Portfolio for more than one year, are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned Portfolio shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Portfolio
shares. None of the dividends paid by the Portfolio will qualify for the corpo-
rate dividends received deduction. The Fund will inform shareholders of the
source and tax status of all distributions promptly after the close of each
calendar year. The Fund is also required to report annually the source, tax
status and recipient information related to the exempt-interest dividends dis-
tributed with the State of New York.
The Fund is required to withhold ("backup withholding") 31% of all dividends,
capital gain distributions, and the proceeds of any redemption, for those
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital distributions also is required for shareholders
who otherwise are subject to backup withholding. Any tax withheld as a result
of backup withholding does not constitute an additional tax, and may be claimed
as a credit on the shareholders' federal income tax return.
PURCHASE OF SHARES
Purchases of Portfolio shares may be made through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"), with a broker that clears
securi-
13
<PAGE>
PURCHASE OF SHARES (CONTINUED)
ties transactions through Smith Barney on a fully disclosed basis (an "Intro-
ducing Broker") or an investment dealer in the selling group. No maintenance
fee will be charged by the Portfolio in connection with a brokerage account
through which an investor purchases or holds shares.
Class A and Class Y shares of the Portfolio are available for purchase
directly by investors. Investors in Class A may open an account by making an
initial investment of at least $1,000 for each Portfolio account. Investors in
Class Y may open an account by making an initial investment of at least
$15,000,000 (except for purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount). Subse-
quent investments of at least $50 may be made for either Class. There are no
minimum investment requirements in Class A for employees of Travelers Group
Inc. ("Travelers") and its subsidiaries, including Smith Barney, and Trustees
or Directors of any Travelers-affiliated Funds, including the Smith Barney
Mutual Funds, and their spouses and children. The Portfolio 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. Share certificates are
issued only upon a shareholder's written request to the Fund's transfer agent,
First Data Investor Services Group, Inc. ("First Data").
For investors who maintain a brokerage account with Smith Barney, Smith Bar-
ney has advised the Portfolio that depending on the type of securities
account, its clients' free credit balances (i.e., immediately available funds)
may be invested automatically in full shares of the Portfolio either on a
daily or weekly basis. In addition to this "sweep" service, shareholders who
open a Smith Barney FMA PLUS SM account, which is a full service investment
account, will also be able to take advantage of, among other things: a free
Individual Retirement Account, free dividend reinvestment, unlimited checking,
100 free ATM withdrawals each year, free gain/loss analysis and online com-
puter access to account information. Smith Barney clients should contact their
Financial Consultant for more complete information. A complete record of Port-
folio dividends, purchases and redemptions will be included on such sharehold-
ers' regular Smith Barney statements.
The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A pur-
chase order becomes effective when the Portfolio, Smith Barney or an Introduc-
ing Broker receives, or converts the purchase amount into, Federal funds
(i.e., monies of member banks within the Federal Reserve System held on
deposit at a Federal Reserve Bank). When orders for the purchase of Portfolio
shares are paid for in Federal funds, or are placed by an investor with suffi-
cient Federal funds or cash balance in
14
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the investor's brokerage account with Smith Barney or the Introducing Broker,
the order becomes effective on the day of receipt if received prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its
net asset value. See "Valuation of Shares." Purchase orders received after the
close of regular trading on the NYSE on any business day are effective as of
the time the net asset value is next determined. When orders for the purchase
of Portfolio shares are paid for other than in Federal funds, Smith Barney or
the Introducing Broker, acting on behalf of the investor, will complete the
conversion into, or itself advance, Federal funds, and the order will become
effective on the day following its receipt by the Fund, Smith Barney or the
Introducing Broker. Shares purchased directly through First Data begin to
accrue income dividends on the day that the purchase order becomes effective.
All other shares begin to accrue income dividends on the next business day fol-
lowing the day that the purchase order becomes effective.
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 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. For share-
holders purchasing shares of the Portfolio through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A
shares and the minimum subsequent investment requirement for both Classes is
$25. For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A shares and the minimum subsequent investment requirement for
both Classes is $50. 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.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
LETTER OF INTENT
Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a 13-month period. Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Portfolio and agree to purchase
a total of $15,000,000 of Class Y shares of the Portfolio within 13 months from
the date of the Letter. If a total investment of $15,000,000 is not made within
the 13-month period, all Class Y shares purchased to date will be converted
into Class A shares, and will be subject to all fees (including a service fee
of 0.10%) 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.
15
<PAGE>
REDEMPTION OF SHARES
Shareholders may redeem their shares without charge on any day the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form before the close of regular trading on the NYSE are
priced at the net asset value as next determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value next determined.
The Portfolio normally transmits redemption proceeds on the business day fol-
lowing receipt of a redemption request but, in any event, payment will be made
within three business days thereafter, exclusive of days on which the NYSE is
closed and the settlement of securities does not otherwise occur, or as permit-
ted 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. A shareholder who pays for Portfolio shares by personal check
will be credited with the proceeds of a redemption of those shares only after
the purchase check has been collected, which may take up to ten days or more. A
shareholder who anticipates the need for more immediate access to his or her
investment should purchase shares with Federal funds, by bank wire or with a
certified or cashier's check.
Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Portfolio will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account with Smith Bar-
ney or the Introducing Broker. One example of how an automatic redemption may
occur involves the purchase of securities. If a shareholder purchases securi-
ties but does not pay for them by the settlement date, the number of Portfolio
shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three business days after the trade date.
Class A shares that are subject to a CDSC (see "Redemption of Shares--Contin-
gent Deferred Sales Charge") are not eligible for such automatic redemption and
will only be redeemed upon specific request. If the shareholder does not
request redemption of such shares, the shareholder's account with Smith Barney
or the Introducing Broker may be margined to satisfy debit balances if suffi-
cient Portfolio shares that are not subject to any applicable CDSC are unavail-
able. No fee is currently charged with respect to these automatic transactions.
Shareholders not wishing to participate in these arrangements should notify a
Smith Barney Financial Consultant.
Redemption requests must be made through Smith Barney, an Introducing Broker
or the securities dealer through whom the shares were purchased. A shareholder
desiring to redeem shares represented by certificates also must present the
certificates to Smith Barney or the Introducing Broker endorsed for transfer
(or accompa-
16
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
nied by an endorsed stock power), signed exactly as the shares are registered.
Redemption requests involving shares represented by certificates will not be
deemed received until the certificates are received by First Data in proper
form.
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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates 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 $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or'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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his or her
initial investment in the Fund.
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data
at1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his or 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
17
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
Reserve System or have a correspondent relationship with a member bank. The
Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated 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 fol-
lowing at least seven days' prior notice to shareholders.
CONTINGENT DEFERRED SALES CHARGE
Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, such Class A shares that
are redeemed within 12 months of the date of purchase of the original fund may
be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on increases in net asset value above the initial purchase price in
the original fund. In addition, no charge will be assessed on shares derived
from reinvestment of dividends or capital gain distributions.
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 reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares have been held will be
calculated from the date the shares were
18
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
initially acquired in one of the other Smith Barney Mutual Funds and such
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 real-
ized on redemption.
The CDSC on Class A shares will be waived on (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) involuntary redemptions; and (d) redemptions
of shares to effect 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.
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 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 may apply.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
19
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Taxable Fixed-Income Funds
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income Fund
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York 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
Global--International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Global Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
20
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Money Market Funds
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
- --------------------------------------------------------------------------------
* Available for exchange with Class A shares of the Portfolio.
Class A Exchanges. Class A shares of the Portfolio will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares of
another fund of the Smith Barney Mutual Funds sold with a sales charge.
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. Excessive exchange
transactions may be detrimental to the Portfolio's performance and its share-
holders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other share-
holders. In this event the Fund may, at its discretion, decide to limit addi-
tional purchases and/or exchanges by the shareholder. Upon such a determina-
tion, the Fund will provide notice in writing or by telephone to the share-
holder 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 "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined plus any applicable sales
charge. Redemption procedures discussed above are also applicable for exchang-
ing 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.
21
<PAGE>
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 account is
less than $500. If a shareholder has more than one account in this Portfolio,
each account must satisfy the minimum account size. 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.
YIELD INFORMATION
From time to time the Portfolio may advertise its yield, effective yield and
taxable equivalent yield. These figures are computed separately for Class A
and Class Y shares of the Portfolio. These yield figures are based on histori-
cal earnings and are not intended to indicate future performance. The yield of
the Portfolio refers to the net investment income generated by an investment
in the 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 the 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 simi-
larly to the yield, except that a stated income tax rate is used to demon-
strate the taxable yield necessary to produce an after-tax yield equivalent to
the tax-exempt yield of the Portfolio.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Portfolio 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 manag-
er, custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager. The SAI contains background infor-
mation regarding each Trustee and executive officer of the Fund.
MANAGER
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. MMC
is a subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney (the "Distributor"). Holdings is a wholly owned sub-
sidiary of Travelers Group, Inc., which is a diversified financial services
holding company engaged, through its subsidiaries, principally in four busi-
ness segments: Invest-
22
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
ment Services including Asset Management, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. MMC, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. MMC renders investment advice to investment companies that had aggregate
assets under management as of March 31, 1998 of approximately $100.5 billion.
MMC provides the Fund with investment management services, 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 Portfolio pays MMC
a daily fee calculated at the annual rate of 0.50% of the Portfolio's average
net assets. For the last fiscal year the total expenses of the Portfolio's
Class A shares were 0.65% of average net assets. MMC has agreed to waive its
fee to the extent that it is necessary if in any fiscal year the aggregate
expenses of a Class exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed 0.70% of its average
daily net assets for that fiscal year. The 0.70% expense limitation shall be in
effect until it is terminated by notice to shareholders and by supplement to
the then-current prospectus.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also sub-
ject to approval by the stockholders of each of Travelers and Citicorp. Travel-
ers has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"). The requirements of the BHCA, the Glass-Steagall Act and certain other
laws and regulations will then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law follow-
ing the merger of Travelers and Citicorp will have a material adverse effect on
its ability to continue to provide the Fund with the same level of investment
advisory services that it currently receives. Smith Barney and the Manager
believe that the Manager's services under the Management Agreement and the
shareholder service activities performed by Smith Barney are not underwriting
and would be consistent with the Glass-Steagall Act and other relevant federal
and state laws. However, there is little controlling precedent regarding the
performance of the combination of investment advisory, shareholder servicing
and administrative activities by subsidiaries of bank holding companies. If
Smith Barney and the Manager, or their affiliates, were to be prevented from
acting as the manager or a shareholder service agent, the Fund would seek
alternative means for obtaining these services. The
23
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
Fund does not expect that shareholders would suffer any adverse financial con-
sequences as a result of any such occurrence.
The term "Smith Barney" in the title of the Fund and Portfolio has been
adopted by permission of Smith Barney and is subject to the right of Smith Bar-
ney to elect that the Fund and Portfolio stop using the term in any form or
combination of its name.
DISTRIBUTION
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 an
annual service fee with respect to Class A shares of the Portfolio at the
annual rate of 0.10% of the average daily net assets of Class A shares. The fee
is used by Smith Barney to pay its Financial Consultants for servicing Class A
shareholder accounts for as long as a shareholder remains a holder of the
Class. The service fee is also spent by Smith Barney on the following types of
expenses: (1) the pro rata share of other employment costs of such financial
consultants (e.g., FICA, employee benefits, etc.); (2) employment expenses of
home office personnel primarily responsible for providing service to Class A
shareholders and (3) the pro rata share of branch office fixed expenses (in-
cluding branch overhead allocations). Shareholder servicing expenses incurred
by Smith Barney but not reimbursed by Class A in any year will not be a contin-
uing liability of the Class in subsequent years.
Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the
Fund. Therefore, in connection with the anticipated merger of Travelers and
Citicorp and as a consequence of the anticipated applicability of the BHCA and
the Glass-Steagall Act, the Fund plans to retain the services of a new entity
(which is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
ADDITIONAL INFORMATION
The Fund, an open-end management investment company, is organized as a "Mas-
sachusetts business trust" pursuant to a Declaration of Trust dated August 14,
1985. Pursuant to the Declaration of Trust, the Trustees have authorized the
issu-
24
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
ance of different series of shares, each representing shares in separate port-
folios. The assets of each portfolio are segregated and separately managed.
Each share of a portfolio represents an equal proportionate interest in the net
assets of that portfolio with each other share of the same portfolio and is
entitled to such dividends and distributions out of the net income of that
portfolio as are declared in the discretion of the Board of Trustees. Share-
holders are entitled to one vote for each share held and will vote by individ-
ual portfolio except as otherwise permitted by the 1940 Act. It is the inten-
tion of the Fund not to hold annual meetings of shareholders. The Board of
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. 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 Board of Trustees may grant in its
discretion. Shares are redeemable as set forth under "Redemption of Shares" and
are subject to automatic liquidation as set forth under "Minimum Account Size."
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Portfolio's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
The Fund sends shareholders of the Portfolio 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. Shareholders who do not want this consol-
idation to apply to their account should contact their Smith Barney Financial
Consultant or the Fund's transfer agent.
25
<PAGE>
SMITH BARNEY
----------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
MUNI FUNDS
NEW YORK
MONEY MARKET
PORTFOLIO
388 Greenwich Street
New York, New York 10013
FD0774 7/98
Smith Barney Muni Funds
388 Greenwich Street
New York, NY 10013
Statement of Additional
Information
July 29, 1998
Shares of Smith Barney Muni Funds (the "Fund") are offered
currently with a choice of eight Portfolios, the National Portfolio, the
Limited Term Portfolio, the Florida Portfolio, the Georgia Portfolio,
the New York 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 seeks to pay its shareholders as high a
level of income exempt from Federal income taxes as is consistent with
prudent investing, and generally selects investments that will enable
its shares to be exempt from the Florida intangibles tax.
The Georgia Portfolio seeks to provide 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 to provide 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 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 and Pennsylvania Portfolio each offer four classes
("Classes") of shares: Class A, Class B, Class L and Class Y. The
Limited Term Portfolio offers three classes of shares: Class A, Class L
and Class Y. Class A shares are sold to investors with an initial sales
charge and Class B shares are sold without an initial sales charge but
with higher ongoing expenses and a Contingent Deferred Sales Charge
("CDSC") payable upon certain redemption's. Class L shares are sold
with a lower initial sales charge than Class A shares but with higher
ongoing expenses and a CDSC. Class Y shares are sold without an initial
sales charge and are available only to investors investing a minimum of
$15,000,000. 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 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 2
Additional Information Regarding Investment Policies 4
Additional Tax Information 7
Investment Restrictions 9
Performance Information 10
Valuation of Shares 12
The Management Agreement 13
Distribution 15
Custodian 16
Independent Auditors 16
The Fund 16
Voting Rights 17
Financial Statements 19
Appendix A 20
Appendix B 24
Appendix C 32
Appendix D 39
Appendix E 44
Appendix F 49
TRUSTEES AND OFFICERS
Set forth below is a list of each Trustee and executive officer of
the Fund, including a description of principal occupation during the
last 5 years, age and address of each such person. All officers of the
Fund have their business address at 388 Greenwich Street, New York, NY
10013.
DONALD R. FOLEY, Trustee
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Trustee or
director of ten investment companies associated with Smith Barney Inc.
("Smith Barney"). Formerly Vice President of Edwin Bird Wilson,
Incorporated (advertising); 75.
PAUL HARDIN, Trustee
Professor of Law at University of North Carolina at Chapel Hill, 12083
Morehead, Chapel Hill, North Carolina 27514. Trustee or director of 12
investment companies associated with Smith Barney; and a Director of The
Summit Bancorporation. Formerly, Chancellor of the University of North
Carolina at Chapel Hill; 67.
*HEATH B. MCLENDON, Chairman of the Board, President and Chief Executive
Officer
Managing Director of Smith Barney; Trustee or director of 58 investment
companies associated with Smith Barney; President of Mutual Management
Corp. ("MMC" or the "Manager"); Chairman of Smith Barney Strategy
Advisors Inc. and President of Travelers Investment Adviser, Inc.
("TIA"); 65.
RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 9 Cadence Court, Morristown, NJ 07960. Trustee or
director of ten investment companies associated with Smith Barney.
Formerly, Vice President of Dresdner and Company Inc. (investment
counselors); 72.
JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey, 07960. Trustee or
director of ten investment companies associated with Smith Barney.
Formerly, Director and Chairman of Smith Barney Trust Company, Director
of Smith Barney Holdings Inc. and the Manager and Senior Executive Vice
President, Director and Member of the Executive Committee of Smith
Barney; 67.
LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney; Senior Vice President and Treasurer
of 42 investment companies associated with Smith Barney, and Director
and Senior Vice President of the Manager and TIA; 40.
PETER M. COFFEY, Vice President and Investment Officer
Managing Director of Smith Barney and Portfolio Manager; Vice President
of the Manager and of five investment companies associated with Smith
Barney; 54.
LAWRENCE McDERMOTT, Vice President and Investment Officer
Managing Director of Smith Barney and Vice President of the Fund and six
investment companies associated with Smith Barney; 50.
JOSEPH BENEVENTO; Vice President and Investment Officer
Vice President of Smith Barney and Vice President of the Fund and four
investment companies associated with Smith Barney; 29.
THOMAS M. REYNOLDS, Controller
Director of Smith Barney and Controller of the Fund and 37 investment
companies associated with Smith Barney; 38.
IRVING DAVID, Controller (California and New York Money Market
Portfolios)
Director of Smith Barney and the Manager. Controller of several of the
investment companies associated with Smith Barney. Prior to March,
1994, Assistant Treasurer of First Investment Management Company; 36.
CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of 42 investment
companies associated with Smith Barney; Secretary and General Counsel of
the Manager and TIA; 47.
*Designates a Trustee that is an "interested person" as defined in the
Investment Company Act of 1940, as amended (the "Act"). Such persons
compensated by Smith Barney and are not separately compensated by the
Fund for serving as a Fund officer or Trustee.
The following table shows the compensation paid by the Fund to
each person who was a 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.
COMPENSATION TABLE
Name of Person
Aggregate
Compensatio
n from Fund
Pension or
Retirement
Benefits
Accrued as
part of Fund
Expenses
Total
Compensation
from Fund and
Fund Complex
Number of
Funds for
Which Person
Serves within
Fund Complex
Joseph H. Fleiss+@
$8,028
0
$54,900
10
Donald R. Foley+
8,128
0
55,400
10
Paul Hardin
8,128
0
73,000
12
Francis P. Martin
7,328
0
53,000
10
Heath B. McLendon*
0
0
0
58
Roderick C.
Rasmussen
8,128
0
55,400
10
John P. Toolan+
8,128
0
55,400
10
* Designates a person that is an "interested Trustee" of the Fund.
+ Pursuant to a deferred compensation plan, the indicated persons
elected to defer payment of the following amounts of their compensation
from the Fund: Joseph H. Fleiss - $1,814, Donald R. Foley - $1,814, and
John P. Toolan - $8,128, and the following amounts of their compensation
from the Fund Complex: Joseph H. Fleiss: $21,000, Donald R. Foley:
$21,000, and John P. Toolan: $55,400.
@ Effective January 1, 1998, Mr. Fleiss became a Trustee Emeritus.
Upon attainment of age 72 the Fund's current Trustees may elect to
change to emeritus status. Any Trustees elected or appointed to the
Board in the future will be required to change to emeritus status upon
attainment of age 80. Trustees Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they are
paid 50% of the annual retainer fee and meeting fees otherwise
applicable to the Fund's Trustees, together with reasonable out-of-
pocket expenses for each meeting attended. For the last Fiscal year,
the total paid to Emeritus Trustees by the Fund was $11,592.
On July 17, 1998, the Trustees and officers owned in the aggregate
less than 1% of the outstanding shares of each Portfolio 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, many of which
may 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, 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 ("IDBs") 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 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, as amended (the "1940 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 IDB or a pollution control revenue bond, if the bond is backed
only by the assets and revenues of the non-governmental user, the non-
governmental 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. Similar criteria apply for purposes of the
diversification requirements under Subchapter M of the Internal Revenue
Code (the "Code").
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 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.
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
interests 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
commitments 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 ratings of
Nationally Recognized Statistical Ratings Organizations ("NRSROs")
such as Moody's Investment Service, Inc. ("Moody's") and Standard &
Poor's Ratings Group ("S&P") represent their opinions 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 debt securities of any grade equal to the amount of the when-issued
commitments will be established with PNC Bank, National Association (the
"Custodian") and marked-to-market daily pursuant to guidelines
established by the Trustees, with additional cash or 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).
The Portfolios 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
may 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%.
ADDITIONAL TAX INFORMATION
Capital gain distributions, if any, are taxable to shareholders,
and are declared and paid at least annually. On March 31, 1998, the
unused capital loss carryovers, by Portfolio, were approximately as
follows: Limited Term Portfolio, $3,628,000; California Money Market
Portfolio, $155,000; New York Money Market Portfolio, $206,000. For
Federal income tax purposes, these amounts are available to be applied
against future securities gains, if any, that are realized. The
carryovers expire as follows:
PORTFOLIO
March
31,
(in
thousands)
1999
2000
2001
2002
2003
2004
Limited
Term
--
--
--
--
1,888
1,740
CA Money
$23
$9
83
1
1
38
NY Money
-
- -
206
- --
- --
-
- -
-
- -
Generally, interest on municipal obligations is exempt from
regular Federal income tax. However, interest on municipal obligations
that are considered to be "private activity bonds," as defined in the
Internal Revenue Code of 1986, as amended (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. 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 Portfolios, will be subject to regular
Federal income tax for most investors.
The Tax Reform Act of 1986 (the "Tax Reform Act") provided 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 provided generally that tax preference
items for corporations 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 shareholder's gain or loss on the disposition of Fund shares
(whether by redemption, sale or exchange), generally will be a long-term
or short-term gain or loss depending whether the shares had been owned
for more than 12 months or not for more than 12 months at disposition.
Losses realized by a shareholder on the disposition of Fund shares owned
for six months or less will be treated as a long-term capital loss to
the extent a capital gain dividend had been distributed on such shares.
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
Each of the Portfolios is subject to certain restrictions and
policies that are "fundamental," which means that they may not be
changed without a "vote of a majority of the outstanding voting
securities" of the Portfolio, as defined under the 1940 Act and Rule
18f-2 thereunder (see "Voting"). The Portfolios are subject to other
restrictions and policies that are "non-fundamental" and which may be
changed by the Fund's Board of Trustees without shareholder approval,
subject to any applicable disclosure requirements.
Fundamental Policies - All Portfolios. Without the approval of a
majority of its outstanding voting securities, no Portfolio may:
1. issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
2. invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities of
the U.S. government (including its agencies and instrumentalities)
and securities of state or municipal governments and their
political subdivisions are not considered to be issued by members
of any industry.
3. borrow money, except that (a) the Portfolio may borrow from banks
for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests which might otherwise require
the untimely disposition of securities, and (b) the Portfolio may,
to the extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent that
it engages in transactions described in (a) and (b), the Portfolio
will be limited so that no more than 33 -1/3% of the value of its
total assets (including the amount borrowed), valued at the lesser
of cost or market, less liabilities (not including the amount
borrowed) valued at the time the borrowing is made, is derived
from such transactions.
4. make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Portfolio may invest consistent
with its investment objectives and policies; (b) repurchase
agreements; and (c) loans of its portfolio securities, to the
fullest extent permitted under the 1940 Act.
5. engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically
be deemed to be an underwriter under the Securities Act of 1933,
as amended, in disposing of portfolio securities.
6. purchase or sell real estate, real estate mortgages, real estate
investment trust securities, commodities or commodity contracts,
but this restriction shall not prevent the Portfolio from (a)
investing in securities of issuers engaged in the real estate
business or the business of investing in real estate (including
interests in limited partnerships owning or otherwise engaging in
the real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate received in
connection with securities it holds or held; or (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the
Portfolio's investment objective and policies).
Additional Fundamental Policies. Without the approval of a majority of
its outstanding voting securities, neither the National Portfolio nor
the Limited Term Portfolio may:
1. invest in a manner that would cause the Portfolio to fail to be a
"diversified company" under the Act and the rules, regulations and
orders thereunder.
Nonfundamental Policies. As a nonfundamental policy, no Portfolio may:
1. purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales
of portfolio securities) or sell any securities short (except
"against the box"). For purposes of this restriction, the deposit
or payment by the Portfolio of underlying securities and other
assets in escrow and collateral agreements with respect to initial
or maintenance margin in connection with futures contracts and
related options and options on securities, indexes or similar
items is not considered to be the purchase of a security on
margin.
2. purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that
are illiquid.
3. write or purchase put, call, straddle or spread options.
4. invest more than 5% of its assets in unseasoned issuers with less
than three years of continuous operation (including that of
predecessors).
5. purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that each
Portfolio may may invest in the securities of issuers which
operate, invest in, or sponsor such programs.
Additional Nonfundamental Policies. As a nonfundamental policy,
1. neither the National Portfolio nor the New York Portfolio may
invest in securities of another investment company except as
permitted by Section 12(d)(1) of the 1940 Act or as part of a
merger, consolidation, or acquisition.
All of the foregoing restrictions stated in terms of percentages
will apply at the time an investment is made; a subsequent increase or
decrease in the percentage that may result from changes in values or net
assets will not result in a violation of the restriction.
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 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- and ten-year periods, if
any, and for the life of the Portfolio ended March 31, 1998 is as
follows:
PORTFOLIO
One Year
Five Years
Ten Years
Life
Inception
Date
National
6.98%
6.14%
8.52%
7.84%
8/20/86
Limited
Term
6.54
5.34
- --
6.72
11/28/88
New York
7.34
6.09
8.45
7.30
1/16/87
Florida
6.70
6.05
- --
7.55
4/2/91
Georgia
9.30
- --
- --
7.81
4/4/94
Pennsylvani
a
8.96
- --
- --
8.01
4/4/94
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, 1998 is as follows:
PORTFOLIO
One
Year
Five Years
Life
Inception
Date
National
6.30%
- --
9.62
%
11/7/94
New York
6.69
- --
9.62
11/11/94
Florida
6.09
- --
9.76
11/16/94
Georgia
8.89
- --
7.60
6/15/94
Pennsylvani
a
8.47
- --
7.63
6/20/94
Each Portfolio's average annual total return with respect to its
Class L shares for a one-year period, five-year period, if any, and for
the life of the Portfolio's Class L shares through March 31, 1998 is as
follows:
PORTFOLIO
One
Year
Five
Years
Life
Inception Date
National
9.71%
6.35%
6.85
%
1/5/93
Limited
Term
7.36
5.50
5.70
1/5/93
New York
10.13
6.30
6.82
1/8/93
Florida
9.51
6.28
6.80
1/5/93
Georgia
12.23
- --
8.21
4/14/94
Pennsylvani
a
11.84
- --
8.50
4/5/94
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
30-day period ending at month end by the maximum offering price per
share on the last day of such period and annualizing 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 are 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 those of 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, 1998 was 2.86%
(the effective yield was 2.90%) with an average dollar-weighted
portfolio maturity of 41 days; the New York Money Market Portfolio's
yield with respect to its Class A shares for the seven-day period ended
March 31, 1998 was 2.92% (the effective yield was 2.97%) with an average
dollar-weighted portfolio maturity of 45 days. From time to time the
California Money Market Portfolio and New York Money Market Portfolio
may advertise their yields, effective yields and taxable equivalent
yields. 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, Martin Luther King, Jr. Day, Presidents' Day,
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 1940 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" including "Risk 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 the
Portfolio would receive if it sold the instrument. During such periods
the yield to investors in a 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 a 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 such Portfolio's shares will remain at
$1.00; however, shareholders should be aware that despite procedures
that will be followed to have a stable 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 Board of 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 one of these
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, is rated in the three
highest long-term rating categories by the requisite NRSROs, and 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 to be of
comparable quality to any such rated security.
THE MANAGEMENT AGREEMENT
The Management Agreement for the National Portfolio, the Georgia
Portfolio and Pennsylvania Portfolio provides for a management fee at
the annual rate of 0.45% of the Portfolio's average net assets. The
management fee for the Limited Term Portfolio, the Florida Portfolio and
the New York Portfolio is an annual rate of 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 assets.
The Management Agreements for the California Money Market
Portfolio and the New York Money Market Portfolio provide for the
payment of a 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 rate of the management fee for each of the money market
Portfolios is 0.50%.
For the fiscal years ended March 31, 1998, 1997 and 1996, the
management fee paid by each Portfolio was as follows:
PORTFOLIO
1998
1997
1996
National
$1,754,11
6
$1,780,78
8
$1,893,904
Limited Term
1,416,637
1,495,020
1,260,753
New York
3,734,185
3,682,923
996,273
Florida
974,400
876,101
622,090
California Money (a)
7,817,640
6,706,574
5,870,779
New York Money
5,154,859
4,554,023
4,035,418
Georgia (b)
131,737
6,917
- --
Pennsylvania (c)
179,220
- --
- --
(a) The Manager waived its management fee in excess of 0.01% of the
California Money Market Portfolio's average daily net assets for the
fiscal year ended March 31, 1996.
(b) The Manager waived its entire management fee with respect to the
Georgia Portfolio for the fiscal year ended March 31, 1996 and its
management fee in excess of 0.33% of the Portfolio's average daily
net assets for the fiscal years ended March 31, 1998 and 1997 .
(c) The Manager waived its entire management fee with respect to the
Pennsylvania Portfolio for the fiscal years ended March 31, 1996 and
March 31, 1997 and its management fee in excess of 0.33% of the
Portfolio's average daily net assets for the fiscal year ended March
31, 1998.
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' meetings, 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 1940
Act, interest, taxes and governmental fees, 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 fees if in any
fiscal year the aggregate expenses of any Class of the following
Portfolios, exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed the indicated
percentage of such Portfolio's average net assets for that fiscal year:
PORTFOLIO
National
0.65%
Limited Term
0.70%
New York
0.70%
Florida
0.70%
California Money
Market
0.70%
New York Money
Market
0.70%
Georgia
0.65%
Pennsylvania
0.65%
The foregoing expense limitations may be terminated at any time by
the Manager by notification to existing shareholders and by
supplementing the relevant Portfolio's then-current Prospectus and/or
Statement of Additional Information.
DISTRIBUTION
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 California and New York Money Market Portfolios is
0.10%). With respect to Class B and Class L 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, 1998, 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 each for each of the Fund's
Portfolios. The distribution expenses for 1998 included compensation of
Smith Barney Financial Consultants and printing costs of prospectuses
and marketing materials.
PORTFOLIO
Class A
Class B
Class L
Class Y
Total
California Money
Market
$1,561,7
91
- --
- --
- --
$ 1,561,791
National
538,970
$99,361
$106,426
- --
744,757
Limited Term
380,172
N/A
104,579
- --
484,751
Florida
202,416
360,738
53,953
- --
617,107
Georgia
24,898
57,757
26,535
- --
109,190
New York
815,993
1,250,544
73,153
- --
2,139,690
NY Money Market
$1,030,9
72
- --
- --
- --
1,030,972
Pennsylvania
23,404
113,999
46,800
- --
184,203
On July 13, 1998, the Board of Trustees approved of a new
distribution agreement between the Fund and CFBDS, Inc., a wholly owned
subsidiary of the signature Financial Group Inc. Such new distribution
arrangement is anticipated to become effective at or about the closing
date of the Travelers Group Inc./Citicorp merger.
CUSTODIAN
All portfolio securities and cash owned by the Fund will be held
in the custody of PNC Bank, National Association, 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
has been selected as independent auditors to examine and report on the
Fund's financial statements for the fiscal year ending March 31, 1999.
THE FUND
The interest of a shareholder is in the assets and earnings of the
Portfolio in which he or she holds shares. The Board of Trustees has
authorized the issuance of shares in separate series, each representing
shares in one of the separate Portfolios. Pursuant to such authority,
the Board may also authorize the creation of additional series of shares
and additional classes of shares within any series. The investment
objectives, policies and restrictions applicable to additional
Portfolios would be established by the Board of Trustees at the time
such Portfolios were established and may differ from those set forth in
the Prospectuses and this 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 Board of Trustees. The Declaration of Trust and the
By-Laws of the Fund are designed to make the Fund similar in certain
respects to an entity organized as a corporation. The principal
distinction between the two forms of business organization 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 is 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 (a) all
types of claims in the latter jurisdictions; (b) tort claims; (c)
contract claims where the provision referred to is omitted from the
undertaking; (c) claims for taxes; and (d) 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 Board of
Trustees intends 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 her 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.
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 Board of Trustees has the power to alter the number and the
terms of office of the Trustees, and may at any time lengthen their own
terms or make their terms of unlimited duration (subject to certain
removal procedures) and fill vacancies, provided that in accordance with
the 1940 Act, (i) a shareholder meeting to elect Trustees must promptly
be called if at any time at least a majority of the Trustees have not
been elected by the shareholders of the Fund, and (ii) at least 2/3 of
the Trustees must have been so elected upon the filing of any vacancy by
the board without a shareholder vote. 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 L 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 July 17, 1998, the following
shareholders beneficially owned 5% or more of a class of shares of a
Portfolio of the Fund :
National Portfolio Class B
James R. Scheele
P.O. Box 2477
Williston, ND 58802-2477
owned 105,761.391 (6.05%) shares
Florida Portfolio Class A
Linda R. Kaminow, Ira Panzier,
S. Norman Reich & Allan Holtz
Co-Succ TTEES U/A/D 01/03/98
E.G. Rosenblatt Trust
2003 North Ocean Blvd. Apt. #704
Boca Raton, FL 33431-7853
owned 632,245.480 (5.88%) shares
Georgia Portfolio Class A
Donald G. Arpin and
Carole A. Arpin JTWROS
8 Marsh Harbor Drive
Savannah, GA 31410-2139
owned 97,102.494 (5.72%) shares
Georgia Portfolio Class L
Jeanette L. Griffis
Rt. 1 Box 266
Fargo, GA 31631-9801
owned 19,223.534 (5.09%) shares
Pennsylvania Portfolio Class A
James J. Broussard
530 Derwyn Rd.
Drexel Hill, PA 19026-1203
owned 202,092.791 (15.39%) shares
Murray L. Katz and Harriet L. Katz JTWROS
186 Commadore Drive
Jupiter, FL 33477-4004
owned 103,446.887 (7.88%) shares
Idlewild Farm Associates
c/o Jerry A & Carol L. Shields
Main Account
Idlewild Farm
617 Williamson Road
Bryn Mawr, PA 19010-1932
owned 90,958.497 (6.93%) shares
Terry A. Halpern
603 Great Springs Road
Bryn Mawr PA 19010-1701
owned 73,894.624 (5.63%) shares
California Money Market Portfolio Class A
Evelyn A. Freed TTEE
FBO Evelyn A. Freed
U/A/D 03/26/90
1511 Clearview Lane
Santa Ana, CA 92705-1501
owned 104,864,495.440 (5.60%) shares
FINANCIAL STATEMENTS
The following information is hereby incorporated by reference to
each Portfolio's March 31, 1998 Annual Report to Shareholders:
Annual Report
Annual Report
of National of
Limited
Page(s) in: Portfolio Term
Portfolio
Schedules of Investments 7-16 7-17
Statements of Assets and Liabilities 19 20
Statements of Operations 20 21
Statements of Changes in Net Assets 21 22
Notes to Financial Statements 22 23-26
Financial Highlights (for a share of each series of
beneficial interest outstanding throughout each year) 25 27
Independent Auditors' Report 28 28
Annual Report Annual
Report
of Florida
of California
Portfolio
Money Market
Portfolio
Page(s) in:
Schedules of Investments 8-16 4-10
Statements of Assets and Liabilities 19 12
Statements of Operations 20 13
Statements of Changes in Net Assets 21 14
Notes to Financial Statements 22-25 15 -
17
Financial Highlights (for a share of each series of
beneficial interest outstanding throughout each year) 26-28
18
Independent Auditors' Report 29 19
Annual Report Annual
Report
Of Georgia of New
York &
& Pennsylvania
N.Y. Money
Portfolios
Market
Portfolios
Schedules of Investments 12- 19
9-23
Statements of Assets and Liabilities 22
27
Statements of Operations 23
28
Statements of Changes in Net Assets 24 - 25
29-30
Notes to Financial Statements 26 - 29
31-34
Financial Highlights (for a share of each series of
beneficial interest outstanding throughout each year) 30 - 35
35-38
Independent Auditors' Report 36
39
APPENDIX A
RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER
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 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 Ratings Group ("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
Fitch/IBCA, Inc.:
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit
risk. The obligor has an exceptionally strong capacity for timely
payment of financial commitments, which is highly unlikely to be
adversely affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments
is considered to be strong, but may be more vulnerable to changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to impair this capacity.
This is the lowest investment grade category assigned by Fitch.
Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however,
are not used in the AAA category.
DESCRIPTION OF STATE AND LOCAL GOVERNMENT NOTE RATINGS
Notes are assigned distinct rating symbols in recognition of the
differences between short-term and long-term credit 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 Ratings Group:
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.
Fitch/IBCA, Inc.:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet financial commitments in a
timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments. The "+" denotes
an exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as
great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction
to non-investment grade.
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 Ratings Group:
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.
Appendices B-F - Special Note:
The following information (set forth in Appendices B-F) is a
summary of special factors available at the time of the preparation of
this SAI affecting municipal obligations for state-specific Portfolios
(California and New York Money Markets, Florida, Georgia, New York and
Pennsylvania Portfolios). For any such state, the summary does not
purport to be a complete description and is based on information from
official statements and other public information relating to securities
offerings, finances and bond ratings of issuers within the state. The
Manager has not independently verified any such information. The
respective states typically indicate that budgetary information is based
on estimates and projections of revenues and expenditures for a fiscal
year and must not be construed as statements of fact; 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. Generally, NRSROs base their ratings on information and
materials furnished to the agencies and on investigations, studies and
assumptions by the rating agencies at a particular point in time. There
is no assurance that any such rating remains in effect for a given
period of time or that it will not be lowered or withdrawn entirely if,
in the judgment of the NRSRO originally establishing the rating,
circumstances so warrant. Any such change or withdrawal of the rating
could have an adverse effect on the market price of the bonds.
APPENDIX B
ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO CALIFORNIA
MUNICIPAL OBLIGATIONS
See Special Note prior to Appendix B.
General
Beginning in the 1990-91 fiscal year, California faced the worst
economic, fiscal and budgetary conditions since the 1930s.
Construction, manufacturing (especially aerospace), exports and
financial services, among others, were severely affected. Job losses
were the worst of any post-war recession and have been estimated to
exceed 800,000.
The recession seriously affected State tax revenues and caused
increased expenditures for health and welfare programs. The State has
also faced a structural imbalance in its budget with the largest
programs supported by the General Fund--K-12 schools and community
colleges, health, welfare and corrections--growing at rates higher than
the growth rates for the principal revenue sources of the General Fund
(the General Fund, the State's main operating fund, consists of revenues
which are not required to be credited to any other fund). The State
experienced recurring budget deficits. The State Controller reported
that expenditures exceeded revenues for four of the six fiscal years
ending with 1992-93, and were essentially equal in 1993-94. According
to the Department of Finance, the State suffered a continuing budget
deficit of approximately $2.8 billion in the Special Fund for Economic
Uncertainties (Special Funds account for revenues obtained from
specific revenue sources, and which are legally restricted to
expenditures for specified 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 approximately $2.8 billion. As a result of
continuing recession, the excess of revenues over expenditures for the
1993-94 fiscal year was less than $300 million. The accumulated budget
deficit at June 30, 1994 was not able to be retired by June 30, 1995 as
planned. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95. 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 deplete the State's cash resources to pay its 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. At the end of its 1995-96
fiscal year, however, the State did not borrow monies into the
subsequent fiscal year.
Many California counties continue to be under severe fiscal
distress. Such distress has impacted smaller, rural counties and larger
suburban counties such as Los Angeles and Orange County, which declared
bankruptcy in 1994. Orange County has implemented significant
reductions in services and personnel, and continues to face fiscal
restraints in the aftermath of its bankruptcy. However, California has
experienced recent economic expansion, with growth in employment and in
early 1998 the state recorded its lowest unemployment rate since 1990.
There can be no assurance this growth trend will continue.
1995-96 Budget
The State began the 1995-1996 Fiscal Year with strengthening
revenues based on an improving economy and the smallest nominal "
budget gap" to be closed in many years.
The 1995-96 Budget Act, signed by the Governor on August 3, 1995,
projects General Fund revenues and transfers of $44.1 billion, about
$2.2 billion higher than projected revenues in 1994-95. The Budget Act
projects Special Fund revenues of $12.7 billion, an increase from $12.1
billion projected in 1994-95.
The Department of Finances released updated projections for the
1995-96 fiscal year in May, 1996, estimating that revenues and transfers
to be $46.1 billion, approximately $2 billion over the original fiscal
year estimate. Expenditures also increased, to an estimated $45.4
billion, as a result of the requirement to expend revenues for schools
under Proposition 98, and, among other things, failure of the federal
government to budget new aid for illegal immigrant costs which had been
counted on to allow reduction in costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges will
increase by about $1 billion (General Fund) and $1.2 billion
total above revised 1994-95 levels. Because of higher-than-
projected revenues in 1994-95, an additional $543 million is
appropriated to the 1994-95
2. Proposition 98 entitlement. A significant component of this
amount is a block grant of about $54 per pupil for any one-time
purpose. Per-pupil expenditures are projected to increase by
another $126 in 1995-96 to $4,435. A full 2.7% cost-of-living
allowance is funded for the first time in several years. The
budget compromise anticipated a settlement of the CTA v. Gould
litigation.
2. Cuts in health and welfare costs totaling about $900 million,
some of which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California
($90 million General Fund) and the California State University
system ($24 million General Fund), with no increases in student
fees.
4. The updated Budget assumes receipt of $494 million in new
federal aid for costs of illegal immigrants, in excess of federal
government commitments.
5. General Fund support for the Department of Corrections is
increased by about 8% over 1994-95, reflecting estimates of
increased prison population. This amount is less than was
proposed in the 1995 Governor's Budget.
1996-97 Budget
The 1996-97 Budget Act was signed by the Governor on July 15, 1996
and projected General Fund revenues and transfers of approximately
$47.64 billion and General Fund expenditures of approximately $47.25
billion. The Governor vetoed about $82 million of appropriations (both
General Fund and Special Fund) and the State has implemented its regular
cash flow borrowing program with the issuance of $3 billion of Revenue
Anticipation Notes to mature on or before June 30, 1997. The 1996-97
Budget Act appropriated a budget reserve in the Special Fund for
Economic Uncertainties of $305 million, as of June 30, 1997.
The Budget Act contained General Fund appropriations totaling
$47.251 billion, a 4.0% increase over the final estimated 1995-96
expenditures. Special Fund expenditures are budgeted at $12.6 billion.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community college
districts increased by almost $1.6 billion (General Fund) and
$1.65 billion total above revised 1995-96 level periods. Almost
half of this money was budgeted to fund class-size reduction in
kindergarten and grades 1-3.
2. Proposed cuts in health and welfare costs totaling about $660
million. All of these cuts require federal law changes (including
welfare reform), federal waivers or federal budget appropriations
in order to be achieved. The 1996-97 Budget Act assumes
approval/action by October, 1996, with the savings to be achieved
beginning November, 1996. The 1996-97 Budget Act was based on
continuation of previously approved assistance levels for Aid to
Families with Dependent Children and other health and welfare
programs, which had been reduced in prior years, including
suspension of State-authorized cost-of-living increases.
3. A 4.9% increase in funding for the University of California
($130 million General Fund) and the California State University
system ($101 million General Fund), with no increases in student
fees, maintaining the second year of the Governor's four-year
"compact" with the State's higher education units.
4. General Fund support for the Department of Corrections was
increased by about 7% over the prior year, reflecting estimates of
increased prison population.
5. With respect to aid to local governments, the principal new
programs included in the 1996-97 Budget Act are $100 million in
grants to cities and counties for law enforcement purposes, and
budgeted $50 million for competitive grants to local governments
for programs to combat juvenile crime.
The 1996-97 Budget Act did not contain any tax increases. As
noted, there was a reduction in corporate taxes. In addition, the
Legislature approved another one-year suspension of the renters' tax
credit, saving $520 in expenditures.
1997-98 Budget
On January 9, 1997, the Governor announced his proposed 1997-98
State budget detailing plans to cut welfare, increase education spending
and provide certain tax cuts to businesses and banks. The total spending
plan in the amount of approximately $66.6 billion represents an increase
of approximately 4% from the 1996-97 State Budget, with an increase in
the State's General Fund to approximately $50.3 billion. The Governor
announced a proposal to restructure the State's welfare system, placing
strict time limits on the provision of assistance and introducing
penalties, and included a plan to increase spending for elementary and
secondary schools.
On August 11, 1997, the State Legislature approved a 1997-98 State
Budget of approximately $68 billion which included approximately $32
billion for public schools, an increase of approximately $4 billion over
the prior year. The Budget also included approximately $100 million for
local law enforcement and approximately $75 million in spending to
subsidize hospitals that care for large numbers of uninsured patients,
as well as approximately $40 million for legal immigrants and an
increase of approximately $223 million in welfare spending, including
job training. The education portion of the State Budget approved by the
Legislature for 1997-98 included approximately $850 million to expand
the class-size reduction program and full statutory funding of the
Revenue Limit COLA comprising a 2.65% COLA, consistent with the May
Revision. Revenue Limit Equalization is as funded in the amount of
approximately $261 million for the school district revenue limit
equalization for 1996-97.
The final State Budget was signed by the Governor on August 18,
1997 after using his line-item veto authority to veto, with reservation
until an acceptable school testing bill is passed, a significant amount
of education funding from the State Budget approved by the Legislature.
Vetoes which would be restored if a testing bill acceptable to the
Governor is passed include approximately $955,000 in Department of
Education spending, and approximately $900 million in local assistance.
Vetoes not relating to the testing issue, but which need legislation in
order to restore the vetoed funds, included more than $20 million in
Department of Education spending. The final State Budget also provided
approximately $377 million for child care programs administered by the
Department of Education and the Department of Social Services,
approximately $160 million for welfare-to-work programs, approximately
$25 million in adult education funding and approximately $50 million to
California community colleges, approximately $100 million to cities and
counties to enhance local law enforcement, approximately $55 million in
federal funds to local government for the construction of detention
facilities and approximately $1.2 billion in deferred general fund
contributions to the Public Employees Retirement System. The final State
Budget did not include the Governor's proposed 10% tax cut for bank and
corporations.
Proposed 1998-99 Budget
In 1997, California experienced employment growth exceeding 3
percent-approximately 400,000 new jobs-and income rose by more than 7
percent. The State's unemployment rate fell during 1997 to a low of 5.8
percent in November. In fiscal year 1996-97, the State's General Fund
collections grew by over 6 percent to reach $49.2 billion, and revenue
for the 1997-98 and 1998-99 fiscal years is expected to reach $52.9
billion and $55.4 billion respectively. This represents an annual growth
of $3.7 billion (7.5 percent) for 1997-98 and $2.5 billion (4.7 percent)
for 1998-99.
The 1998-99 Governor's Budget provides $50 million in General Fund
and $200 million in a proposed bond issue to capitalize the
Infrastructure and Development Bank, which will provide capital to local
governments to help businesses locate and expand in California, and $3
million for the small business loan guarantee program. The Budget also
includes an Early Childhood Development Initiative, which is designed to
improve the health and development of children from birth to age three
and provides additional funds for anti-gang programs and for the
apprehension of sexual predators. The Budget proposes an approximately
$7 billion investment plan to maintain and build the State's system of
schools, water supply, prisons, natural resources, and other
infrastructure.
In addition, the Budget includes approximately $40 billion to be
devoted to California's 999 school districts and 58 county offices of
education, resulting on estimated total per-pupil expenditures from all
sources of $6,620 in fiscal year 1997-98 and $6,749 in 1998-99.
Projected state revenues will contribute to a 7 percent increase in
Proposition 98 General Fund support for K-12 education in 1998-99. This
level of resources results in K-12 Proposition 98 per-pupil expenditures
of $5,636 in 1998-99, up from $5,114 in 1996-97 and $5,414 in 1997-98.
In addition, approximately $350 million has been allocated to lengthen
the school year to 180 days while maintaining sufficient funds for staff
development days. The State Budget includes a 2.22% COLA for revenue
limit, special education, and child development in an amount of $657.4
million which includes school district and county office of education
apportionments ($470.6 million), summer school ($4.0 million), special
education ($57.8 million), child development ($14.6 million), class size
reduction ($33.6 million), and categorical program COLA and growth
($73.7 million); enrollment growth funding of $564.5 million; class size
reduction funding in the amount of $547 billion for all pupils in grades
K-3 at $818 per pupil; and approximately $2 billion in state bonds for
the 1998 election and $2.0 billion for each two years thereafter in
2000, 2002, and 2004 and an additional $135 million for deferred
maintenance to be matched locally.
It cannot be predicted what actions will be taken in the future by
the State Legislature and the Governor to deal with changing State
revenues and expenditures. The State budget will be affected by national
and state economic conditions and other factors.
Voter Initiative
"Proposition 218" or the "Right to Vote on Taxes Act" (the
"Proposition") was approved by the California electorate at the
November, 1996 general election. Officially titled "Voter Approval For
Local Government Taxes, Limitation on Fees, Assessments and Charges
Initiative Constitutional Amendment," the Act was approved by a
majority of the voters voting at the election and adds Articles XIIIC
and XIIID to the California Constitution.
The Proposition, among other things, requires local governments to
follow certain procedures in imposing or increasing any fee or charge as
defined. "Fee" or "charge" is defined to mean "any levy other than
an ad valorem tax, a special tax or an assessment imposed by an agency
upon a parcel or upon a person as an incident of property ownership,
including user fees or charges for a property related service."
The procedure required by the Proposition to impose or increase
any fee or charge include a public hearing upon the proposed fee or
charge and the opportunity to present written protests by the owners of
the parcels subject to the proposed fee or charge. If written protests
against the proposed fee or charge are presented by a majority of the
owners of the identified parcels, the local government shall not impose
the fee or charge.
The Proposition further provides as follows:
"Except for fees or charges for sewer, water, and refuse
collection services, no property related fee or charge shall be
imposed or increased unless and until such fee or charge is
submitted and approved by a majority vote of the property owners
of the property subject to the fee or charge or, at the option of
the agency, by a two-thirds vote of the electorate residing in the
affected area."
Additionally, the Proposition provides, with respect to stand-by
charges as follows:
"No fee or charge may be imposed for a service unless that
service is actually used by, or immediately available to, the
owner of the property in question. Fees or charges based on
potential or future use of a service are not permitted. Standby
charges, whether characterized as charges or assessments, shall be
classified as assessments and shall not be imposed without
compliance with Section 4 of this Article."
The Proposition provides that beginning July 1, 1997, all fees or
charges shall comply with the Proposition's requirements.
The Proposition is silent with respect to future increases of
existing fees or charges which are pledged to payment of indebtedness or
obligations previously incurred by the local government. Presumably,
the Proposition cannot preempt outstanding contractual obligations
protected by the contract impairment clause of the federal constitution.
However, with respect to any given situation or case, litigation may be
the method which will settle any question concerning the authority of a
local government to increase fees or charges outside of the strictures
or the Proposition in order to meet contractual obligations.
Proposition 218 also contains a new provision subjecting "matters
of reducing or repealing any local tax, assessments and charges" to the
initiative power. This means that no city or local agency revenue
source is safe from reduction or repeal pursuant to the initiative
process.
Litigation concerning various elements of the Proposition may
ultimately ensue and clarifying legislation may be enacted.
Future Initiatives
Articles XIIIA, XIIIB, XIIIC and XIIID were each adopted as
measures that qualified for the ballot pursuant to the State's
initiative process. From time to time, other initiative measures could
be adopted which could affect revenues of the State or public agencies
within the State.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by
Article XIIIB 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, $1.083 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 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 $1.76 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., ruled that the 1992-93 loans to
K-12 schools and community colleges violate Proposition 98. As part of
the negotiations leading to the 1995-96 Budget Act, an oral agreement
was reached to settle this case. The parties reached a conditional
final settlement of the case in April, 1996. The settlement required
adoption of legislation satisfactory to the parties to implement its
terms, which has occurred, and final approval by the court, which was
pending in early July, 1996.
The settlement provides, among other things, that both the State
and K-14 schools share in the repayment of prior year's emergency loans
to schools. Of the total $1.76 billion in loans, the State will repay
$935 million by forgiveness of the amount owed, while schools will repay
$825 million. The State share of the repayment will be reflected as
expenditures above the current Proposition 98 base circulation. The
school's share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the
current base. Repayments are to be spread over the eight-year period
beginning 1994-95 through 2002-03. Once the Director of Finance
certifies that a settlement has occurred, approximately $377 million in
appropriations from the 1995-96 fiscal year to schools will be
disbursed.
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 Money Market 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.
State Indebtedness
As of July 1, 1996, the State had over $18.20 billion aggregate
amount of its general obligation bonds outstanding. General obligation
bond authorizations in the aggregate amount of approximately $4.31
billion remained unissued as of July 1, 1996. The State also builds and
acquires capital facilities through the use of lease-purchase borrowing.
As of July 1, 1996, the State had approximately $5.85 billion of
outstanding lease-purchase debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $20.77 billion aggregate principal amount
of revenue bonds and notes outstanding as of June 30, 1996. 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
and pollution control facilities.
Litigation
The State is a party to numerous legal proceedings. 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 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 challenges of
payments of wages under the Fair Labor Standards Act, the method of
determining gross insurance premiums involving health insurance,
property tax challenges, challenges of transfer of monies from State
Treasury Special Fund accounts to the State's General Fund pursuant to
1991, 1992, 1993 and 1994 Budget Acts. 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.
Ratings
During 1996, the ratings of California's general obligation bonds
was upgraded by the following ratings agencies. Recently Standard &
Poor's Ratings Group upgraded its rating of such debt to A+; the same
rating has been assigned to such debt by Fitch Investors Service.
Moody's Investors Service has assigned such debt an A1 rating. Any
explanation of the significance of such ratings may be obtained only
from the rating agency furnishing such ratings. There is no assurance
that such ratings will continue of any given period of time or that they
will not be revised downward or withdrawn entirely if, in the judgment
of the particular rating agency, circumstances so warrant.
The Manager believes the information summarized above describes
some of the more significant aspects relating to the California Money
Market Portfolio. The sources of such information are Preliminary
Official Statements and Official Statements relating to the State's
general obligation bonds and the State's revenue anticipation notes, or
obligations of other issuers located in the State of California, or
other publicly available documents. Although the Manager has not
independently verified this information, it has no reason to believe
that such information is not correct in all material aspects.
APPENDIX C
See Special Note prior to Appendix B.
ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO NEW YORK MUNICIPAL
OBLIGATIONS
Economic Trends
Over the long term, the State of New York (the "State") and the
City of New York (the "City") face serious economic problems. The
City accounts for approximately 41% of the State's population and
personal income, and the City's financial health effects the State in
numerous ways. The State historically has been one of the wealthiest
states in the nation. For decades, however, the State has grown more
slowly than the nation as a whole, gradually eroding its relative
economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success
that the South and West have had in attracting people and business. The
City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less
dependent on the specialized services traditionally available almost
exclusively in the City.
The State has for many years had a very high state and local tax
burden relative to other states. The State and its localities have used
these taxes to develop and maintain their transportation networks,
public schools and colleges, public health systems and other social
services and recreational facilities. Despite these benefits, the
burden of state and local taxation, in combination with the many other
causes of regional economic dislocation, has contributed to the decision
of some businesses and individuals to relocate outside, or not locate
within, the State.
Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced
budgets, reductions in federal spending could materially and adversely
affect the financial condition and budget projections of the State and
its localities.
The State and its Authorities
The State's budget for the State's 1997-1998 fiscal year,
commencing on April 1, 1997, was adopted by the Legislature on August 4,
1997. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements for its 1997-1998 fiscal year
considered to be necessary for State operations and other purposes. The
State Financial Plan for the 1997-1998 fiscal year was formulated on
August 11, 1997 and is based on the State's budget as enacted by the
Legislature, as well as actual results for the first quarter of the
current fiscal year. The 1997-1998 State Financial Plan is expected to
be updated in October and January. The 1997-1998 State Financial Plan is
projected to be balanced on a cash basis. Total General Fund receipts
and transfers from other funds are projected to be $35.09 billion, while
total General Fund disbursements and transfers to other funds are
projected to be $34.60 billion. The adopted 1997-1998 budget projects a
year-over-year increase in General Fund disbursements of 5.2 percent. As
compared to the Governor's proposed budget amended in February 1997, the
State's adopted budget for 1997-1998 increases General Fund spending by
$1.7 billion, primarily due to increases for local assistance ($1.3
billion). Resources used to fund these additional expenditures include
increased revenues projected for the 1997-1998 fiscal year, increased
resources produced in the 1996-1997 fiscal year that will be utilized in
1997-1998, reestimates of social service, fringe benefit and other
spending, and certain non-recurring resources.
The 1997-1998 adopted budget includes multi-year tax reductions,
including a State funded property and local income tax reduction
program, estate tax relief, utility gross receipts tax reductions,
permanent reductions in the State sales tax on clothing, and elimination
of assessments on medical providers. The various elements of the State
and local tax and assessment reductions have little or no impact on the
1997-1998 Financial Plan, and do not begin to materially affect the out-
year projections until the State's 1999-2000 fiscal year.
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. In
addition, 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. Actual results could differ materially
and adversely from projections and those projections may be changed
materially and adversely from time to time.
The State closed projected budget gaps of $5.0 billion, $3.9
billion and $2.3 for its 1995-96, 1996-97 and 1997-1998 fiscal years,
respectively. The 1998-1999 budget gap was projected at $1.68 billion
(before the application of any assumed efficiencies) in the out-year
projections submitted to the Legislature in February 1997. As a result
of changes made in the adopted budget, the 1998-1999 gap is now expected
by the State to be about the same or smaller than the amount previously
projected, after application of the $530 million reserve for future
needs. The Governor has indicated that he will propose to close any
potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. The revised expectations for the 1998-1999 fiscal year
reflect the loss of $1.4 billion in surplus resources from 1996-1997
operations that are being utilized to finance current year spending, an
incremental effect of approximately $300 million in legislated State and
local tax reductions in the out-year and other factors.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy,
actions of the Federal government and other factors have created
structural budget gaps for the State. These gaps resulted from a
significant disparity between recurrent revenues and the costs of
maintaining or increasing the level of support for State programs. To
address a potential imbalance in any 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. There can be no assurance, however, that the Legislature will
enact the Governor's proposals or 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.
Other actions taken in the 1997-1998 adopted budget add further
pressure to future State budget balance. For example, the fiscal effects
of tax reductions adopted in the 1997-1998 budget are projected to grow
more substantially beyond the 1998-1999 fiscal year. The full annual
cost of the enacted tax reduction package is estimated by the State at
approximately $4.8 billion when fully effective in State fiscal year
2001-2002. In addition, the 1997-1998 budget included multi-year
commitments for school aid pre-kindergarten early learning programs
which could add as much as $1.4 billion in costs when fully annualized
in fiscal year 2001-2002. These spending commitments are subject to
annual appropriation.
On September 11, 1997, the New York State Comptroller issued a
report which noted that the ability to deal with future budget gaps
could become a significant issue in the State's 2000-2001 fiscal year,
when the cost of tax cuts increases by $1.9 billion. The report
contained projections that, based on current economic conditions and
current law for taxes and spending, showed a gap in the 2000-2001 State
fiscal year of $5.6 billion and of $7.4 billion in the 2001-2002 State
fiscal year. The report noted that these gaps would be smaller if
recurring spending reductions produce savings in earlier years. The
State Comptroller has also stated that if Wall Street earnings moderate
and the State experiences a moderate recession, the gap for the 2001-
2002 State fiscal year could grow to nearly $12 billion.
In recent years, the State has failed to adopt a budget prior to
the beginning of its fiscal year. A prolonged delay in the adoption of
the State's budget beyond the statutory April 1 deadline without interim
appropriations could delay the projected receipt by the City of State
aid, and there can be no assurance that State budgets in future fiscal
years will be adopted by the April 1 statutory deadline.
On August 28, 1997, Standard & Poor's revised its ratings on the
State's general obligation bonds from A- to A and, in addition, revised
its ratings on the State's moral obligation, lease purchase, guaranteed
and contractual obligation debt. On January 6, 1992, Moody's reduced its
ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 10, 1997, Moody's
confirmed its A2 rating on the State's general obligation long-term
indebtedness.
New York City
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 printing.
The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989.
As a result, the City experienced job losses in 1990 and 1991 and real
Gross City Product ("GCP") fell in those two years. Beginning in
calendar year 1992, the improvements in the national economy helped
stabilize conditions in the City. Employment losses moderated toward
year-end and real GCP increased, boosted by strong wage gains. After
noticeable improvements in the City's economy during calendar year 1994,
economic growth slowed in calendar year 1995, and thereafter improved
during calendar year 1996, reflecting improved securities industry
earnings and employment in other sectors. The City's current four-year
financial plan assumes that moderate growth will continue through
calendar year 2001, with moderating job growth and wage increases.
For each of the 1981 through 1996 fiscal years, the City achieved
balanced operating results as reported in accordance with generally
accepted accounting principles ("GAAP"). The City was required to
close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurances that the City
will continue to maintain a balanced budget as required by State law
without additional tax or other revenue increases or reductions in City
services, which could adversely affect the City's economic base.
Pursuant to the New York State Financial Emergency Act of the City
of New York, 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 and outlines proposed
gap-closing programs for years with projected budget gaps. The City's
current four-year financial plan projects a surplus in the 1998 fiscal
year (before discretionary transfers) and substantial budget gaps for
each of the 1999, 2000 and 2001 fiscal years. This pattern of current
year surplus and projected subsequent year budget gaps has been
consistent through virtually the entire period since 1982, during which
the City has achieved balanced operating results for each fiscal year.
The City is required to submit its financial plans to review bodies
including the New York State Financial Control Board (the "Control
Board").
The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. The State's 1995-96
Financial Plan projects a balanced General Fund. There can be no
assurance that there will not be reductions in State aid to the City
from amounts currently projected or that State budgets in future fiscal
years will be adopted by the April 1 statutory deadline and that such
reductions or delays will not have adverse effects on the City's cash
flow or expenditures. In addition, the federal budget negotiation
process could result in a reduction in or a delay in the receipt of
federal grants which could have additional adverse effects on the City's
cash flow or revenues.
The Mayor is responsible for preparing the City's four-year
financial plan, including the City's current financial plan for the 1998
through 2001 fiscal years (the "1998-2001 Financial Plan" or
"Financial Plan"). The City's projections set forth in the Financial
Plan are based on various assumptions and contingencies which are
uncertain and which may not materialize. Changes in major assumptions
could significantly affect the City's ability to balance its budget as
required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the condition
of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees
consistent with those assumed in the Financial Plan, employment growth,
the results of a pending actuarial audit of the City's pension system
which is expected to significantly increase the City's annual pension
costs, the ability 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, the ability of the New
York City Health and Hospitals Corporation ("HHC") and the Board of
Education ("BOE") to take actions to offset potential budget
shortfalls the ability to complete revenue-generating transactions and
provisions of State and federal aid and mandate relief and the impact on
City revenues of proposals for federal and State welfare reform and any
future legislation affecting Medicare or other entitlements.
Implementation of the Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's
financing program for fiscal years 1998 through 2001 contemplates the
issuance of $4.9 billion of general obligation bonds and $7.1 billion of
bonds to be issued by the proposed New York City Infrastructure Finance
Authority ("Finance Authority") to finance City capital projects. The
Finance Authority was created as part of the City's effort to assist in
keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized
to incur. In addition, the City issues revenue and tax anticipation
notes to finance its seasonal working capital requirements. The success
of projected public sales of City bonds and notes, New York Municipal
Water Finance Authority ("Water Authority") bonds and Finance
Authority bonds will be subject to prevailing market conditions. Future
developments concerning the City and public discussion of such
developments, as well as prevailing market conditions, may affect the
market for outstanding City general obligation bonds and notes.
The City's operating results for the 1996 fiscal year were
balanced in accordance with GAAP, after taking into account a
discretionary transfer of $224 million, the 16th consecutive year of
GAAP balanced results.
The most recent quarterly modification to the City's financial
plan for the 1997 fiscal year, which was submitted to the Control Board
on June 10, 1997 (the ''1997 Modification''), projects a balanced budget
in accordance with GAAP for the 1997 fiscal year, after taking into
account an increase in projected tax revenues of $1.2 billion during the
1997 fiscal year and a discretionary prepayment in the 1997 fiscal year
of $1.3 billion of debt service due in the 1998 and 1999 fiscal years.
On June 10, 1997, the City submitted to the Control Board the
financial Plan for the 1998 through 2001 fiscal years, which relates to
the City, BOE and the City University of New York (''CUNY'') and
reflects the City's expense and capital budgets for the 1998 fiscal
year, which were adopted on June 6, 1997. The Financial Plan projects
revenues and expenditures for the 1998 fiscal year balanced in
accordance with GAAP. The Financial Plan includes increased tax revenue
projections; reduced debt service costs; the assumed restoration of
Federal funding for programs, assisting certain legal aliens; additional
expenditures for textbooks, computers, improved education programs and
welfare reform, law enforcement, immigrant naturalization, initiatives
proposed by the City Council and other initiatives; and a proposed
discretionary transfer to the 1998 fiscal year of $300 million of debt
service due in the 1999 fiscal year for budget stabilization purposes.
In addition, the Financial Plan reflects the discretionary transfer to
the 1997 fiscal year of $1.3 billion of debt service due in the 1998 and
1999 fiscal years, and includes actions to eliminate a previously
projected budget gap for the 1998 fiscal year. These gap closing actions
include (i) additional agency actions totaling $621 million; (ii) the
proposed sale of various assets; (iii) additional State aid of $294
million, including a proposal that the State accelerate a $142 million
revenue sharing payment to the City from March 1999; and (iv)
entitlement savings of $128 million which would result from certain of
the reductions in Medicaid spending proposed in the Governor's 1997-1998
Executive Budget and the State making available to the City $77 million
of additional Federal block grant aid, as proposed in the Governor's
1997-1998 Executive Budget. The Financial Plan also sets forth
projections for the 1999 through 2001 fiscal years and projects gaps of
$1.8 billion, $2.8 billion and $2.6 billion for the 1999 through 2001
fiscal years, respectively.
The Financial Plan assumes approval by the State Legislature and
the Governor of (i) a tax reduction program proposed by the City
totaling $272 million, $435 million, $465 million and $481 million in
the 1998 through 2001 fiscal years, respectively, which includes a
proposed elimination of the 4% City sales tax on clothing items under
$500 as of December 1, 1997, and (ii) a proposed State tax relief
program, which would reduce the City property tax and personal income
tax, and which the Financial Plan assumes will be offset by proposed
increased State aid totaling $47 million, $254 million, $472 million and
$722 million in the 1998 through 2001 fiscal years, respectively.
The Financial Plan assumes (i) approval by the Governor and the
State Legislature of the extension of the 14% personal income tax
surcharge, which is scheduled to expire on December 31, 1999 and the
extention of which is projected to provide revenue of $166 million and
$494 million in the 2000 and 2001 fiscal years, respectively, and of the
extension of the 12.5% personal income tax surcharge, which scheduled to
expire on December 31, 1998 and the extention of which is projected to
provide revenue of $188 million, $527 million and $554 million in the
1999 through 2001 fiscal years, respectively; (ii) collection of the
projected rent payments for the City's airports, totalling $385 million,
$175 million and $170 million in the 1999 through 2001 fiscal years,
respectively, which may depend on the successful completion of
negotiations with the Port Authority or enforcement of the City's rights
under the existing leases through pending legal actions; and (iii) State
approval of the cost containment initiatives and State aid proposed by
the City; as gap-closing actions for the 1998 fiscal year, and $115
million in additional State aid which is assumed in the Financial Plan
but not provided for in the Governor's 1997-98 Executive Budget. The
Financial Plan reflects the increased costs which the City expects to
incur as a result of welfare legislation recently enacted by Congress.
The Financial Plan provides no additional wage increases for City
employees after their contracts expire in fiscal years 2000 and 2001. In
addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors
which could have a material effect on the City.
The City annually prepares a modification to its financial plan in
October or November which amends the financial plan to accommodate any
revisions to forecast revenues and expenditures and to specify any
additional gap-closing initiatives to the extent required to offset
decreases in projected revenues or increases in projected expenditures.
The Mayor is expected to publish the first quarter modification (the
''Modification'') for the 1998 fiscal year in November. Since the
preparation of the Financial Plan, the State has adopted its budget for
the 1997-1998 fiscal year. The State budget enacted a smaller sales tax
reduction than the tax reduction program assumed by the City in the
Financial Plan, which will increase projected City sales tax revenues;
provided for State aid to the City which was less than assumed in the
Financial Plan; and enacted a State funded tax relief program which
begins a year later than reflected in the Financial Plan. In addition,
the net effect of tax law changes made in the Federal Balanced Budget
Act of 1997 are expected to increase tax revenues in the 1998 fiscal
year. These changes will be reflected in the Modification.
The projections for the 1998 through 2001 fiscal years reflect the
costs of the settlements with the United Federation of Teachers
("UFT") and a coalition of unions headed by District Council 37 of the
American Federation of State, County and Municipal Employees ("District
Council 37"), which together represent approximately two-thirds of the
City's work force, and assume that the City will reach agreement with
its remaining municipal unions under terms which are generally
consistent with such settlements. The settlement provides for a wage
freeze in the first two years, followed by a cumulative effective wage
increase of 11% by the end of the five-year period covered by the
proposed agreements, ending in fiscal years 2000 and 2001. Additional
benefit increases would raise the total cumulative effective increase to
13% above present costs. Costs associated with similar settlements of
all City-funded employees would total $49 million, $459 million and $1.2
billion in the 1997, 1998 and 1999 fiscal years, respectively, and
exceed $2 billion in each fiscal year after the 1999 fiscal year.
Subsequently, the City reached settlements, through agreements or
statutory impasse procedures, with bargaining units which, together with
the UFT and District Council 37, represent approximately 86% of the
City's workforce.
In 1975, Standard & Poor's suspended its A rating of City bonds.
This suspension remained in effect until March 1981, at which time the
City received an investment grade rating of BBB from Standard & Poor's.
On July 2, 1985, Standard & Poor's revised its rating of City bonds
upward to BBB+ and on November 19, 1987, to A-. On July 10, 1995,
Standard & Poor's revised its rating of City bonds downward to BBB+.
Moody's ratings of City bonds were revised in November 1981 from B
(in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985
to Baa1, in May 1988 to A and again in February 1991 to Baa1. On July
17, 1997, Moody's changed its outlook on City bonds to positive from
stable. Since July 15, 1993, Fitch has rated City bonds A-. Since July
8, 1997, IBCA Limited has rated City bonds A.
Litigation
A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally
involve state programs and miscellaneous tort, real property and
contractual claims. While the ultimate outcome and fiscal impact, if
any, on the State of those proceedings and claims are not currently
predictable, adverse determinations in certain of them might have a
material adverse effect upon the State's ability to maintain a balanced
1997-98 State Financial Plan.
The claims involving the City other than routine litigation
incidental to the performance of governmental and other functions and
certain other litigation, arise out of alleged constitutional
violations, tort, breaches of contract and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact,
if any, on the City of those proceedings and claims are not currently
predictable, adverse determinations in certain of them might have a
material adverse effect upon the City's ability to carry out the 1998-
2001 Financial Plan. The City has estimated that its potential future
liability on account of outstanding claims against it as of June 30,
1996 amounted to approximately $2.8 billion.
APPENDIX D
ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO FLORIDA MUNICIPAL
OBLIGATIONS
See Special Note prior to Appendix B.
General
In 1980, Florida was the seventh most populous state in the U.S.
The State has grown dramatically since then and as of April 1, 1995,
ranks fourth with an estimated population of 14.1 million. Florida's
attraction, as both a growth and retirement state, has kept net
migration at an average of 224,240 new residents a year from 1987
through 1995. The U.S. average population increase since 1984 is about
1% annually, while Florida's average annual rate of increase is about
2.2%. Florida continues to be the fastest growing of the 11 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 1987, the prime working age population (18-44)
has grown at an average annual rate of 2.1%. 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 21st century.
The State's personal income has been growing strongly the last
several years and has generally outperformed 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 because 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 a broader economic base. As a result, Florida's real per capita
personal income has tracked closely with the national average and has
tracked above the Southeast. From 1985 through 1995, the State's real
per capita income rose an average 5.0% a year, while the national real
per capita income increased at an average 4.9%.
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 1995 was
60.6% of total personal income, while a similar figure for the nation
for 1990 was 70.8%. 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 1996 of $24,104 was
slightly above the national average of $24,231 and significantly ahead
of that for the Southeast United States, which was $21,880. Real
personal income in the State is estimated to increase 5.2% in 1997-98
and 3.7% in 1998-99. Real personal income per capita in the State is
projected to grow at 3.2% in 1997-98 and 1.8% in 1998-99. The Florida
economy appears to be performing in line with the U.S. economy and is
expected to experience steady if unspectacular growth over the next
couple of years.
Since 1987, the State's population has increased an estimated 20%.
In that same period, Florida's total non-farm employment has grown by
over 27%. Since 1987, the job creation rate in the state is more than
twice that of the nation as whole. Contributing to this is the State's
rapid rate of growth in employment and income is international trade.
Changes to its economy has also contributed to the State's strong
performance. The State is now less dependent on employment from
construction, construction-related manufacturing and resource-based
manufacturing, which have declined as a proportion of total State
employment. The State's service sector employment is nearly 87% of
total non-farm employment. While the Southeast and the nation have a
greater proportion of manufacturing jobs, which tend to pay higher
wages, service jobs tend to be less sensitive to swings in the business
cycle. The State has a concentration of manufacturing jobs in high-tech
and high value-added sectors, such as electrical and electronic
equipment, as well as printing and publishing. These type of
manufacturing jobs tend to be less cyclical. The State's unemployment
rate throughout the 1980's tracked below the nation's. In the 1990's,
this trend reversed, until 1995 and 1996, when the unemployment rate
again tracked below the national average. The average rate in Florida
since 1987 has been 6.2%. The national average is also 6.2%. 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 4.8% during 1997. As of October, 1997, the Organization estimates
that the unemployment rate will be 4.7% for 1998 and 4.9% in 1999.
The State's economy is expected to decelerate along with the
nation, but is expected to outperform the nation as a whole. Total non-
farm employment in Florida is expected to grow at an increase of 3.9% in
1997-98 and 2.6% in 1998-99. 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 4.8% in 1997-98,
while growing 4.1% in 1998-99. Trade is expected to expand 3.7% in 1998
and 2.3% in 1999. 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. For example,
in 1980, total contract construction employment as a share of total non-
farm employment was just about 7.5%, and in 1985, 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 8.1% of total U.S. housing starts in 1996 while the
State's population is 5.5% of the U.S. total population. Florida's
housing starts in 1996 were 118,400.
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 slow somewhat as the number of people moving
into the State is expected to grow close to 230,000 a year throughout
the 1990's. 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.
Single and multi-family housing starts in 1996-97 were projected
to reach a combined level of 129,500, increasing to 131,300 in 1997-
1998. Total construction expenditures were forecasted to increase 13.2%
last year and increase 6.5% this year.
Tourism
Tourism is one of State's most important industries.
Approximately 42.9 million tourists visited the State in 1996, as
reported by the Florida Department of Commerce. In terms of business
activities and state tax revenues, tourists in Florida in 1996
represented an estimated 4.6 million additional residents. Visitors to
the State tend to arrive slightly more by air than by car. The State's
tourist industry over the years has become more sophisticated,
attracting visitors year-round and, to a degree, reducing its
seasonality. Tourist arrivals were expected to increase 2.1% last
fiscal year and 4.0% this fiscal year. Tourist arrivals to Florida by
air were expected to increase by 1.6% last year and increase by 3.7 next
year, while arrivals by car are expected fall by 2.7% last year and
increase 4.2% this fiscal year. By the end of the State's current
fiscal year, 43.8 million domestic and international tourists were
expected to have visited the State. In 1997-99, tourist arrivals should
approximate 45.6 million.
Revenues and Expenses
Estimated fiscal year 1997-98 General Revenue plus Working Capital
and Budget Stabilization funds available to the State total $18,150.9
million, an 8.5% increase over 1996-97. Of the total General Revenue
plus Working Capital and Budget Stabilization funds available to the
State, $16,598.5 million of that is Estimated Revenues, which represents
an increase of 5.7% over the previous year's Estimated Revenues. With
effective General Revenues plus Working Capital Fund and Budget
Stabilization appropriations at $17,114 million, unencumbered reserves
at the end of 1996-97 are estimated at $1,036.9 million. Estimated,
fiscal year 1998-99 General Revenue plus Working Capital and Budget
Stabilization funds available total $18,644 million, a 7.7% increase
over 1998-98. The $17,405.5 million in Estimated Revenues (including
recent Measures Affecting Revenues) represents an increase of 4.9% over
the previous year's Estimated Revenues.
In fiscal year 1996-97, approximately 67% of the State's total
direct revenue to its three operating funds were derived from State
taxes and fees, with federal grants and other special revenue accounting
for the balance. State sales and use tax, corporate income tax,
intangible personal property tax, beverage tax and estate tax amounted
to 68%, 8%, 4%, 3% and 4%, respectively, of total General Revenue Funds
available during fiscal 1996-97. In that same year, expenditures for
education, health and welfare and public safety amounted to
approximately 53%, 26% and 14%, 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, 1997, sales and
use tax receipts (exclusive of the tax on gasoline and special fuels)
totaled $12,089 million, an increase of 5.5% over fiscal year 1995-1996.
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 $447.2 million in fiscal year ending
June 30, 1997. Alcoholic beverage tax receipts increased 1.0% from the
previous year's total. Ninety-eight percent of 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, 1996, receipts from this source were $1,3623
million, an increase of 17.2% from fiscal year 1995-96.
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 $844.2 million
during fiscal year 1996-97, an 8.9% increase from the previous fiscal
year. For fiscal year 1996-97, 62.63% of these taxes were deposited to
the General Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas
and telecommunications services. All gross receipts utilities tax
collections are credited to the State's Public Education Capital Outlay
and Debt Service Trust Fund. In fiscal year 1996-97, this amounted to
$575.7 million, an increase of 6.0% over the previous year.
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
liens on Florida real property. The annual rate of tax is 2 mils
($2,000 of tax per $1,000,000 of value). 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 1996-97, total
intangible personal property tax collections were $952.4 million, a 6.3%
increase over the prior year. Of the tax proceeds, 66.5% are
distributed to the General Revenue Fund.
The State imposes an estate tax on the estate of a decedent for
the privilege of transferring property at death. All receipts of the
estate tax are credited to the General Revenue Fund. For the fiscal year
ended June 30, 1997, receipts from this source were $546.9 million, an
increase of 30% from fiscal year 1995-96.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50% to the public in prizes, 38% for use
in enhancing education, and the balance, 12%, for the costs of
administering the lottery. Fiscal year 1996-97 lottery ticket sales
totaled $2.09 billion, providing education with approximately $792.3
million.
Debt-Balanced Budget Requirement
At the end of fiscal 1997, approximately $7.89 billion in
principal amount of debt secured by the full faith and credit of the
State was outstanding. In addition, since July 1, 1997, the State
issued about $799.9 million 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 from 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 material
adverse affect on the State's financial position.
The State was assigned a bond rating of Aa, AA and AA from
Moody's, S&P and Fitch, respectively, on the majority of its general
obligation bonds, although the rating of a particular series of revenue
bonds relates primarily to the project, facility, or other revenue
source from which such series derives funds for repayment. While these
ratings and some of the information presented above indicate that the
State has been in satisfactory economic health, there can be no
assurance that there will not be a decline in economic conditions or
that particular Florida municipal obligations will not be adversely
affected by any such changes.
APPENDIX E
See special note prior to Appendix B.
ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO GEORGIA MUNICIPAL
OBLIGATIONS
Appropriations and Debt Limitations
Article III, Section IX, Paragraph IV(b) of the Constitution of
the State of Georgia (the "Constitution") provides:
The General Assembly shall not appropriate funds for any given
fiscal year which, in aggregate, exceed a sum equal to the amount
of unappropriated surplus expected to have accrued in the state
treasury at the beginning of the fiscal year together with an
amount not greater than the total treasury receipts from existing
revenue sources anticipated to be collected in the fiscal year,
less refunds, as estimated in the budget report and amendments
thereto. Supplement appropriations, if any, shall be made in the
manner provided in Paragraph V of this section of the
Constitution; but in no event shall a supplementary appropriations
Act continue in force and effect beyond the expiration of the
general appropriations Act in effect when such supplementary
appropriations Act was adopted and approved.
Article VII, Section W, Paragraph f(c), (d), (e) and (f) of the
Constitution provides that the State may incur public debt of two types
for public purposes: (1) general obligation debt and (2) guaranteed
revenue debt. General obligation debt may be incurred to acquire,
construct, develop, extend, enlarge or improve land, waters, property,
highways, buildings, structures, equipment or facilities of the State,
its agencies, departments, institutions and certain State Authorities,
to provide educational facilities for county and independent school
systems, to provide public library facilities for county and independent
school systems, counties, municipalities, and boards of trustees of
public libraries or boards of trustees of public library systems, to
make loans to counties, municipal corporations, political subdivisions,
local authorities and other local government entities for water or
sewerage facilities or systems, and to make loans to local government
entities for regional or multi-jurisdictional solid waste recycling or
solid waste facilities or systems. Guaranteed revenue debt may be
incurred by guaranteeing the payment of certain revenue obligations
issued by an instrumentality of the State as set forth in said
subparagraph (f) of Paragraph 1, Section IV, Article VII of the
Constitution. Article VII, Section IV, Paragraph II(b)-(e) of the
Constitution further provides that:
"(b) No debt may be incurred under subparagraphs (c), (d), and
(e) of Paragraph I of this section or Paragraph V of this section
at any time when the highest aggregate annual debt service
requirements for the then current year or any subsequent year for
outstanding general obligation debt and guaranteed revenue debt,
including the proposed debt, and the highest aggregate annual
payments for the then current year or any subsequent fiscal year
of the state under all contracts then in force to which the
provisions of the second paragraph of Article IX, Section VI,
Paragraph l(a) of the Constitution of 1976 are applicable, exceed
10 percent of the total revenue receipts, less refunds, of the
state treasury in the fiscal year immediately preceding the year
in which any such debt is to be incurred.
(c) No debt may be incurred under subparagraphs (c) and (d) of
Paragraph I of this section at any time when the term of the debt
is in excess of 25 years.
(d) No guaranteed revenue debt may be incurred to finance water
or sewage treatment facilities or systems when the highest
aggregate annual debt service requirements for the then current
year or any subsequent fiscal year of the state for outstanding or
proposed guaranteed revenue debt for water facilities or systems
or sewage facilities or systems exceed 1 percent of the total
revenue receipts less refunds, of the state treasury in the fiscal
year immediately preceding the year in which any debt is to be
incurred.
(e) The aggregate amount of guaranteed revenue debt incurred to
make loans for educational purposes that may be outstanding at any
time shall not exceed $18 million, and the aggregate amount of
guaranteed revenue debt incurred to purchase, or to lend or
deposit against the security of, loans for educational purposes
that may be outstanding at any time shall not exceed $72 million."
In addition, Article VII, Section IV, Paragraph IV of the
Constitution provides:
"The state, and all state institutions, departments and agencies
of the state are prohibited from entering into any contract except
contracts pertaining to guaranteed revenue debt with any public
agency, public corporation, authority, or similar entity if such
contract is intended to constitute security for bonds or other
obligations issued by any such public agency, public corporation,
or authority and, in the event any contract between the state, or
any state institution, department or agency of the state and any
public agency, public corporation, authority or similar entity, or
any revenues from any such contract, is pledged or assigned as
security for the repayment of bonds or other obligations, then and
in either such event, the appropriation or expenditure of any
funds of the state for the payment of obligations under any such
contract shall likewise be prohibited."
Article VII, Section IV, Paragraph l(b) of the Constitution
provides that the State may incur: "Public debt to supply a temporary
deficit in the state treasury in any fiscal year created by a delay in
collecting the taxes of that year. Such debt shall not exceed, in the
aggregate, 5 percent of the total revenue receipts, less refunds, of the
state treasury in the fiscal year immediately preceding the year in
which such debt is incurred. The debt incurred shall be repaid on or
before the last day of the fiscal year in which it is incurred out of
taxes levied for that fiscal year. No such debt may be incurred in any
fiscal year under the provisions of this subparagraph (b) if there is
then outstanding unpaid debt from any previous fiscal year which was
incurred to supply a temporary deficit in the state treasury." No such
debt has been incurred under this provision since its inception.
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's overall debt was recently estimated at $677 per capita
and 3.25% of personal income (personal income per capita in 1995 was
$21,741). Debt service carrying charges were estimated at 5%-6% of
estimated 1997 treasury receipts. Principal amortization is accelerated
on all long term debt.
Revenue
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.
Estimated revenues for fiscal year 1997 equal $11.3 billion of which the
majority are derived from income taxes (44.6%); sales taxes (34.8%);
motor fuel taxes (4.9%); lottery proceeds (4.8%); fees and sales (3.3%);
indigent care (1.3%); and all other taxes (6.2%).
Expenditures during fiscal year 1997 are estimated to equal $11.3
billion which is allocated in the following manner: education (54.2%);
human resources (24.0%); public safety (8.5%); transportation (4.8%);
debt service (3.6%); general government (1.6%); natural resources
(1.2%); legislative/judicial (1.2%); and economic development (0.9%).
At the end of fiscal year 1996, the rainy day fund (which serves
as a savings account for the state should revenue collections decline
unexpectedly or uncontrollably) had $313 mm (up to 3% of net revenue
collections) available.
Georgia's lottery laws require the establishment of two reserves
that are funded as a percentage of lottery collections to avoid
disruption in the program should collections fall short of annual
appropriations. The two lottery reserves as of June 30, 1996 totalled
as follows: shortfall reserve subaccount $50,306,302 and scholarship
shortfall reserve subaccount $77,718,586 for a total lottery reserve
equal to $128,024,888. Net lottery proceeds grew to $558 million in
fiscal 1996, were estimated at $546 million for fiscal 1997 and budgeted
at $510 million in fiscal 1998. Initially, expectations for net lottery
proceeds in fiscal 1994 were $139 million. As a result of the stronger
than expected performance of the lottery, the state has set aside
reserves of 10% of lottery proceeds as a revenue reserve and an
additional amount as a scholarship shortfall reserve.
Estimated revenues for fiscal year 1998 equal $11.7 billion of
which the majority are derived from income taxes (45.4%); sales taxes
(34.8%); motor fuel taxes (4.8%); lottery proceeds (4.3%); fees and
sales (3.3%); indigent care (1.3%); and all other taxes (6.1%).
Expenditures during fiscal year 1998 are estimated to equal $11.7
billion which is allocated in the following manner: education (55.8%);
human resources (23.2%); public safety (8.4%); transportation (4.6%);
debt service (3.3%); general government (1.5%); natural resources
(1.1%); legislative/judicial (1.3%); and economic development (0.8%).
Environment
Governor Miller established the Preservation 2000 program in 1991
in an effort to acquire and protect 100,000 acres of natural and
environmentally sensitive land. Total funding for Preservation 2000
totaled $69.7 million of which $65 million was general obligation bonds.
Governor Miller announced during 1995 his intention to establish the
River Care 2000 Program, the guiding principle of this program is to
preserve Georgia's 70,000 miles of rivers and streams. A committee has
been selected that is currently approving procedures for selecting
riverfront lands to acquire. Recommended state appropriations for
fiscal year 1998 equals $93 million and $10 million in bonds will be
issued for the River Care 2000 Program, brining the total amount
available to River Care equal to $24.5 million since Governor Miller
initiated the program.
Transportation
The recommended state appropriation for the Department of
Transportation during fiscal year 1998 equals $542 million. During
fiscal year 1998, $100 million in general obligation bonds will be
issued to continue work on the Governor's Road Improvement Program.
With the bond funds, the department will have received over $710 million
for the 2,697 mile developmental highway system during the Governor's
administration. Over 42% of the system has been completed or is under
construction or right-of-way acquisition as of September 1996.
The motor fuel tax revenue estimate for fiscal year 1998 is $570
million. Of this amount $35 million is appropriated directly to the
general obligation debt sinking fund to meet fiscal year 1998 debt
service requirements on bonds previously issued on behalf of the
Department of Transportation. Five percent ($28.5 million) of the motor
fuel funds provides funding that enables local governments to enhance
their road systems and will assist in the construction of approximately
1,900 miles of road.
Human Resources
The recommended state appropriations for fiscal year 1998 for the
Department of Human Resources equals $1.2 billion, a decrease of $41
million over the fiscal year 1997 budget. The Governor is proposing a
revised welfare budget to recognize the implementation of Georgia's new
Technical Assistance for Needy Families (TANF) program effective January
1, 1997. A total of $533.3 million in combined state and federal block
grant funds is recommended to provide assistance to needy families with
children on a temporary basis and provide parents with job preparation,
work opportunities, and other support services to enable them to become
self-sufficient and leave the program as soon as possible.
Education
The recommended state appropriations for education for fiscal year
1998 equals $4.5 billion, an increase of $156 million over the fiscal
year 1997 budget. Of the $4.5 billion in state appropriations, $176
million will be used to provide a six percent pay increase for
certificated personnel, continuing the Governors commitment to raise
Georgia teachers' salaries. Approximately $60 million will be used to
reduce the class size of the high school program from 23 to 20. Lottery
funds in the amount of $26 million will be used to provide half-time
technology specialists on site to provide K-12 teachers necessary
training in the use and application of computers and advanced electronic
technology. General obligation bonds in the amount of $98 million will
be issued for 33 school systems to fund new school construction and/or
renovations.
The recommended state appropriations for Regents, University
System of Georgia, for fiscal year 1998 equals $1.4 billion, an increase
of $12 million over the fiscal year 1997 budget. Of this amount, $69
million will be used to provide a six percent pay increase for all
employees of the Board of Regents in keeping with the Governor's
commitment to raise faculty salaries. The Miller Administration has
funded over $833 million in new construction for the University system
and during fiscal year 1998 an additional $75 million in bonds will be
issued for eight new construction or repair projects for the University
system.
Medicaid
The recommended state appropriations for fiscal year 1998 for the
Department of Medical Assistance equal $1.3 billion, which is an
increase of $7.7 million over the 1997 budget. In fiscal year 1996,
roughly one in six Georgians, or 16% of the state's population, was
covered by Medicaid. The Governor's recommendation reflects $37 million
in savings in state funds from various cost saving and cost containment
initiatives.
Legal Matters
The State from time to time is named as a party in certain
lawsuits, which may or may not have a material adverse impact on the
financial position of the State if decided in a manner adverse to the
State's interests. Certain of such lawsuits could have a significant
impact on the State's financial position.
Ratings
Moody's, S&P and Fitch gave Georgia's General Obligation Bonds,
series 1997A, ratings of "Aaa", "AA+" and "AAA," respectively. Series
1997B and 1997C Bonds were rated AAA by Fitch.
APPENDIX F
See special note prior to Appendix B.
ADDITIONAL DISCUSSION OF SPECIAL FACTORS AFFECTING PENNSYLVANIA
MUNICIPAL OBLIGATIONS
General
Pennsylvania had been historically identified as a heavy industry
state. That reputation has changed over the last thirty years as the
coal, steel and railroad industries declined and the Commonwealth's
business environment readjusted to reflect a more diversified industrial
base. This economic readjustment was a direct result of a long-term
shift in jobs, investment and workers away from the Northeast part of
the nation. Currently, the major sources of growth in Pennsylvania are
in the service sector, including trade, medical and health services,
education and financial institutions.
Pennsylvania's agricultural industries remain an important
component of the Commonwealth's economic structure, accounting for more
than $2.6 billion in crop and lives stock products annually.
Agribusiness and food-related industries support $9 billion in economic
activity annually, Over 51,000 farms form the backbone of the State's
agricultural economy. Farmland in Pennsylvania includes over four
million acres of harvested cropland and four million acres of pasture
and farm woodlands--nearly one-third of the Commonwealth's total land
area. Agricultural diversity in the Commonwealth is demonstrated by the
fact that Pennsylvania ranks among the top ten states in the production
of a number of agricultural products.
Pennsylvania's natural resources include major deposits of coal,
petroleum, natural gas and cement. Extensive public and private forests
provide a vast source of material for the lumber/wood products industry
and the related furniture industry. Additionally, the Commonwealth
derives a good water supply from underground sources, abundant rainfall,
and a large number of rivers, streams and man-made and natural lakes.
Human resources are plentiful in Pennsylvania. The work force is
estimated at 5.9 million people, ranking as the sixth largest labor pool
in the nation. The high level of education embodied in the
Commonwealth's work force fosters a wide variety of employment
capabilities. Pennsylvania's basic and higher education statistics
compare favorably with other states in the nation.
The Commonwealth is highly urbanized. Of the Commonwealth's 1990
census population, 79 percent residing the 15 Metropolitan Statistical
Areas ("MSAs") of the Commonwealth. The largest MSAs in the
Commonwealth are those which include the cities of Philadelphia and
Pittsburgh, which together contain almost 44 percent of the State's
total population. The population of Pennsylvania, 12.06 million people
in 1996, according to the U.S. Bureau of the Census, represents a slight
increase from the 1987 population of 11.81 million. A high proportion
(15.9 percent) of Pennsylvania's population is comprised of persons 65
and over.
Manufacturing employment constitutes a diminished share of total
employment within the Commonwealth. Manufacturing, contributing 17.9
percent of 1995 non-agricultural employment and 17.5 percent as of
December 1996, has fallen behind both the services sector and the trade
sector as the largest single source of employment within the
Commonwealth. In 1991, the services sector accounted for 28.6 percent
of all non-agricultural employment while the trade sector accounted for
22.8 percent.
In 1994 and 1995, Pennsylvania's annual average unemployment rate
was below the Middle Atlantic region's average, but slightly higher than
that of the nation. As of January, 1997 the seasonally adjusted
unemployment rate for the Commonwealth was 4.7 percent, compared to 5.4
percent for the United States.
The commonwealth of Pennsylvania and certain of its municipal
subdivisions, including the City of Philadelphia, have undergone the
financial difficulties and pressures that accompany a decline in
economic conditions. As the heavy industries historically associated
with Pennsylvania - e.g., coal, steel and railroad - have declined with
increasing competition for foreign producers, the services sector,
including trade, medical and health services, education and financial
institutions, has provided major new sources of growth. Agriculture and
related industries continue to be an important part of Pennsylvania/s
economy.
Budgetary Process
All funds received by the Commonwealth are subject by statute to
appropriation in specific amounts by the General Assembly or by
executive authorizations by the Governor. The Governor's budget
encompasses both annual appropriations and executive authorizations.
The Constitution mandates that total operating budget
appropriations made by the General Assembly may not exceed the sum of
(a) the actual and estimated revenues in a given year, and (b) the
surplus of the preceding year. The Constitution further specifies that
a surplus of operating funds at the end of the fiscal year shall be
appropriated. That is, if funds remain from the end of a fiscal year
they must be appropriated for the ensuing year. Also, if a deficit
occurs at year-end, funds must be provided for such a deficit.
Pursuant to the Administrative Code, the revenue estimates used in
the budget are determined by the executive branch. In practice, the
revenue estimates used to balance the operating budget consist of the
appropriate fund's available surplus and its estimated cash receipts for
the fiscal year as well as net accruals. Lapses estimated to occur
during the year or at year-end are not included; lapses are not
available for appropriation until they occur.
Under Pennsylvania's budgetary process, a deficit can occur if
revenues are less than those estimated in the budget and the shortfall
is not offset by any unappropriated surplus or by lapses during or at
the end of the year or by legislative action to increase revenues or
reduce appropriation.
Both the Commonwealth of Pennsylvania and the City of Philadelphia
have historically experienced significant revenue shortfalls. On the
other hand, rising demands on state programs, particularly for medical
assistance and cash assistance programs, and the increased cost of
special education programs and correction facilities and programs, have
contributed to increased expenditures. In response, the Commonwealth
and the City of Philadelphia have, in recent years, sought to balanced
budgets with a combination of tax increases and expenditure restraints.
To deal with its budget deficits, Philadelphia has considered
significant service cuts and a plan to privatize certain city-provided
services. In addition, in 1991 the Commonwealth created the
Pennsylvania Inter-Governmental cooperation Authority ("PICA"), with
authority to issue notes and bonds on behalf of Philadelphia to cover
budget shortfalls , to eliminate projected deficits and to fund capital
spending. PICA has issued approximately $1.76 billion of Special
Revenue Bonds on behalf of the city. However, its power to issue bonds
for most purposes expired on December 31, 1994 and its power to issue
bonds to finance cash flow deficits expired on December 31, 1996.
PICA's authority to refund existing debt will not expire. PICA had
approximately $1.1 billion in special revenue bonds outstanding as of
June 30, 1997.
Bond Ratings
Although there can be no assurance that such conditions will
continue, the Commonwealth's general obligation bonds have recently been
rated AA - by Standard & Poors, A1 by Moody's and AA by Fitch, while
Philadelphia's general obligation bonds have recently been rated BBB and
Baa by Standard & Poor's and Moody's, respectively.
4
U:\LEGAL\FUNDS\SBMU\1998\SECDOCS\SAI.DOC
PART C Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements Location In:
Part A Part B
Annual
Report
Investment Portfolios *
Statement of Assets and Liabilities *
Statements of Operations *
Statements of Changes in Net Assets *
Notes to Financial Statements *
Supplementary Information *
* The Registrant's Annual Reports for the fiscal year ended March 31,
1998 and the Reports of Independent Accountants dated May 15, 1998
are incorporated by reference to the N-30D filed on June 10, 1998 as
Accession # 91155-98-379.
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.
(c) Instrument of the Trustees, dated June 12, 1998,
establishing and designating classes of certain
series of the Trust is filed herewith.
(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 New York Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit
5(e) to Post-Effective Amendment No. 18.
(d) Management Agreement between the Florida Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit
(5)(h) to Post-Effective Amendment No. 16.
(e) Management Agreement between the Georgia Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit
5(m) to Post-Effective Amendment No. 27.
(f) Management Agreement between the Pennsylvania Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit
5(q) to Post-Effective Amendment No. 27.
(g) Form of Management Agreement between California Money Market
Portfolio (and New York Money Market Portfolio) and Mutual
Management Corp. is incorporated by reference to Exhibit 5(s) to
Post-Effective Amendment No. 34.
(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 (filed by herewith).
(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
Georgia Portfolio is incorporated by reference to Exhibit 15(f) to
Post-Effective Amendment No. 27.
(c) 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.
(d) 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 Portfolios is
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.
(17) Financial Data Schedule (filed herewith)
(18) Amended and Restated Plan pursuant to Rule 18f-3 is 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 record holders on
Title of Class July 2, 1998
California Money Market Portfolio 30,191
Florida Portfolio 3,249
Georgia Portfolio 687
Limited Term Portfolio 4,559
National Portfolio 7,515
New York Money Market Portfolio 27,167
New York Portfolio 14,439
Pennsylvania Portfolio 1,013
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."
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 Mutual Management
Corp., (formerly known as Smith Barney Mutual Funds Management
Inc.) ("MMC") 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
Consulting Group Capital Markets Funds
Global Horizons Investment Series (Cayman Islands)
Greenwich Street California Municipal Fund Inc.
Greenwich Street Municipal Fund Inc.
Greenwich Street Series Fund
High Income Opportunity Fund Inc.
The Italy Fund Inc.
Managed High Income Portfolio Inc.
Managed Municipals Portfolio II Inc.
Managed Municipals Portfolio Inc.
Municipal High Income Fund Inc.
Puerto Rico Daily Liquidity Fund Inc.
Puerto Rico Equity Index and Income Fund Inc.
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Intermediate Municipal Fund, Inc.
Smith Barney Investment Funds Inc.
Smith Barney Investment Trust
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Fund, Inc.
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Smith Barney Worldwide Special Fund N.V. (Netherlands Antilles)
Travelers Series Fund Inc.
The USA High Yield Fund N.V.(Netherlands Antilles)
Worldwide Securities Limited (Bermuda)
Zenix Income Fund Inc. and various series of unit investment
trusts.
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 and Exchange Act of 1934 (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) Not applicable.
(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, as amended,
and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned and where applicable, the true and lawful
attorney-in-fact, thereto duly authorized, in the City of New York, and
State of New York on the 29th day of July, 1998.
SMITH BARNEY MUNI FUNDS
By: \s\ Heath B. McLendon
Heath B. McLendon, President
and Chief Executive Officer
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 President, Chief Executive Officer and Trustee
7/29/98
(Heath B. McLendon)
\s\ Donald R. Foley* Trustee 7/29/98
(Donald R. Foley)
\s\ Paul Hardin* Trustee 7/29/98
(Paul Hardin III)
\s\ Roderick C. Rasmussen* Trustee
7/29/98
(Roderick C. Rasmussen)
\s\ John P. Toolan* Trustee 7/29/98
(John P. Toolan)
\s\ Lewis E. Daidone Senior Vice
President and Treasurer 7/29/98
(Lewis E. Daidone)
*By: \s\ Christina T. Sydor Secretary
7/29/98
Christina T. Sydor
Pursuant to Power of Attorne
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
1(c) Instrument of Trustees
11(ii) Auditor's Consent
17 Financial Data Schedule
18 Amended and Restated 18f-3 Plan
U:\legal\funds\sbmu\1998\secdocs\pea40
SMITH BARNEY MUNI FUNDS
Instrument of the Trustees Establishing and Designating
Classes of Shares of the Trust
WHEREAS, pursuant to Section 6.9(g) of the Declaration of
Trust of Smith Barney Muni Funds dated as of April 23, 1986 (the
"Trust"), the Trustees of the Trust may establish and designate
classes of shares within any series of shares of beneficial interest
of the Trust by an instrument signed by a majority of such Trustees;
and
WHEREAS, the Trust currently has eight series (each, a
"Portfolio") consisting of (i) the National Portfolio, the Florida
Portfolio, the New York Portfolio, the Pennsylvania Portfolio and
the Georgia Portfolio, each of which consists of Class A, Class B,
Class C and Class Y shares of beneficial interest, $.001 par value
per share ("Shares"); (ii) the Limited Term Portfolio, which
consists of Class A, Class C and Class Y Shares; and (iii) the
California Money Market Portfolio and the New York Money Market
Portfolio, each of which consists of Class A and Class Y Shares.
NOW THEREFORE, the Trustees hereby redesignate all Class C
shares of the National Portfolio, Florida Portfolio, New York
Portfolio, Pennsylvania Portfolio, Georgia Portfolio and Limited
Term Portfolio outstanding as of the date hereof and all Class C
shares of each such Portfolio authorized but unissued as of the date
hereof as Class L shares from and after the date hereof, the
preferences, privileges, limitations and rights, including voting
and dividend rights of such class of shares of each such Portfolio
to be as set forth in the Trust's Declaration of Trust.
The undersigned, consisting a majority of the Trustees of the
Trust, hereby execute this instrument as of the 12th day of June,
1998.
_______________________ __________________________
Donald R. Foley Heath B. McLendon
_______________________ __________________________
John P. Toolan Paul Hardin
_______________________
Roderick C. Rasmussen
u\legalfunds\sbmu\1998\secdocs\inoftr
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Muni Funds:
We consent to the use of our report dated as summarized below, with
respect to the Portfolios listed below of Smith Barney Muni Funds
incorporated herein by reference and to the references to our Firm
under the headings "Financial Highlights" in the Prospectus and
"Independent Auditors" in the Statement of Additional Information.
Portfolio
Date of Independent Auditor's Reports
National Portfolio
May 15, 1998
Limited Term Portfolio
May 15, 1998
Georgia Portfolio
May 15, 1998
Florida Portfolio
May 15, 1998
New York Portfolio
May 15, 1998
Pennsylvania Portfolio
May 15, 1998
California Money Market Portfolio
May 15, 1998
New York Money Market Portfolio
May 15, 1998
KPMG Peat Marwick LLP
New York, New York
July 25, 1998
Rule 18f-3 (d) Multiple Class Plan for Smith Barney Mutual Funds
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of the
Investment Company Act of 1940, as amended (the "1940 Act"). The
purpose of the Plan is to restate the existing arrangements previously
approved by the Boards of Directors and Trustees of certain of the open-
end investment companies set forth on Schedule A (the "Funds" and each a
"Fund") distributed by Smith Barney Inc. ("Smith Barney") under the
Funds' existing order of exemption (Investment Company Act Release Nos.
20042 (January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of the Funds are
distributed pursuant to a system (the "Multiple Class System") in which
each class of shares (a "Class") of a Fund represents a pro rata
interest in the same portfolio of investments of the Fund and differs
only to the extent outlined below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for purchase by
investors with the following sales load structure. In addition,
pursuant to Rule 12b-1 under the 1940 Act (the "Rule"), the Funds have
each adopted a plan (the "Services and Distribution Plan") under which
shares of the Classes are subject to the services and distribution fees
described below.
1. Class A Shares
Class A shares are offered with a front-end sales load and under the
Services and Distribution Plan are subject to a service fee of up to
0.25% of average daily net assets. In addition, the Funds are permitted
to assess a contingent deferred sales charge ("CDSC") on certain
redemptions of Class A shares sold pursuant to a complete waiver of
front-end sales loads applicable to large purchases, if the shares are
redeemed within one year of the date of purchase. This waiver applies
to sales of Class A shares where the amount of purchase is equal to or
exceeds $500,000 although this amount may be changed in the future.
2. Class B Shares
Class B shares are offered without a front-end sales load, but are
subject to a five-year declining CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate of up
to 0.25% of average daily net assets and a distribution fee at an annual
rate of up to 0.75% of average daily net assets.
3. Class D Shares
Class D shares are offered without a front-end sales load, CDSC, service
fee or distribution fee.
4. Class L Shares
Class L shares are offered with a front-end load, are subject to a one-
year CDSC and under the Services and Distribution Plan are subject to a
service fee at an annual rate of up to 0.25% of average daily net assets
and a distribution fee at an annual rate of up to 0.75% of average daily
net assets. Unlike Class B shares, Class L shares do not have the
conversion feature as discussed below and accordingly, these shares are
subject to a distribution fee for an indefinite period of time. The
Funds reserve the right to impose these fees at such higher rates as may
be determined.
5. Class I Shares
Class I shares are offered without a front-end sales load, but are
subject under the Services and Distribution Plan to a service fee at an
annual rate of up to 0.25% of average daily net assets.
6. Class O Shares
Class O shares are offered without a front-end load, but are subject to
a one-year CDSC and under the Services and Distribution Plan are subject
to a service fee at an annual rate of up to 0.25% of average daily net
assets and a distribution fee at an annual rate of up to 0.50% of
average daily net assets. Unlike Class B shares, Class O shares do not
have the conversion feature as discussed below and accordingly, these
shares are subject to a distribution fee for an indefinite period of
time. The Funds reserve the right to impose these fees at such higher
rates as may be determined.
Effective June __, 1999, Class O share will be offered with a front-end
load and will continue to be subject to a one year CDSC, a service fee
at an annual rate of up to 0.25% of average daily net assets and a
distribution fee at an annual rate of up to 0.50% of average daily net
assets.
7. Class Y Shares
Class Y shares are offered without imposition of either a sales charge
or a service or distribution fee for investments where the amount of
purchase is equal to or exceeds a specific amount as specified in each
Fund's prospectus.
8. Class Z Shares
Class Z shares are offered without imposition of either a sales charge
or a service or distribution fee for purchase (i) by employee benefit
and retirement plans of Smith Barney and its affiliates, (ii) by certain
unit investment trusts sponsored by Smith Barney and its affiliates, and
(iii) although not currently authorized by the governing boards of the
Funds, when and if authorized, (x) by employees of Smith Barney and its
affiliates and (y) by directors, general partners or trustees of any
investment company for which Smith Barney serves as a distributor and,
for each of (x) and (y), their spouses and minor children.
9. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the authority to
create additional classes, or change existing Classes, from time to
time, in accordance with Rule 18f-3 of the 1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a Fund are
allocated among the various Classes of shares based on the net assets of
the Fund attributable to each Class, except that each Class's net asset
value and expenses reflect the expenses associated with that Class under
the Fund's Services and Distribution Plan, including any costs
associated with obtaining shareholder approval of the Services and
Distribution Plan (or an amendment thereto) and any expenses specific to
that Class. Such expenses are limited to the following:
(i) transfer agency fees as identified by the transfer agent as
being attributable to a specific Class;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and
proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class of shares;
(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;
(v) the expense of administrative personnel and services as
required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating solely to one
Class of shares; and
(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of shares.
Pursuant to the Multiple Class System, expenses of a Fund allocated to a
particular Class of shares of that Fund are borne on a pro rata basis by
each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert to Class A
shares after a certain holding period, expected to be, in most cases,
approximately eight years but may be shorter. Upon the expiration of
the holding period, Class B shares (except those purchases through the
reinvestment of dividends and other distributions paid in respect of
Class B shares) will automatically convert to Class A shares of the Fund
at the relative net asset value of each of the Classes, and will, as a
result, thereafter be subject to the lower fee under the Services and
Distribution Plan. For purposes of calculating the holding period
required for conversion, newly created Class B shares issued after the
date of implementation of the Multiple Class System are deemed to have
been issued on (i) the date on which the issuance of the Class B shares
occurred or (ii) for Class B shares obtained through an exchange, or a
series of exchanges, the date on which the issuance of the original
Class B shares occurred.
Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B shares.
However, for purposes of conversion to Class A, all Class B shares in a
shareholder's Fund account that were purchased through the reinvestment
of dividends and other distributions paid in respect of Class B shares
(and that have not converted to Class A shares as provided in the
following sentence) are considered to be held in a separate sub-account.
Each time any Class B shares in the shareholder's Fund account (other
than those in the sub-account referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B shares
then in the sub-account also converts to Class A. The portion is
determined by the ratio that the shareholder's Class B shares converting
to Class A bears to the shareholder's total Class B shares not acquired
through dividends and distributions.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of a ruling of the Internal Revenue Service that
payment of different dividends on Class A and Class B shares does not
result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as
amended (the "Code"), and the continuing availability of an opinion of
counsel to the effect that the conversion of shares does not constitute
a taxable event under the Code. The conversion of Class B shares to
Class A shares may be suspended if this opinion is no longer available,
In the event that conversion of Class B shares does not occur, Class B
shares would continue to be subject to the distribution fee and any
incrementally higher transfer agency costs attending the Class B shares
for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net asset value for
shares of the same Class in certain other of the Smith Barney Mutual
Funds as set forth in the prospectus for such Fund. Funds only permit
exchanges into shares of money market funds having a plan under the Rule
if, as permitted by paragraph (b) (5) of Rule 11a-3 under the 1940 Act,
either (i) the time period during which the shares of the money market
funds are held is included in the calculations of the CDSC or (ii) the
time period is not included but the amount of the CDSC is reduced by the
amount of any payments made under a plan adopted pursuant to the Rule by
the money market funds with respects to those shares. Currently, the
Funds include the time period during which shares of the money market
fund are held in the CDSC period. The exchange privileges applicable to
all Classes of shares must comply with Rule 11a-3 under the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of May 29, 1998)
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Smith Barney Concert Allocation Series Inc.
Conservative Portfolio
Balanced Portfolio
Global Portfolio
Growth Portfolio
Income Portfolio
High Growth Portfolio
Smith Barney Equity Funds -
Concert Social Awareness Fund
Smith Barney Large Cap Blend Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Large Cap Value Fund
Short-Term High Grade Bond Fund
U.S. Government Securities Fund
Smith Barney Income Funds -
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Smith Barney Investment Trust -
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney S&P 500 Index Fund
Smith Barney Investment Funds Inc.
Concert Peachtree Growth Fund
Smith Barney Contrarian Fund
Smith Barney Government Securities Fund
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund
Smith Barney Institutional Cash Management Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Money Market Portfolio
Florida Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New York Portfolio
New York Money Market
Pennsylvania Portfolio
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
Emerging Markets Portfolio
U:\legal\general\forms\18f3plan.doc
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
<NUMBER> 4
<NAME> LIMITED TERM PORTFOLIO. CLASS A
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<TABLE> <S> <C>
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<NAME> SMITH BARNEY MUNI FUNDS
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<NAME> LIMITED TERM PORTFOLIO. CLASS C
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
<NUMBER> 1
<NAME> NATIONAL PORTFOLIO. CLASS A
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
<NUMBER> 1
<NAME> NATIONAL PORTFOLIO. CLASS B
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<TABLE> <S> <C>
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<NAME> SMITH BARNEY MUNI FUNDS
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<NAME> NATIONAL PORTFOLIO. CLASS C
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
<NUMBER> 8
<NAME> NEW YORK MONEY MARKET PORTFOLIO
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
<NUMBER> 2
<NAME> NEW YORK PORTFOLIO. CLASS A
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
<NUMBER> 2
<NAME> NEW YORK PORTFOLIO. CLASS B
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000775370
<NAME> SMITH BARNEY MUNI FUNDS
<SERIES>
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<NAME> NEW YORK PORTFOLIO. CLASS C
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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