Registration No. 33-_________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. _
[ ] Post-Effective Amendment No.
___
Smith Barney Income Trust
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (212) 723-9218
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Christina T. Sydor
Secretary
Smith Barney Income Trust
388 Greenwich Street
New York, New York 10013
_____________________
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as
possible
after the effective date of this Registration Statement.
Registrant has registered an indefinite amount of securities
pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as
amended.
Registrant's Rule 24f-2 Notice for the fiscal year ended
November 30,
1994 was filed with the Securities and Exchange Commission
on
January 27, 1995.
Registrant hereby amends this Registration Statement on
such date
or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states
that this Registration Statement shall thereafter become
effective in
accordance with Section 8(a) of the Securities Act of 1933
or
until the Registration Statement shall become effective on
such
date as the
Commission, action pursuant to said Section 8(a), may
determine.
ADDENDUM TO COVER PAGE
On January 6, 1995, the Registrant filed in respect of its
portfolio,
Smith Barney Intermediate Maturity California Municipals
Fund (
the
"Intermediate Maturity Fund"), a Registration Statement on
Form
N-14.
The Prospectus/Proxy Statement contained in the Registration
Statement
sought the approval of the shareholders of California
Limited
Term
Portfolio (the "Limited Term Portfolio"), a separate series
of
Smith Barney
Muni Funds, for a proposed reorganization pursuant to which
the
Limited
Term Portfolio would be combined with the Intermediate
Maturity
Fund and
shares of the Intermediate Maturity Fund would be
distributed
to
shareholders of the Limited Term Portfolio.
The Registration Statement became effective on January 26,
1995
in
accordance with Section 8 of the Securities Act of 1933, as
amended.
The Prospectus/Proxy Statement contained in the Registration
Statement has
not been mailed to any shareholders nor has any other action
been taken
to give effect to the matters contemplated thereby.
In accordance with discussions between members of the Staff
of
the
Securities and Exchange Commission and representatives of
the
Registrant, the Registrant submits hereby a new Registration
Statement
on Form N-14 (the "April Registration Statement") in respect
of
the
Intermediate Maturity Fund regarding the proposed
reorganization of the
Limited Term Portfolio into the Intermediate Maturity Fund.
In
view of
the filing of this April Registration Statement, no further
action will
be taken with respect to the filing made on January 6, 1995.
In connection with the proposed reorganization contemplated
by
the April
Registration Statement the registrant has filed an
application for exemptive relief from Section 17(a) of the
Investment
Company Act of 1940, as amended (the "1940 Act"). (The
funds
currently
are unable to rely on Section 17a-8 of the 1940 Act because
the
funds'
distributor, Smith Barney Inc., owns more than 5% of the
outstanding
shares of the Limited Term Portfolio.) The consummation of
the
reorganization is contingent upon receiving such relief.
SMITH BARNEY INCOME TRUST
CONTENTS
REGISTRATION STATEMENT
This Registration Statement contains the following pages and
documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibit
SMITH BARNEY INCOME TRUST
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) Under the Securities Act of 1933
Part A Item No. and Caption
Prospectus/Proxy
Statement Caption
Item
1.
Beginning of
Registration
Statement and Outside
Front Cover Page of
Prospectus
Cover Page; Cross Reference
Sheet
Item
2.
Beginning and Outside
Back Cover Page of
Prospectus
Table of Contents
Item
3.
Synopsis Information
and
Risk Factors
Overview; Comparison of
Investment Objectives and
Policies
Item
4.
Information About the
Transaction
Summary; Reasons for the
Reorganization; Information About
the Reorganization; Comparative
Information on Shareholder
Rights; Exhibit A (Agreement and
Plan of Reorganization)
Item
5.
Information About the
Registrant
Cover Page; Summary; Information
About the Reorganization;
Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders Rights; Additional
Information About the Acquiring
Fund and the Acquired Fund;
Prospectus of Smith Barney
Intermediate Maturity California
Municipals Fund dated January 29,
1995
Item
6.
Information About the
Company Being Acquired
Summary; Information About the
Reorganization; Comparison of
Investment Objectives and
Policies; Comparative Information
on Shareholder Rights; Additional
Information About the Acquiring
Fund and the Acquired Fund
Item
7.
Voting Information
Summary; Information About the
Reorganization; Comparative
Information on Shareholder
Rights; Voting Information
Item
8.
Interest of Certain
Persons and Experts
Financial Statements and Experts;
Legal Matters
Item
9.
Additional Information
Required for Reoffering
By Persons Deemed to be
Underwriters
Not Applicable
Part B Item No. and Caption
Statement of Additional
Information Caption
Item 10.
Cover Page
Cover Page
Item 11.
Table of Contents
Cover Page
Item 12.
Additional Information
About the Registrant
Cover Page; Statement of
Additional Information of
Smith Barney Income Trust
dated January 29, 1995
Item 13.
Additional Information
About the Company Being
Acquired
Not Applicable
Item 14.
Financial Statements
Annual Report of Smith
Barney Income Trust with
respect to its Smith Barney
Intermediate Maturity
California Municipals Fund;
Annual Report of Smith
Barney Muni Funds-California
Limited Term Portfolio; Pro
Forma Financial Statements
Part C Item No. and Caption
Other Information Caption
Item
15.
Indemnification
Incorporated by reference to
Part A caption "Comparative
Information on Shareholders'
Rights--Liability of
Trustees"
Item
16.
Exhibits
Item 16. Exhibits
Item
17.
Undertakings
Item 17. Undertakings
SMITH BARNEY MUNI FUNDS -
CALIFORNIA LIMITED TERM PORTFOLIO
388 Greenwich Street
New York, New York 10013
June , 1995
Dear Shareholder:
The Board of Trustees of Smith Barney Muni Funds
(the "Trust"), on behalf of the California Limited Term
portfolio (the "Limited Term Portfolio"), a separate series
of
the Trust, has
recently reviewed and unanimously endorsed a proposal for
the
reorganization of the Limited Term Portfolio, which it
judges
to be in the best interests of the Limited Term Portfolio's
shareholders.
Under the terms of the proposal, Smith Barney
Intermediate Maturity California Municipals Fund (
the "Intermediate Maturity Fund"), a separate series
of the Smith Barney Income Trust (the "Income Trust"),
would acquire all or substantially all of the assets and
liabilities of the Limited Term Portfolio. After
the transaction, the Limited Term Portfolio would be
terminated and you would become a shareholder of the
Intermediate Maturity Fund, having received shares with an
aggregate net asset value equivalent to the aggregate net
asset value of your Limited Term Portfolio
investment at the time of the transaction. The transaction
would, in
the opinion of counsel, be free from
Federal income taxes to you and the Limited Term Portfolio.
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
The Board of Trustees of the Trust has determined that
the proposed reorganization should provide benefits to
shareholders due, in part, to savings in expenses borne by
shareholders. We have therefore called a Special Meeting of
Shareholders to be held July 10, 1995 to
consider this transaction. We strongly urge your
participation
by
asking you to review, complete
and return your proxy no later than July 7, 1995.
Detailed information about the proposed
transaction is described in the enclosed proxy statement.
On behalf of the Board, I thank you for your
participation as a shareholder and urge you to exercise
your right to vote by completing, dating and
signing the enclosed proxy card. A self-addressed,
postage-paid envelope has been enclosed for your
convenience. If you sign and date your proxy card,
but do not provide voting instructions, your shares
will be voted FOR the proposal.
If you have any questions regarding the proposed
transaction, please feel free to call your Financial
Consultant.
IT IS VERY IMPORTANT THAT YOUR VOTING
INSTRUCTIONS
BE RECEIVED NO LATER THAN July 7, 1995.
Sincerely,
Heath B. McLendon
Chairman of the Board
SMITH BARNEY MUNI FUNDS - CALIFORNIA LIMITED
TERM PORTFOLIO
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On July 10, 1995
___________________
Notice is hereby given that a Special Meeting of
Shareholders of Smith Barney Muni
Funds - California Limited Term Portfolio (the "Limited Term
Portfolio"), will be held at 388
Greenwich Street, New York, New York on July 10, 1995, at
4:30
p.m. for
the following purposes:
1. To consider and act upon the Agreement and
Plan
of
Reorganization (the
"Plan") dated as of December 20, 1994 providing for (i)
the acquisition of all or substantially all of the assets
of the Limited Term Portfolio by Smith Barney Income Trust
(the
"Income Trust") on behalf of the Smith Barney Intermediate
Maturity
California Municipals Fund
(the "Intermediate Maturity Fund"), a separate series of the
Income Trust, in exchange for shares of the Intermediate
Maturity Fund and the assumption
by the Income Trust on behalf of the Intermediate
Maturity Fund of certain liabilities of the Limited Term
Portfolio,
(ii) the distribution of such shares of the Intermediate
Maturity Fund to shareholders of the Limited Term Portfolio
in
liquidation of the Limited Term
Portfolio and (iii) the subsequent termination of the
Limited
Term
Portfolio.
2. To transact any other business which may
properly come
before the meeting or
any adjournment(s) thereof.
The Trustees of Smith Barney Muni Funds have fixed
the close
of business on May 31,
1995, as the record date for the determination of
shareholders
of
the Limited Term Portfolio entitled
to notice of and to vote at this meeting or any adjournments
thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS
WHO DO NOT EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND
RETURN
WITHOUT DELAY THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE,
WHICH
REQUIRES NO POSTAGE IF MAILED IN THE CONTINENTAL UNITED
STATES,
SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING.
INSTRUCTIONS
FOR THE
PROPER EXECUTION OF PROXIES ARE SET FORTH ON THE FOLLOWING
PAGE.
PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED
BY
THE
SUBSEQUENT EXECUTION AND SUBMISSION OF A REVISED PROXY BY
GIVING
WRITTEN NOTICE OF REVOCATION TO THE LIMITED TERM PORTFOLIO
AT
ANY TIME
BEFORE THE PROXY IS EXERCISED OR BY VOTING IN PERSON AT THE
MEETING.
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO
AVOID
THE
EXPENSE OF FURTHER SOLICITATION.
By order of the
Board of
Trustees
Christina T.
Sydor
Secretary
June ___, 1995
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may
be
of assistance to you and avoid the time and expense involved
in
validating your vote if you fail to sign your proxy card
properly.
1. Individual Accounts: Sign your name exactly as
it appears in the registration on the proxy card.
2. Joint Accounts: Either party may sign, but the
name of the party signing should conform exactly to the name
shown in the registration on the proxy card.
3. All Other Accounts: The capacity of the
individual
signing the proxy card should be indicated unless it is
reflected
in the form of registration. For example:
Registration Valid
Signatures
Corporate Accounts
(1) ABC Corp. ............................ ABC
Corp.
(2) ABC Corp. ............................ John
Doe,
Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer ....... John
Doe
(4) ABC Corp. Profit Sharing Plan ..... John
Doe, Trustee
Trust Accounts
(1) ABC Trust ..............................
Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 ................. Jane
B.
Doe
Custodial or estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA. John B.
Smith
(2) John B. Smith ..........John B. Smith, Jr.,
Executor
PROSPECTUS/PROXY STATEMENT DATED June , 1995
Acquisition of the Assets Of
SMITH BARNEY MUNI FUNDS - CALIFORNIA LIMITED TERM
PORTFOLIO
388 Greenwich Street
New York, New York 10013
(212) 723-9218
By And In Exchange For Shares Of
SMITH BARNEY INCOME TRUST -
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS
FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
This Prospectus/Proxy Statement is being furnished to
shareholders of the California Limited
Term Portfolio (the "Limited Term Portfolio"), a separate
series
of Smith Barney Muni Funds (the
"Trust"), in connection with a proposed plan of
reorganization,
to be
submitted to shareholders for
consideration at a Special Meeting of Shareholders to be
held
on July
10, 1995 at 4:30 p.m., New York
City time, at the offices of Smith Barney Inc., located at
388
Greenwich
Street, 26th Floor, New York,
New York, and any adjournments thereof (collectively, the
"Meeting").
The Plan provides for all or substantially all of the
assets of the Limited Term Portfolio to be acquired by Smith
Barney Income Trust (the "Income Trust") on behalf of the
Smith
Barney
Intermediate Maturity
California Municipals Fund (the "Intermediate Maturity
Fund"),
a
separate series of the
Income Trust, in exchange for shares of the
Intermediate Maturity Fund and the
assumption by the Income Trust on behalf of Intermediate
Maturity Fund of certain liabilities of
the Limited Term Portfolio
(hereinafter referred to as the "Reorganization"). (The
Limited Term
Portfolio and the Intermediate
Maturity Fund are herein referred to individually as a
"Fund"
and
collectively as the "Funds.")
Following the Reorganization, shares of the Intermediate
Maturity Fund
will be distributed to
shareholders of the Limited Term Portfolio in liquidation of
the Limited
Term Portfolio and the Limited
Term Portfolio will be terminated. As a result of the
proposed
Reorganization, each shareholder of the
Limited Term Portfolio will receive that number of shares of
the
Intermediate Maturity Fund having an
aggregate net asset value equal to the aggregate net asset
value of such
shareholder's shares of the
Limited Term Portfolio. Holders of Class A, Class C and
Class
Y shares
of the Limited Term Portfolio
will receive Class A, Class C and Class Y shares,
respectively,
of the
Intermediate Maturity Fund and
no sales charge will be imposed on the shares of the
Intermediate
Maturity Fund received by the Limited
Term Portfolio shareholders. This transaction is being
structured as a
tax-free reorganization.
The Intermediate Maturity Fund and the Limited
Term
Portfolio are both series of open-end
diversified management investment companies and each Fund
has
similar investment
objectives. The Limited Term
Portfolio's investment objective is to seek as high a level
of
income
exempt from Federal income taxes
and California personal income taxes as is consistent with
prudent
investing. The investment objective
of the Intermediate Maturity Fund is to provide California
investors
with as high a level of current
income exempt from Federal income taxes and California
personal
income
tax as is consistent with the
preservation of principal by investing in investment grade
obligations
issued by the State of California
and its political subdivisions, agencies and public
authorities. Each
Fund invests primarily, but not
exclusively, in California municipal obligations. Although
the
investment policies of the Funds are
generally similar, there are certain differences which are
described
under "Comparison of Investment
Objectives and Policies" in this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be
retained
for future reference, sets
forth concisely the information about the Intermediate
Maturity
Fund
that a prospective investor should
know before investing. Certain relevant documents listed
below, which
have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated
by
reference. A Statement of
Additional Information dated June , 1995 relating to this
Prospectus/Proxy Statement and the
Reorganization, has been filed with the SEC and is
incorporated
by
reference into this Prospectus/Proxy
Statement. A copy of such Statement of Additional
Information
and the
Limited Term Portfolio
Prospectus referred to below are available upon request and
without
charge by writing to the Limited
Term Portfolio at the address listed on the cover page of
this
Prospectus/Proxy Statement or by calling
1-800-224-7523.
1. The Prospectus dated January 29, 1995 of
Smith
Barney Intermediate
Maturity California Municipals Fund is incorporated in its
entirety by
reference and a copy is included
herein.
2. The Prospectus dated November 7, 1994 of
Smith
Barney Muni Funds
- - California Limited Term Portfolio is incorporated in its
entirety by
reference.
Also accompanying this Prospectus/Proxy Statement
as
Exhibit
A is a copy of the
Agreement and Plan of Reorganization (the "Plan") for the
proposed
transaction.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR
ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF
THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY
IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Additional Materials
Summary
Risk Factors
Reasons for the Reorganization
Information about the Reorganization
Comparison of Investment Objectives and Policies
Comparative Information on Shareholders' Rights
Additional Information About the Intermediate
Maturity Fund
and
the Limited Term Portfolio
Other Business
Voting Information
Financial Statements and Experts
Legal Matters
Exhibit A: Agreement and Plan of Reorganization
ADDITIONAL MATERIALS
The following additional materials, which have been
incorporated
by reference into the Statement
of Additional Information dated June , 1995 relating to
this
Prospectus/Proxy Statement and the
Reorganization, will be sent to all shareholders requesting
a
copy of
such Statement of Additional
Information.
1. Statement of Additional Information of Smith
Barney
Muni Funds dated
November 7, 1994.
2. Statement of Additional Information of Smith
Barney
Income Trust dated January
29, 1995.
3. Annual Report of Smith Barney Muni Funds -
California
Limited Term Portfolio
dated March 31, 1994.
4. Semi-Annual Report of Smith Barney Muni Funds
- -
California Limited Term
Portfolio dated September 30, 1994.
5. Annual Report of Smith Barney Intermediate
Maturity
California Municipals
Fund dated November 30, 1994.
[FEE TABLE TO BE PROVIDED]
SUMMARY
This summary is qualified in its entirety by
reference to
the additional information
contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus
of the Intermediate Maturity
Fund dated January 29, 1995, the Statement of Additional
Information of
Smith Barney Income Trust
dated January 29, 1995, the Prospectus of the Limited Term
Portfolio and
Statement of Additional
Information of the Smith Barney Muni Funds, each dated
November
7, 1994,
and the Plan, a copy of
which is attached to this Prospectus/Proxy Statement as
Exhibit
A.
Proposed Reorganization. The Plan provides for the
transfer of
all or substantailly all of the assets of the Limited
Term Portfolio in exchange for shares of the Intermediate
Maturity Fund
and the assumption by the Income Trust on behalf of the
Intermediate Maturity Fund of certain liabilities of the
Limited Term
Portfolio. The Plan also calls for the
distribution of shares of the Intermediate Maturity Fund to
the
Limited
Term Portfolio shareholders in
liquidation of the Limited Term Portfolio. As a result of
this
Reorganization, each shareholder of the
Limited Term Portfolio will become the owner of that number
of
full and
fractional shares of the
Intermediate Maturity Fund having an aggregate net asset
value
equal to
the aggregate net asset value of
the shareholder's shares of the Limited Term Portfolio as of
the close
of business on the date that the
Limited Term Portfolio's assets are exchanged for shares of
the
Intermediate Maturity Fund. Class A,
Class C and Class Y shareholders of the Limited Term
Portfolio
will
receive Class A, Class C and Class Y
shares, respectively, of the Intermediate Maturity Fund.
See
"Information About the Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the Board of Trustees of
the Trust, including all of the "non-interested" Trustees,
as
that term
is defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), has unanimously
concluded that
the Reorganization would be in
the best interests of the shareholders of the Limited Term
Portfolio and
that the interests of the Limited
Term Portfolio's existing shareholders would not be diluted
as
a result
of the transaction contemplated by
the Reorganization, and therefore has submitted the Plan for
approval by
the Limited Term Portfolio's
shareholders. The Board of Trustees of the Trust
recommends approval of the Plan
effecting the Reorganization.
The Board of Trustees of the Income Trust has also
approved the Reorganization.
Approval of the Reorganization will require the
affirmative vote
of a majority of the outstanding
shares of the Limited Term Portfolio. See "Voting
Information."
This consummation of the Reorganization is subject to
the
conditions set forth in the agreement and plan of
reorganization,
including that the parties shall have received a no-action
letter or
exemptive relief from the Securities and Exchange Commission
with
respect to the issues, if any, raised by Section 17(a) of
the
1940 Act
and concerning the applicability of Rule 17a-8 thereunder.
An
application for an exemption has been filed that, when
granted,
would
permit the Reorganization to be completed as described in
this
Prospectus/Proxy Statement. There can be no assurance that
the
relief
sought will be obtained, although the type of relief sought
has
been obtained
by others in similar situations. The
Intermediate Maturity Fund and the Limited Term Portfolio do
not
currently intend to proceed with the Reorganization unless
the
relief
requested from the SEC has been obtained.
Tax Consequences. Prior to completion of the
Reorganization, the
Limited Term Portfolio will
have received from counsel an opinion that, upon the
Reorganization and
the transfer of the assets of the
Limited Term Portfolio, no gain or loss will be recognized
by
the
Limited Term Portfolio or its
shareholders for Federal income tax purposes. The holding
period and
tax basis of shares of the
Intermediate Maturity Fund that are received by each Limited
Term
Portfolio shareholder will be the same
as the holding period and tax basis of the shares of the
Limited Term
Portfolio previously held by such
shareholder. In addition, the holding period and tax basis
of
the
assets of the Limited Term Portfolio in the
hands of the Intermediate Maturity Fund as a result of the
Reorganization will be the same as in the hands
of the Limited Term Portfolio immediately prior to the
Reorganization.
Investment Objectives, Policies and Restrictions. The
Limited
Term Portfolio and the
Intermediate Maturity Fund have generally similar investment
objectives,
policies and restrictions. The
Intermediate Maturity Fund seeks as high a level of current
income
exempt from federal income taxes and
California State personal income taxes as is consistent with
preservation of principal. The Limited Term
Portfolio also seeks as high a level of income exempt from
federal
income taxes and California personal
income taxes as is consistent with prudent investing. Each
Fund
attempts to achieve its objective by
investing primarily, but not exclusively, in obligations
issued
by the
State of California and its political
subdivisions, agencies and instrumentalities the interest
from
which is,
in the opinion of bond counsel,
exempt from Federal income taxes at the time of their
issuance.
Although the respective investment objectives and
policies
of the
Intermediate Maturity Fund and
the Limited Term Portfolio are generally similar,
shareholders
of the
Limited Term Portfolio should
consider certain differences in such objectives and
policies.
See
"Comparison of Investment Objectives and
Policies."
Fees and Expenses. The Intermediate Maturity Fund pays
its
investment adviser, Smith Barney
Mutual Funds Management Inc. ("SBMFM"), a monthly advisory
fee
calculated at an annual rate of
0.35% of the value of the Fund's average daily net assets
and
an
administration fee calculated at an annual
rate of 0.20% of the Fund's average daily net assets. The
Limited Term
Portfolio pays its investment
adviser, SBMFM, a monthly fee of 0.45% of the
Portfolio's average daily net
assets.
The expense ratio of the Intermediate Maturity Fund
(without
waivers of any fees) subsequent to
the Reorganization is expected to be lower than that of the
Limited
Term Portfolio (without waivers of any
fees). See "Reasons for the Reorganization." Total
operating
expenses
for the Limited Term Portfolio
stated as a percentage of average net assets as of January
31,
1995
without waivers and reimbursements
for Class A, Class C and Class Y shares were 0.97%, 1.17%
and 0.83%, respectively. Total operating expenses for the
Intermediate Maturity Fund stated as a
percentage of average net assets as of January 31, 1995
before
waivers
and reimbursements for Class A and Class C shares were 1.24%
and
1.44%, respectively. Total annual operating expenses for
the
Intermediate Maturity Fund subsequent to the Reorganization
stated as a
percentage of average net assets
(based upon pro forma financial statements included in the
Statement of
Additional Information dated
June__, 1995 and incorporated herein) are expected to be
0.96%,
1.16% and 0.81% for Class A,
Class C and Class Y shares, respectively.
Shares of the Intermediate Maturity Fund and the
Limited
Term
Portfolio are both sold subject to
distribution plans adopted pursuant to Rule 12b-1 under the
1940 Act.
Under their respective plans, Smith
Barney Inc. ("Smith Barney") is paid a service fee
calculated
at the
annual rate of 0.15% of the value of
each Fund's average daily net assets attributable to each
Fund's Class A
shares. In addition, each Fund's
Class C shares pay a distribution fee at an annual rate of
0.20% of the
value of the respective Fund's
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
to
cover
expenses primarily intended to result
in the sale of those shares.
Management of the Funds. SBMFM serves as the investment
adviser of
the Intermediate Maturity
Fund and the Limited Term Portfolio. SBMFM is a wholly
owned
subsidiary of Smith Barney Holdings Inc.
("Holdings"), which in turn,
is a wholly owned subsidiary of The Travelers Inc., a
diversified
financial services company engaged,
through its subsidiaries, principally in four business
segments:
Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty
Insurance
Services. Joseph P. Deane, an
investment officer of SBMFM, has served as Vice President
and
Investment
Officer of the Intermediate
Maturity Fund since it commenced operations on December 31,
1991, and
manages the day-to-day
operations of the Intermediate Maturity Fund, including
making
all investment decisions. Mr. Deane would continue to act
as
portfolio manager of the Intermediate Maturity Fund upon the
Reorganization.
SBMFM also serves as the investment adviser of the
Limited
Term
Portfolio. Peter M. Coffey, an investment officer of SBMFM,
has served as a Vice President
and Investment Officer of the Limited Term Portfolio since
its
inception
on April 27, 1993. Mr. Coffey
manages the Limited Term Portfolio's day-to-day operations,
including making all
investment decisions for the Portfolio.
Purchase and Redemption Procedures. Purchases of
shares
of the
Intermediate Maturity Fund
and the Limited Term Portfolio must be made through a
brokerage
account
maintained with Smith Barney,
a broker that clears securities transactions through Smith
Barney on a
fully disclosed basis or an
investment dealer in the selling group, at the shares'
respective public
offering prices (net asset value next
determined plus any applicable sales charges). Class A
shares
of each
Fund are sold with an initial sales
charge of 2.00% of the public offering price and Class C
shares
of both
Funds are sold without an initial
sales charge but are subject to a contingent deferred sales
charge
("CDSC") of 1.00% payable upon certain
redemptions and an annual distribution fee of 0.20% of the
average daily
net assets of the Class. Class Y
shares of each Fund are sold without an initial sales charge
or
CDSC,
and are available only to investors
investing a minimum of $5,000,000. Additionally, Class A
and
Class C
shares of both Funds are subject
to an annual service fee of 0.15% of the average daily net
assets of
each Class.
Shares of both the Intermediate Maturity Fund and the
Limited Term
Portfolio may be redeemed at
their net asset value per share next determined after
receipt
of written
request in proper form at no charge
other than any applicable CDSC. Redemptions made within
twelve
months
of purchase of (i) certain Class
A shares of each Fund and (ii) Class C shares of each Fund
may
be
subject to a CDSC equal to 1.00% of
the amount being redeemed. Redemptions may be made by
forwarding an
appropriate written request for
redemption with signature guarantee to the Fund's transfer
agent, The
Shareholder Services Group, Inc.
("TSSG"). See also "Redemption of Shares" in the
accompanying
Prospectus of the Intermediate Maturity
Fund.
Exchange Privileges. The exchange privileges available
to
shareholders of the Intermediate
Maturity Fund are identical to those available to
shareholders
of the
Limited Term Portfolio. Shareholders
of both the Limited Term Portfolio and the Intermediate
Maturity Fund
may exchange at net asset value all
or a portion of their shares for shares of the same or a
specified class
in certain funds in the Smith Barney
Mutual Funds at the respective net asset values next
determined, plus
any applicable sales charge
differential. Any exchange will be a taxable event for
which a
shareholder may have to recognize a gain or
a loss under Federal income tax provisions. For purposes of
computing
the CDSC, if any, that may be
payable upon a disposition of the shares, the holding period
for the
shares exchanged is added to the
holding period of the new shares. Shareholders of each Fund
also may
exchange certain classes of shares
for shares of the corresponding class of shares of certain
Smith Barney
sponsored mutual funds. (See
"Exchange Privilege" in each Fund's Prospectus.) Exchanges
are
subject
to minimum investment and other
requirements of the fund into which exchanges are made.
Dividends. The policies of each Fund with regard to
dividends and
distributions are generally the
same. The Limited Term Portfolio declares and pays
dividends
of
investment income monthly and the
Intermediate Maturity Fund declares dividends of investment
income daily
and pays them monthly. Each
Fund's policy is to make distributions of any realized
capital
gains
annually. Shareholders of both the
Intermediate Maturity Fund and the Limited Term Portfolio,
if
he or she
does not otherwise instruct, will
have their income dividends and capital gain distributions
reinvested
automatically in additional shares of
the same Class of the Fund at net asset value, subject to no
sales
charge or CDSC. Whichever distribution
option is currently in effect for a shareholder of the
Limited
Term
Portfolio will remain in effect after the
Reorganization, however, shareholders may change their
distribution
option at anytime after the
Reorganization by contacting TSSG in writing. See
"Dividends,
Distributions and Taxes" in the
accompanying Prospectus of the Intermediate Maturity Fund.
Shareholder Voting Rights. The Trust and the Income
Trust
are
both open-end investment companies organized in
Massachusetts.
As
permitted by Massachusetts law,
there will normally be no meetings of shareholders for the
purpose of
electing trustees unless and until such
time as less than a majority of the trustees holding office
have been
elected by shareholders. At that time,
the trustees then in office will call a shareholders'
meeting
for the
election of trustees. Shareholders may, at
any meeting called for the purpose, remove a trustee by the
affirmative
vote of the holders of record of a
majority of the votes entitled to be cast for the election
of
trustees.
For purposes of voting with respect to
the Reorganization, the Class A, Class C and Class Y shares
of
the
Limited Term Portfolio shall vote
together as a single class. See "Comparative Information on
Shareholders' Rights-Voting Rights."
RISK FACTORS
Due to the similarities of investment objectives and
policies of
the Intermediate Maturity Fund and
the Limited Term Portfolio, the investment risks are
generally
similar.
Such risks are generally those
typically associated with investing in municipal obligations
of
the
State of California and its political
subdivisions. Such risks, and certain differences in the
risks
associated with investing in the Funds, are
discussed under the caption "Comparison of Investment
Objectives and
Policies."
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Trust has determined that
it
is
advantageous to combine the Limited
Term Portfolio with the Intermediate Maturity Fund. The
Funds
have
generally similar investment
objectives and policies and the same distributor and
transfer
agent.
The Board of Trustees of the Trust has determined that
the
Reorganization
should provide certain benefits to
the shareholders of the Limited Term Portfolio. In making
such
a
determination, the Board of Trustees
considered, among other things: (i) the terms and conditions
of
the
Reorganization; (ii) the fact that the Reorganization will
be
effected
as a tax-free reorganization; (iii) the costs of the
Reorganization to the
Funds; (iv) the compatibility of the objectives, policies
and
restrictions
of the two Funds; (v) the savings in expenses borne by
shareholders
expected to be realized by the Reorganization; and (vi) the
potential
benefits to the Funds' affiliates, including SBMFM, Smith
Barney and Holdings.
In light of the foregoing, the Board of Trustees of the
Trust,
including the non-interested Trustees,
have decided that it is in the best interests of the Limited
Term
Portfolio and its shareholders to combine
with the Intermediate Maturity Fund. The Board of Trustees
has
also
determined that a combination of the
Limited Term Portfolio and the Intermediate Maturity Fund
would
not
result in a dilution of the interests of
the Limited Term Portfolio's shareholders.
The Board of Trustees of the Income Trust has
considered
the
following factors, among others, in
approving the Reorganization and determining that it is
advantageous for
the Intermediate Maturity Fund to
acquire the assets of the Limited Term Portfolio: (i) the
terms
and
conditions of the Reorganization; (ii) the fact that the
Reorganization will be effected
as a tax-free reorganization; (iii) the costs of the
Reorganization to the
Funds; (iv) the compatibility of the objectives, policies
and
restrictions
of the two Funds; (v) the savings in expenses borne by
shareholders
expected to be realized by the Reorganization; and (vi) the
potential
benefits to the Funds' affiliates, including SBMFM, Smith
Barney and Holdings.
Accordingly, the Board of Trustees of the Income Trust,
including a
majority of the non-interested
Trustees, has determined that the Reorganization is in the
best
interests of the Intermediate Maturity Fund's
shareholders and that the interests of the Intermediate
Maturity Fund's
shareholders will not be diluted as a
result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The following summary of the
Plan
is
qualified in its entirety by
reference to the Plan (Exhibit A hereto). The Plan provides
that the
Intermediate Maturity Fund will
acquire all or substantially all of the assets of the
Limited
Term Portfolio in
exchange for shares of the
Intermediate Maturity Fund and the assumption by the
Intermediate
Maturity Fund of certain liabilities of
the Limited Term Portfolio on July 14, 1995, or such later
date
as may be
agreed upon by the parties (the
"Closing Date"). Prior to the Closing Date, the Limited
Term
Portfolio
will endeavor to discharge all of its
known liabilities and obligations. The Intermediate
Maturity
Fund will
not assume any liabilities or
obligations of the Limited Term Portfolio other than those
reflected in
an unaudited statement of assets and
liabilities of the Limited Term Portfolio prepared as of the
close of
regular trading on the New York Stock
Exchange, Inc. (the "NYSE"), currently 4:00 p.m. New York
time,
on the
Closing Date. The number of
full and fractional shares of the Intermediate Maturity Fund
to
be
issued to the Limited Term Portfolio
shareholders will be determined on the basis of the
Intermediate
Maturity Fund's and the Limited Term
Portfolio's relative net asset values per their respective
classes of
shares, computed as of the close of
regular trading on the NYSE on the Closing Date. The net
asset
value
per share of the affected shares will
be determined by dividing assets, less liabilities, by the
total number
of such outstanding shares.
Both the Limited Term Portfolio and the Intermediate
Maturity Fund
will utilize The Boston Company Advisors, Inc. ("Boston
Advisors") as agent
to determine the value of their respective portfolio
securities. The
Limited Term Portfolio and the
Intermediate Maturity Fund also will use the same
independent
pricing
service to determine the value of
each security so that Boston Advisors, as agent, can
determine
the
aggregate value of each Fund's portfolio.
The method of valuation employed will be consistent with
Rule
22c-1
under the 1940 Act, and with the
interpretation of such rule by the SEC's Division of
Investment
Management.
At or prior to the Closing Date, the Limited Term
Portfolio shall
have declared a dividend or
dividends which, together with all previous such dividends,
shall have
the effect of distributing to the
Limited Term Portfolio's shareholders all taxable income for
the taxable
year ending on or prior to the
Closing Date (computed without regard to any deduction for
dividends
paid) and all of its net capital gains
realized in the taxable year ending on or prior to the
Closing
Date
(after reductions for any capital loss
carry forward).
As soon after the Closing Date as conveniently
practicable, the
Limited Term Portfolio will
liquidate and distribute pro rata to shareholders of record
as
of the
close of business on the Closing Date
the full and fractional shares of the Intermediate Maturity
Fund
received by the Limited Term Portfolio.
Such liquidation and distribution will be accomplished by
the
establishment of accounts in the names of the
Limited Term Portfolio's shareholders on the share records
of
the
Intermediate Maturity Fund's transfer
agent. Each account will represent the respective pro rata
number of
full and fractional shares of the
Intermediate Maturity Fund due to each of the Limited Term
Portfolio's
shareholders. After such
distribution and the winding up of its affairs, the Limited
Term
Portfolio will be terminated.
The consummation of the Reorganization is subject to
the
conditions set forth in the Plan and to the receipt by the
parties of
a no-action letter or exemptive relief from the SEC with
respect to
the issues raised by Section 17(a) of the 1940 Act and
concerning
the applicability of Rule 17a-8 thereunder.
Notwithstanding approval of the Limited Term Portfolio's
shareholders,
the Plan may be amended as set
forth in the Plan and may be terminated at any time at or
prior
to the
Closing Date by either party if (i) a
material condition to one party's performance under the Plan
or
a
material covenant of one party shall not
be fulfilled on or before the date specified for the
fulfillment
thereof, (ii) a material default or material
breach of the Plan shall be made by one party that is not
cured
or (iii)
the Closing Date does not occur on
or prior to July 14, 1996.
Smith Barney shall be liable for the
expenses incurred in connection with
the Reorganization, except that each Fund shall be liable
for
any fees and expenses of its own custodian and transfer
agent
incurred in connection with the Reorganization and the
Limited
Term Portfolio will be liable for all fees and expenses
incurred
relating to its liquidation and termination.
Approval of the Plan will require the affirmative vote
of
a
majority of the outstanding shares of the
Limited Term Portfolio. If the Reorganization is not
approved
by
shareholders of the Limited Term
Portfolio, the Board of Trustees will consider other
possible
courses of
action, including liquidation of the
Limited Term Portfolio.
Description of the Intermediate Maturity Fund Shares.
Full and
fractional shares of the respective Class
of shares of beneficial interest of the Intermediate
Maturity
Fund will be
issued to the Limited Term Portfolio
in accordance with the procedures detailed in the Plan and
as
described
in the Intermediate Maturity Fund's
Prospectus. Generally, the Intermediate Maturity Fund does
not
issue
share certificates to shareholders
unless a specific request is submitted to the Intermediate
Maturity
Fund's transfer agent, TSSG. The
shares of the Intermediate Maturity Fund to be issued to the
Limited
Term Portfolio's shareholders and
registered on the shareholder records of TSSG will have no
pre-
preemptive or conversion rights.
Federal Income Tax Consequences. The exchange of
assets
for
shares of the Intermediate
Maturity Fund is intended to qualify for Federal income tax
purposes as
a tax-free reorganization under
Section 368 (a) of the Internal Revenue Code of 1986, as
amended (the
"Code"). As a condition to the
closing of the Reorganization, the Limited Term Portfolio
will
receive
an opinion from Willkie Farr &
Gallagher, counsel to the Intermediate Maturity Fund, to the
effect
that, on the basis of the existing
provisions of the Code, U.S. Treasury regulations issued
thereunder,
current administrative rules,
pronouncements and court decisions, for Federal income tax
purposes,
upon consummation of the
Reorganization:
(1) the transfer of all or substantially
all of the Limited Term Portfolio's assets in exchange for
the
Intermediate Maturity Fund's shares and the assumption by
the
Intermediate Maturity Fund of certain scheduled liabilities
of
the Limited Term Portfolio will constitute a
"reorganization"
within the meaning
of Section 368 (a)(1)(C) of the Code, and the Intermediate
Maturity Fund
and the Limited Term Portfolio
are each a "party to a reorganization" within the meaning of
Section
368(b) of the Code;
(2) no gain or loss will be recognized
by
the Intermediate Maturity
Fund upon the receipt of the assets of the Limited Term
Portfolio in exchange for the Intermediate Maturity Fund's
shares, and the assumption by the
Intermediate Maturity Fund of certain scheduled liabilities
of
the Limited Term Portfolio;
(3) no gain or loss will be recognized
by
the Limited Term Portfolio upon the transfer of the Limited
Term Portfolio's assets to the Intermediate Maturity
Portfolio
in exchange for the Intermediate Maturity Fund shares and
the
assumption by the Intermediate Maturity Fund of certain
scheduled liabilities of the Limited Term Portfolio or upon
the
distribution (whether actual or constructive) of the
Intermediate Maturity Fund shares to the Limited Term
Portfolio
shareholders;
(4) no gain or loss will be recognized
by
shareholders of the Limited Term Portfolio upon the exchange
of
their Limited Term Portfolio shares for the Intermediate
Maturity Fund shares and the assumption of the Intermediate
Maturity Fund of certain scheduled liabilities of the
Limited
Term Portfolio;
(5) the aggregate tax basis of the
Intermediate Maturity Fund shares received by each Limited
Term
Portfolio shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Limited Term
Portfolio shares surrendered in exchange therefor and the
holding period of the Intermediate Maturity Fund shares to
be
received by each Limited Term Portfolio shareholder will
include the period during which the shares of the Limited
Term
Portfolio which are surrendered in exchange therefor were
held
by such shareholder (provided the Limited Term Portfolio
shares
were held as capital assets on the date of Reorganization);
(6) the tax basis of the Limited Term
Portfolio's assets acquired by the Intermediate Maturity
Fund
will be the same as the tax basis of such assets to the
Limited
Term Portfolio immediately prior to the Reorganization and
the
holding period of the assets in the hands of the
Intermediate
Maturity Fund will include the period during which such
assets
were held by the Limited Term Portfolio.
Shareholders of the Limited Term Portfolio should
consult
their tax advisors regarding the effect, if any, of the
proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion only relates
to
the Federal income tax consequences of the Reorganization,
shareholders of the Limited Term Portfolio should also
consult
their tax advisors as to state and local tax consequences,
if
any, of the Reorganization.
Capitalization. The following table, which is
unaudited,
shows
the capitalization of the
Intermediate Maturity Fund and the Limited Term Portfolio as
of
May
[___], 1995 and on a pro forma
basis as of that date, giving effect to the proposed
acquisition of
assets at net asset value (in thousands,
except per share value):
Class A Shares Interim. Maturity Fund Lim. Term
Portfolio
Pro forma for Reorg.
Net Assets
Net asset value per
share
Shares outstanding
Class C Shares Interm. Maturity Fund Lim. Term
Portfolio
Pro forma for Reorg.
Net Assets
Net asset value per
share
Shares outstanding
Class Y Shares Interm. Maturity Fund Lim. Term
Portfolio
Pro forma for Reorg.
Net Assets
Net asset value per
share
Shares outstanding
As of the Record Date, May 31, 1995, there were
outstanding Class A shares,
outstanding Class C shares and outstanding Class Y
shares
of the
Limited Term Portfolio and
outstanding Class A shares, outstanding
Class
C shares
and outstanding Class Y
shares of the Intermediate Maturity Fund. As of the Record
Date, the
officers and trustees of the Trust beneficially owned as a
group less than 1% of the
outstanding shares of the Limited Term
Portfolio. To the best knowledge of the Trustees, as of the
Record
Date, no shareholder or "group" (as that
term is used in Section 13(d) of the Securities Exchange Act
of
1934
(the "Exchange Act")) owned
beneficially or of record more than 5% of the Limited Term
Portfolio except Smith Barney which owns in excess of 5% of
the
outstanding shares of the Portfolio. (The consummation of
the
Reorganization is contingent on receiving exemptive relief
to
permit Smith Barney to redeem these shares.)
As of the Record Date, the officers
and trustees of the Income Trust beneficially owned as a
group
less than
1% of the outstanding shares of
the Intermediate Maturity Fund. To the best knowledge of
the
Trustees
of the Income Trust, as of the
Record Date, no shareholder or "group" (as that term is used
in
Section
13(d) of the Exchange Act) owned
beneficially or of record more than 5% of the Intermediate
Maturity
Fund.
INFORMATION ABOUT INTERMEDIATE MATURITY FUND
Management's Discussion and Analysis of Market
Conditions
and Portfolio Review (through November 30, 1994). During
the
year ended November 30, 1994, the bond market experienced
significant volatility. After falling to their lowest
levels
in 15 years in November 1993, yields on municipal bonds
retraced their path during the course of the year and in
November 1994 they reached their highest levels in three
years.
The reason for this change in interest rates was the
improving
economy. In late 1993 and early 1994, the U.S. economy was
clearly showing signs of moderate growth. In addition, a
significant amount of leverage also had built up in the
fixed
income markets. To curb the possibility of higher inflation
and to stem the growth of leverage in the market, the
Federal
Reserve began to raise short-term interest rates for the
first
time since 1988. The Federal Reserve continued this policy
of
higher short-term rates throughout 1994, raising the Federal
funds rate to 5.50% and the discount rate to 4.75%. Both
are
sensitive indicators of the direction of interest rates.
In response to the Federal Reserve's policy of higher
short-term interest rate, management's investment strategy
has
been to keep the portfolio average maturity between
approximately 8.5 and 9 years. This enabled the
Intermediate
Maturity Fund to maximize its tax-exempt income while
minimizing its exposure to changing short-term interest
rates.
All of the securities in the portfolio are rated investment
grade by either Moody' Investors Service, Inc. ("Moody's")
or
Standard & Poor's Corporation ("S&P"), and they are also
widely
diversified by investment sector.
Throughout 1994, the California economy has shown signs
of
improvement. Significant gains in employment coupled with a
firmer real estate market have boded well for state tax
revenues. However, management has avoided general obligation
bonds issued by the state as well as lease revenue bonds
that
rely on state budget appropriations to pay bondholder
because
of management's concern over the state's ongoing budget
deficits and the legislature's inability to balance the
budget.
Management has instead invested the Intermediate Maturity
Fund's assets in essential service revenue bonds -
transportation, water and sewer bonds - and debt issued by
local communities for redevelopment projects and various
civic
improvements.
The problems of Orange County's investment pool have
dominated the municipal market since early December when
Orange
County filed for bankruptcy. The investment pool consists
of
deposits from Orange County, agencies in Orange County (such
as
Orange County Sanitation District and Orange County
Transportation Authority) and various local communities.
The
pool suffered substantial losses through the use of leverage
and risky derivative investments.
At the end of the fiscal year, approximately 3.70% of
the
Intermediate Maturity Fund's assets were invested in Orange
County Development Agency Tax Allocation bonds. Although
these
bonds are issued under the name of Orange County, they rely
on
a dedicated property tax to pay debt service. Management
believes that the bankruptcy proceeding will not have any
material impact on the ability of the issuer to make its
scheduled interest and principal payments and therefore will
have little, if any, effect on the Intermediate Maturity
Fund.
INFORMATION ABOUT THE LIMITED TERM PORTFOLIO
Management's Discussion and Analysis of Market
Conditions
and Portfolio Review (through September 30, 1994). In July
of
1994, Moody's downgraded California's debt rating for the
third
time in two years, this time from Aa to A1. S&P also cut
its
rating to A from A+. Despite some signs of economic
recovery,
the State continued to grapple with a structurally
imbalanced
budget, an accumulated deficit of over $3 billion and short-
term borrowings of $7 billion. One widely publicized
outcome
of the November elections was the approval by voters of the
proposition barring illegal aliens from receiving state
benefits. However, most observers view the resulting
benefits
as uncertain and anticipate they will be slow in
implementation, given anticipated legal challenges.
Reflecting the volatile municipal bond market
conditions,
the Limited Term Portfolio's total return in the six-month
period ended September 30, 1994, was 0.39%. As a result,
the
Limited Term Portfolio was rated as the No. 1 fund among the
California intermediate municipal funds included in the
September 1994 survey by Lipper Analytical Services, Inc.
The Limited Term Portfolio's relative performance was
primarily the result of an emphasis on higher quality issues
that are trading at a premium to face value. In
particular,
management has concentrated on those bonds that are priced
to a
call date earlier than their stated maturity date, and
issues
have been diminished or lost over the month of September
1994.
During late October and the first half of November, 1994,
municipal bond yields had increased substantially, and many
issues were no longer trading at a premium. Even though
much
of the rise in long-term interest rates is probably behind,
the
prospect of continued tightening of monetary policy by the
Federal Reserve Board is likely to sustain at least some
upward
pressure on the yields of shorter-term securities.
Accordingly, management intends to increase the use of short-
term floating rate securities and continue to favor higher
quality bonds trading at a premium to face value. Though
this
strategy may result in some sacrifice to current yield, it
will
reduce volatility if rates rise further, while providing
reasonable performance should rates begin to decline.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment
objectives,
policies
and restrictions of the
Intermediate Maturity Fund and the Limited Term Portfolio is
based upon
and qualified in its entirety by
the respective investment objectives, policies and
restrictions
sections
of the Prospectuses of the
Intermediate Maturity Fund and the Limited Term Portfolio.
For
a full
discussion of the investment
objectives, policies and restrictions of the Intermediate
Maturity Fund,
refer to the Intermediate Maturity
Fund's Prospectus, which accompanies this Prospectus/Proxy
Statement,
under the captions, "Investment
Objective and Management Policies," and for a discussion
of
these
issues as they apply to the Limited
Term Portfolio, refer to the Limited Term Portfolio's
Prospectus under
the caption, "Investment Objective
and Management Policies."
Investment Objective. The principal investment
objective
of the
Intermediate Maturity Fund is a
high level of current income exempt from Federal income
taxes
and
California personal income taxes. The
principal investment objective of the Limited Term Portfolio
is
also a
high level of income exempt from
Federal income taxes and California personal income taxes.
Although the
language used by each Fund to
define its respective investment objectives is slightly
different, the
investment objectives of the Funds are
essentially the same.
Primary Investments. Under normal conditions, the
Intermediate
Maturity Fund attempts to invest
100%, and invests no less than 80%, of its assets in a
portfolio of
investment grade debt obligations issued
by or on behalf of the State of California and other states,
territories
and possessions of the United States,
the District of Columbia and their respective authorities,
agencies,
instrumentalities and political
subdivisions ("California Obligations"), the interest from
which is, in
the opinion of bond counsel, exempt
from Federal income taxes and California personal income
tax.
As a non-
diversified fund under the 1940
Act, the Intermediate Maturity Fund is not limited in the
proportion of
its assets that it may invest in the
obligations of a single issuer; however, it has conducted
and
intends to
continue to conduct its operations so
as to qualify as a "regulated investment company" for
purposes
of the
Code. Up to 20% of the
Intermediate Maturity Fund's total assets may be invested in
unrated
securities that are deemed by its
investment adviser to be of a quality comparable to
investment
grade.
The weighted average maturity of
the portfolio of the Intermediate Maturity Fund will
normally
be no less
than three nor more than ten years,
and the maximum remaining maturity of such securities will
be
no greater
than twenty years. The
Intermediate Maturity Fund may also invest, without limit,
in
California
Obligations that are tax-exempt
"private activity bonds" as defined in the Code, which are
in
most cases
revenue bonds that generally do not
carry the pledge of the credit of the issuing municipality,
but
are
guaranteed by the corporate entity on
whose behalf they are issued. Up to an aggregate of 10% of
the
Fund's
assets may be invested in illiquid
assets, which includes securities subject to contractual and
other
restrictions on resale and may purchase
securities on a when-issued or delayed delivery basis. The
types of
California Obligations in which the Intermediate Maturity
Fund may invest include municipal leases, zero coupon
securities,
custodial receipts, floating and variable
rate instruments and participation interests purchased from
financial
institutions. Under normal conditions
the Intermediate Maturity Fund may hold up to 20% of its
total
assets in cash or money market
instruments, including taxable
money market instruments.
Under normal market conditions, the Limited Term
Portfolio
seeks
to invest 100%, and invests no
less than 80%, of its assets in municipal obligations the
interest from
which is, in the opinion of bond
counsel, exempt from Federal income taxes at the time of
their
issuance.
Under normal market conditions,
the Limited Term Portfolio invests at least 65% of its
assets
in municipal
obligations issued by the State of California, its
political subdivisions and their agencies and
instrumentalities. At
least 80% of the Limited Term
Portfolio's assets are invested in obligations with
remaining
maturities
of less than ten years and the dollar-
weighted average maturity of its entire portfolio will
normally
not
exceed ten years. Municipal bonds
purchased by the Limited Term Portfolio must, at the time
of
purchase,
be investment grade municipal
bonds and at least two-thirds of the municipal bonds must be
rated in
the category of A or better.
Investment grade bonds are those rated Aaa, Aa, A and Baa by
Moody's
and AAA, AA, A and BBB by S&P or have an
equivalent rating by any nationally recognized statistical
rating
organization (an "NRSRO"). Up to one-
third of the assets of the Limited Term Portfolio may be
invested in municipal bonds
rated Baa or BBB. The Limited Term Portfolio's
short-term municipal obligations will be limited to high
grade
obligations (i.e., obligations that are secured
by the full faith and credit of the United States or are
rated
MIG 1 or
MIG 2, VMIG 1 or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-1+, SP-1, SP-2, or
A-1
or AA or
better by S&P or have an
equivalent rating by any NRSRO or obligations determined by
the
Limited Term Portfolio's investment adviser to be
equivalent). Among the types of short-term instruments in
which the
Limited Term 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. The Limited Term Portfolio will not invest more than
15% of the value of its
net assets in illiquid securities and
may purchase new issues of municipal obligations on a when-
issued basis.
Under certain conditions, and
as a hedging policy in pursuit of its investment objective,
the
Limited
Term Portfolio may invest in
municipal bond index futures (currently traded on the
Chicago
Board of
Trade) or in listed contracts based
on United States Government securities.
Investment Restrictions. The fundamental investment
restrictions adopted by the Income Trust and the Trust in
respect of the Intermediate Maturity Fund and the Limited
Term
Portfolio, respectively, are generally similar. Neither
Fund
may, without the vote of a majority (as defined under the
1940
Act) of its outstanding voting securities: (a) borrow money,
except from banks for temporary or emergency purposes such
as
facilitating redemptions, in an amount not to exceed 10% of
the
value of its total assets at the time of the borrowing; (b)
mortgage or pledge its assets, except to secure permitted
borrowings; (c) invest more than 25% of its total assets in
any
one industry; (d) purchase or sell real estate or real
estate
limited partnerships; (e) write or purchase put, call,
straddle
or spread options; (f) underwrite the securities of other
issuers; (g) purchase or sell commodities or commodities
contracts; (h) make loans, except to the extent the purchase
of
bonds or other evidences of indebtedness or the entry into
repurchase agreements or deposits with banks may be
considered
loans; (i) make short sales of securities or maintain a
short
position; or (j) purchase securities on margin.
Investment Risks. Both Funds' concentration in California
obligations involves special risks that should be carefully
considered by investors. Certain California constitutional
amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter
initiatives could result in certain adverse consequences
affecting the California obligations held by the Funds. For
example, recent amendments to the California Constitution
and
other statutes have limited the taxing and spending
authority
of California governmental entities, which may have the
effect
of impairing the ability of certain issuers of California
obligations to pay principal and interest on their
obligations.
Because both Funds are classified as non-diversified
funds
under the 1940 Act, investment in either may present greater
risks to investors than an investment in a diversified fund.
The investment return on a non-diversified fund typically is
dependent upon the performance of a smaller number of
securities relative to the number of securities held in a
diversified fund.
Both Funds are permitted to invest a limited portion of
their respective portfolios in non-publicly traded
securities
(Intermediate Maturity Fund: 10%. Limited Term Portfolio:
15%).
Non-publicly traded securities may be less liquid than
publicly-
traded securities. Although non-publicly traded securities
may
sometimes be sold in privately negotiated transactions, the
prices realized from these sales could be less than those
originally paid by a Fund.
Both Funds are also permitted to invest in when-issued
or
delayed-delivery transactions. Securities purchased on
either
of these basis, may expose the Fund to risk because the
securities may experience fluctuations in value prior to
delivery. Purchasing securities on a when-issued or delayed
delivery basis can involve the additional risk that the
yield
available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
Under the investment policies of both Funds, at the
time
of purchase, municipal bonds must be of investment grade.
Investment grade bonds are those rated Aaa, Aa, A and Baa by
Moody's and AAA, AA, A and BBB by S&P. In addition to this
requirement, however, the Limited Term Portfolio is required
to
have at least two-thirds of its municipal bonds rated in the
top three rating categories whereas the Intermediate
Maturity
Fund is not subject to any similar requirement. As a
result,
the Intermediate Maturity Fund may have a larger portion of
its
portfolio invested in municipal bonds that are regarded as
having an adequate capacity to pay interest and repay
principal
but are only of medium quality and have speculative
characteristics.
The Intermediate Maturity Fund may invest in municipal
leases which are leases or installment contracts issued by
state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities, such as
computer equipment, and other capital assets. These types
of
investments have special risks not normally associated with
municipal obligations. For example, these obligations
frequently contain non-appropriation clauses that provide
that
the governmental issuer of the obligation need not make
future
payments under the lease or contract unless money is
appropriated for that purpose by a legislative body annually
or
on another periodic basis. Municipal leases also represent
a
type of financing that has not yet developed the depth of
marketability generally associated with other municipal
obligations. Furthermore, although a municipal lease will
be
secured by financed equipment or facilities, the disposition
of
the equipment or facilities in the event of foreclosure
might
prove difficult. Municipal leases are also subject to the
risk
of non-payment which would result in a reduction of income
to
the Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
General. The Income Trust and the Trust are open-end,
management investment companies registered under the 1940
Act,
which
continuously offer to sell shares
at their current net asset value. Each is a trust organized
under Massachusetts law as a
"Massachusetts business trust" and is governed by the
respective trust's
Master Trust Agreement and Declaration of Trust, board of
trustees and its by-laws. Each Fund is also governed by
applicable
state and Federal law. The
Intermediate Maturity Fund is a separate series of the
Income
Trust.
The Board of Trustees of the Income Trust has
authorized the issuance of four
series of shares, each representing shares in one of four
separate
portfolios, and may authorize the issuance
of additional series of shares in the future. 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. The
Limited Term Portfolio is a separate series of the Trust.
For both of the Funds, Class A shares, Class
C shares and Class Y shares have
identical voting, dividend, liquidation, and other rights on
the same
terms and conditions except that
expenses related to the distribution of a specific class of
shares, are
borne solely by that class and each
class of shares has exclusive voting rights with respect to
provisions
of the Fund's Rule 12b-1 distribution
plan which pertains to a particular class.
Trustees. The by-laws of each of the Income Trust and
the
Trust
provide that the term of office
of each trustee shall be from the time of his election and
qualification
until the next annual meeting of
shareholders or until his successor shall have been elected
and
shall
have qualified. Any trustee may be
removed by the shareholders by a majority of the votes
entitled
to be
cast for the election of trustees.
Vacancies on the Boards of either the Income Trust or the
Trust
may be
filled by the trustees remaining in
office. A meeting of shareholders will be required for the
purpose of
electing additional trustees whenever
fewer than a majority of the Trustees then in office were
elected by
shareholders.
Voting Rights. As permitted by Massachusetts law,
there
will
normally be no meetings of
shareholders for the purpose of electing trustees unless and
until such
time as less than a majority of the
trustees holding office have been elected by shareholders.
At
that
time, the directors then in office will call
a shareholders' meeting for the election of trustees.
Shareholders may,
at any meeting called for the
purpose, remove a trustee by the affirmative vote of the
holders of
record of a majority of the votes entitled
to be cast for the election of trustees.
Liquidation or Termination. In the event of the
liquidation or
termination of the Intermediate
Maturity Fund or the Limited Term Portfolio, the
shareholders
of each
Fund are entitled to receive, when,
and as declared by the Trustees in respect of the Fund, the
excess of the assets belonging to
the Fund over the liabilities
belonging to such Fund. In either case, the assets so
distributed to
shareholders of the Fund will be
distributed among the shareholders in proportion to the
number
of shares
of the Fund held by them and
recorded on the books of the Fund.
Liability of Trustees. The Master Trust Agreement and
the
Declaration of Trust of the Income
Trust and the Trust, respectively, provide that
each Fund will indemnify Trustees and officers against
liabilities and
expenses incurred in connection with
litigation in which they may be involved because of their
positions with
the Income Trust or the Trust as the case may be. However,
nothing in the
Master Trust Agreement or the Declaration of Trust as the
case
may be, nor the by-laws of the
Income Trust or the Trust
protects or indemnifies a trustee or
officer against any liability to which such person would
otherwise be
subject by reason of willful
misfeasance, bad faith, gross negligence or reckless
disregard
of the
duties involved in the conduct of such
person's office.
Rights of Inspection. Shareholders of the Intermediate
Maturity
Fund and the Limited Term
Portfolio have the same inspection rights. Currently, each
shareholder
is permitted to inspect the records,
accounts and books of the trust subject to reasonable
regulations of the
Board of Trustees, not contrary to
Massachusetts law, as to whether and to what extent, and at
what times
and places, and under what
conditions and regulations, such right shall be exercised.
Appraisal Rights. There are no appraisal rights under
Massachusetts law for shareholders of an
open-end investment company registered under the 1940 Act if
the value
placed on the shareholder's stock
that is the subject of the transaction is its net asset
value.
Because
shares of the Limited Term Portfolio to
be exchanged for shares of the Intermediate Maturity Fund in
the
Reorganization will be valued at their net
asset values, shareholders of the Limited Term Portfolio
will
have no
appraisal rights under Massachusetts
law and will be bound by the terms of the Plan, if approved.
The foregoing is only a summary of certain
characteristics
of the
operations of the Intermediate
Maturity Fund and the Limited Term Portfolio. The foregoing
is
not a
complete description of the
documents cited. Shareholders should refer to the
provisions
of the
corporate documents and state laws
governing each Fund for a more thorough description.
ADDITIONAL INFORMATION ABOUT
THE INTERMEDIATE MATURITY FUND
AND THE LIMITED TERM PORTFOLIO
The Limited Term Portfolio. Information about the
Limited
Term
Portfolio is incorporated herein
by reference from its current Prospectus dated November
7,1994
and in
the Statement of Additional
Information dated November 7, 1994 which has been filed with
the SEC. A
copy of the Prospectus and the
Statement of Additional Information is available upon
request
and
without charge by writing to the Limited
Term Portfolio at 388 Greenwich Street, New York, New York
10013 or by
calling 1-800-224-7523.
The Intermediate Maturity Portfolio. Information
concerning the
operation and management of
the Intermediate Maturity Fund is incorporated herein by
reference from
the Prospectus dated January 29,
1995 a copy of which is included herein, and in the
Statement
of
Additional Information dated January 29,
1995 which has been filed with the SEC. A copy of such
Statement of
Additional Information is available
upon request and without charge by writing the Intermediate
Maturity
Fund at 388 Greenwich Street, New
York, New York 10013 or by calling 1-800-224-7523.
Both the Intermediate Maturity Fund and the Limited
Term
Portfolio
are subject to the
informational requirements of the Exchange Act and in
accordance
therewith file reports and other
information including proxy material, reports and charter
documents with
the SEC. These reports can be
inspected and copies obtained at the Public Reference
Facilities
maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the New York Regional
Office of the
SEC, 75 Park Place, New
York, New York 10007. Copies of such material can also be
obtained from
the Public Reference Branch,
Office of Consumer Affairs and Information Services, SEC,
Washington,
D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Trustees of the Trust do not intend to
present any other business at the
Meeting. If, however, any other matters are properly
brought
before the
Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance
with
their
judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in
connection
with a
solicitation of proxies by the
Board of Trustees of the Trust to be used at the
Special Meeting of Shareholders of the Limited Term
Portfolio
to be
held at 4:30 p.m. on July 10, 1995, at 388 Greenwich Street,
New York,
New York 10013 and at any
adjournments thereof. This Prospectus/Proxy Statement,
along
with a
Notice of the Meeting and a proxy
card, is first being mailed to shareholders of the Limited
Term
Portfolio on or about June [_____], 1995.
Only shareholders of record as of the close of business on
the
Record
Date will be entitled to notice of, and
to vote at, the Meeting or any adjournments thereof. The
holders of a
majority of the shares of the Limited
Term Portfolio outstanding at the close of business on the
Record Date
present in person or represented by
proxy will constitute a quorum for the Meeting. For
purposes
of determining a quorum for transacting business at the
Meeting, abstentions and broker "non-votes" (that is,
proxies
from brokers or nominees indicating that such persons have
not
received instructions from the beneficial owner or other
persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have
discretionary power) will be treated as shares that are
present
but which have not been voted. For this reason, abstentions
and broker non-votes will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the Plan.
If
the enclosed form of
proxy is properly executed and
returned in time to be voted at the Meeting, the proxies
named
therein
will vote the shares represented by
the proxy in accordance with the instructions marked
thereon.
Unmarked
proxies will be voted FOR the
proposed Reorganization and FOR any other matters deemed
appropriate. A
proxy may be revoked at any
time on or before the Meeting by written notice to Smith
Barney
Muni
Funds - California Limited Term
Portfolio, 388 Greenwich Street, New York, New York 10013,
22nd
Floor,
c/o the Corporate Secretary.
Unless revoked, all valid proxies will be voted in
accordance
with the
specifications thereon or, in the
absence of such specifications, FOR approval of the Plan and
the
Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote
of
a
majority of the outstanding shares of the
Limited Term Portfolio. Shareholders of Class A, C and Y
shares of the
Limited Term Portfolio shall vote
together as a single class. Shareholders of the Limited
Term
Portfolio
are entitled to one vote for each
share.
Proxies are solicited by mail. Additional
solicitations
may be
made by telephone, telegraph or
personal contact by officers or employees of: the Trust; the
Trust's distributor, Smith Barney; the Trust's transfer
agent,
TSSG; and the Trust's administrator, SBMFM. The aggregate
cost
of solicitation of the Limited Term Portfolio shareholders
is
expected to be [$__]. Expenses of the Reorganization,
including the costs of proxy solicitation, the preparation
of
this Prospectus/Proxy Statement and enclosures attached
hereto
and reimbursement of expenses for forwarding solicitation
material to beneficial owners of shares of the Limited Term
Portfolio will be borne by Smith Barney.
In the event that sufficient votes to approve the
Reorganization
are not received by July 7, 1995,
the persons named as proxies may propose one or more
adjournments of the
Meeting to permit further
solicitation of proxies. In determining whether to adjourn
the
Meeting,
the following factors may be
considered: the percentage of votes actually cast, the
percentage of
negative votes actually cast, the nature
of any further solicitation and the information to be
provided
to
shareholders with respect to the reasons for
the solicitation. Any such adjournment will require an
affirmative vote
by the holders of a majority of the
shares present in person or by proxy and entitled to vote at
the
Meeting. The persons named as proxies will
vote upon such adjournment after consideration of the best
interests of
all shareholders.
The votes of the shareholders of the Intermediate
Maturity
Fund
are not being solicited by this
Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of assets and liabilities of the
Limited
Term Portfolio as of March 31,
1994, and the Intermediate Maturity Fund as of November 30,
1994 and the
related statements of
operations for the year then ended and changes in net assets
for the two
years then ended and selected per
share data and ratios, have been incorporated by reference
into
the
Statement of Additional Information
relating to this Prospectus/Proxy Statement in reliance on
the
reports
of KPMG Peat Marwick and Coopers
and Lybrand, independent auditors for the Limited Term
Portfolio and the
Intermediate Maturity Fund,
respectively, given on the authority of such firms as
experts
in
accounting and auditing. In addition, the
unaudited financial statements for the Limited Term
Portfolio
and the
Intermediate Maturity Fund for the
six-month periods ended September 30, 1994 and May 31, 1994,
respectively, are incorporated by
reference into the aforementioned Statement of Additional
Information.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares
of
the
Intermediate Maturity Fund will be
passed upon by Willkie Farr & Gallagher, 153 East 53rd
Street,
New York,
New York 10022.
THE BOARD OF TRUSTEES OF THE LIMITED TERM PORTFOLIO,
INCLUDING
THE "NON-
INTERESTED" TRUSTEES, UNANIMOUSLY RECOMMEND APPROVAL OF THE
PLAN, AND
ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY
WILL
BE VOTED
IN FAVOR OF APPROVAL OF THE PLAN.
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement")
is
made as of this 20th day of December, 1994, by and between
Smith Barney
Income Trust ("Income Trust"), a business trust organized
under
the laws
of
The Commonwealth of Massachusetts with its principal place
of
business
at
388 Greenwich Street, New York, New York 10013, on behalf of
Smith
Barney
Intermediate Maturity California Municipals Fund (the
"Acquiring Fund"),
an
investment portfolio of Income Trust and Smith Barney Muni
Funds (the
"Trust"), a business trust organized under the laws of The
Commonwealth
of
Massachusetts with its principal place of business at 388
Greenwich
Street,
New York, New York 10013, on behalf of the California
Limited
Term
Portfolio, an investment portfolio of the Trust (the
"Acquired
Fund").
This Agreement is intended to be and is adopted as
a
plan of
reorganization and liquidation within the meaning of Section
368(a)(1)(C)
of the United States Internal Revenue Code of 1986, as
amended
(the
"Code"). The reorganization (the "Reorganization") will
consist of the
transfer of all or substantially all of the assets of the
Acquired Fund
in
exchange for shares of beneficial interest of the Acquiring
Fund
(collectively, the "Acquiring Fund Shares" and each, an
"Acquiring Fund
Share") and the assumption by the Acquiring Fund of certain
scheduled
liabilities of the Acquired Fund and the distribution, after
the Closing
Date herein referred to, of Acquiring Fund Shares to the
shareholders of
the Acquired Fund in liquidation of the Acquired Fund and
the
dissolution
and termination of the Acquired Fund, all upon the terms and
conditions
hereinafter set forth in this Agreement.
WHEREAS, the Trust and the Income Trust are
registered
investment companies of the management type and the Acquired
Fund owns
securities that generally are assets of the character in
which
the
Acquiring Fund is permitted to invest;
WHEREAS, the Trust and the Income Trust are
authorized to
issue
shares of beneficial interest on behalf of the Acquired Fund
and
Acquiring
Fund, respectively;
WHEREAS, the Board of Trustees of the Trust, on
behalf of
the
Acquired Fund, has determined that the exchange of all or
substantially
all
of the assets and certain of the liabilities of the Acquired
Fund for
Acquiring Fund Shares and the assumption of such liabilities
by
the
Acquiring Fund is in the best interests of the Acquired
Fund's
shareholders
and that the interests of the existing shareholders of the
Acquired Fund
would not be diluted as a result of this transaction;
WHEREAS, the Board of Trustees of the Trust has
determined
that
the exchange of all or substantially all of the assets of
the
Acquired
Fund
for Acquiring Fund Shares is in the best interests of the
Acquiring
Fund's
shareholders and that the interests of the existing
shareholders of the
Acquiring Fund would not be diluted as a result of this
transaction;
NOW, THEREFORE, in consideration of the premises
and
of the
covenants and agreements hereinafter set forth, the parties
hereto
covenant
and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR
THE
ACQUIRING
FUND SHARES AND ASSUMPTION OF THE ACQUIRED FUND'S SCHEDULED
LIABILITIES
AND
LIQUIDATION, DISSOLUTION AND TERMINATION OF THE ACQUIRED
FUND
1.1. Subject to the terms and conditions herein
set
forth
and
on the basis of the representations and warranties contained
herein, the
Trust on behalf of the Acquired Fund agrees to transfer the
Acquired
Fund's
assets as set forth in paragraph 1.2 to the Acquiring Fund,
and
the
Income
Trust on behalf of the Acquiring Fund agrees in exchange
therefor: (i)
to
deliver to the Acquired Fund the number of Acquiring Fund
Shares,
including
fractional Acquiring Fund Shares, determined by dividing the
value of
the
Acquired Fund's net assets attributable to its shares,
computed
in the
manner and as of the time and date set forth in paragraph
2.1,
by the
net
asset value of one Acquiring Fund Share, computed in the
manner
and as
of
the time and date set forth in paragraph 2.2; and (ii) to
assume in
respect
of the Acquiring Fund certain scheduled liabilities of the
Acquired
Fund,
as set forth in paragraph 1.3. Such transactions shall take
place at
the
closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be
acquired by
the Acquiring Fund shall consist of all or substantially all
of
its
property, including, without limitation, all cash,
securities
and
dividends
or interest receivables which are owned by the Acquired
Fund,
and any
deferred or prepaid expenses shown as an asset on the books
of
the
Acquired
Fund on the closing date provided in paragraph 3.1 (the
"Closing Date").
(b) The Trust and the Acquired Fund have
provided the
Income Trust and Acquiring Fund with a list of all of the
Acquired
Fund's
assets as of the date of execution of this Agreement. The
Acquired Fund
reserves the right to sell any of the securities but will
not,
without
the
prior approval of the Acquiring Fund, acquire any additional
securities
other than securities of the type in which the Acquiring
Fund
is
permitted
to invest. The Acquiring Fund will, within a reasonable
time
prior to
the
Closing Date, furnish the Trust and the Acquired Fund with a
statement
of
the Acquiring Fund's investment objectives, policies and
restrictions
and a
list of the securities, if any, on the Acquired Fund's list
referred to
in
the first sentence of this paragraph which do not conform to
the
Acquiring
Fund's investment objectives, policies and restrictions. In
the event
that
the Acquired Fund holds any investments which the Acquiring
Fund may not
hold, the Acquired Fund will dispose of such securities
prior
to the
Closing Date. In addition, if it is determined that the
portfolios of
the
Acquired Fund and the Acquiring Fund, when aggregated, would
contain
investments exceeding certain percentage limitations imposed
upon the
Acquiring Fund with respect to such investments, the
Acquired
Fund, if
requested by the Acquiring Fund, will dispose of and/or
reinvest a
sufficient amount of such investments as may be necessary to
avoid
violating such limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge
all the
Acquired Fund's known liabilities and obligations prior to
the
Closing
Date. The Income Trust on behalf of the Acquiring Fund
shall
assume all
liabilities, expenses, costs, charges and reserves reflected
on
an
unaudited Statement of Assets and Liabilities of the
Acquired
Fund
prepared
by The Boston Company Advisors, Inc. ("Boston Advisors"), as
sub-
administrator of the Acquired Fund, as of the Valuation Date
(as defined
in
paragraph 2.1), in accordance with generally accepted
accounting
principles
consistently applied from the prior audited period. The
Acquiring Fund
shall assume only those liabilities of the Acquired Fund
reflected in
that
unaudited Statement of Assets and Liabilities and shall not
assume any
other liabilities, whether absolute or contingent, not
reflected
thereon.
1.4. As provided in paragraph 3.4, as soon after
the
Closing
Date as is conveniently practicable (the "Liquidation
Date"),
the
Acquired
Fund will liquidate and distribute pro rata to its
shareholders
of
record
determined as of the close of business on the Closing Date
(the
"Acquired
Fund Shareholders"), the Acquiring Fund Shares it receives
pursuant to
paragraph 1.1. Such liquidation and distribution will be
accomplished
by
the transfer of the Acquiring Fund Shares then credited to
the
account
of
the Acquired Fund on the books of the Acquiring Fund to open
accounts on
the share records of the Acquiring Fund in the name of the
Acquired
Fund's
shareholders and representing the respective pro rata number
of
the
Acquiring Fund Shares due such shareholders. All issued and
outstanding
shares of the Acquired Fund will simultaneously be canceled
on
the
books
of the Acquired Fund, although share certificates
representing
interests
in
the Acquired Fund will represent a number of Acquiring Fund
Shares after
the Closing Date as determined in accordance with paragraph
1.1. The
Acquiring Fund shall not issue certificates representing the
Acquiring
Fund
Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be
shown on
the
books of the Acquiring Fund's transfer agent. Acquiring
Fund
Shares
will
be issued in the manner described in the Acquiring Fund's
current
prospectus and statement of additional information.
1.6. Any transfer taxes payable upon issuance of
the
Acquiring
Fund Shares in a name other than the registered holder of
the
Acquired
Fund
shares on the books of the Acquired Fund as of that time
shall,
as a
condition of such issuance and transfer, be paid by the
person
to whom
such
Acquiring Fund Shares are to be issued and transferred.
1.7. Any reporting responsibility of the Trust
and
the
Acquired Fund is and shall remain the responsibility of the
Trust and
the
Acquired Fund, respectively, up to and including the
Closing
Date and
such
later dates on which the Acquired Fund is dissolved and
deregistered.
2. VALUATION
2.1. The value of the Acquired Fund's assets to
be
acquired
by
the Acquiring Fund hereunder shall be the value of such
assets
computed
as
of the close of regular trading on the New York Stock
Exchange,
Inc.
(the
"NYSE") on the Closing Date (such time and date being
hereinafter called
the "Valuation Date"), using the valuation procedures set
forth in the
Acquiring Fund's then current prospectus or statement of
additional
information.
2.2. The net asset value of Acquiring Fund Shares
shall be
the
net asset value per share computed as of the close of
regular
trading on
the NYSE on the Valuation Date, using the valuation
procedures
set forth
in
the Acquiring Fund's then current prospectus or statement of
additional
information.
2.3. All computations of value shall be made by
Boston
Advisors in accordance with its regular practice as pricing
agent for
the
Acquired Fund and the Acquiring Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be __________, 1995,
or
such
later
date as the parties may agree to in writing. All acts
taking
place at
the
Closing shall be deemed to take place simultaneously as of
the
close of
business on the Closing Date unless otherwise provided. The
Closing
shall
be held as of 5:00 p.m. at the offices of Smith Barney Inc.,
388
Greenwich
Street, New York, New York 10013, or at such other time
and/or
place as
the
parties may agree.
3.2. The custodian for the Acquiring Fund (the
"Custodian"),
shall deliver at the Closing a certificate of an authorized
officer
stating
that: (a) the Acquired Fund's portfolio securities, cash
and
any other
assets shall have been delivered in proper form to the
Acquiring Fund
within two business days prior to or on the Closing Date and
(b) all
necessary transfer taxes including all applicable federal
and
state
stock
transfer stamps, if any, shall have been paid, or provision
for
payment
shall have been made, in conjunction with the delivery of
portfolio
securities.
3.3. In the event that on the Valuation Date (a)
the
NYSE
or
another primary trading market for portfolio securities of
the
Acquiring
Fund or the Acquired Fund shall be closed to trading or
trading
thereon
shall be restricted or (b) trading or the reporting of
trading
on the
NYSE
or elsewhere shall be disrupted so that accurate appraisal
of
the value
of
the net assets of the Acquiring Fund or the Acquired Fund is
impracticable,
the Closing Date shall be postponed until the first business
day after
the
day when trading shall have been fully resumed and reporting
shall have
been restored.
3.4. The Acquired Fund shall deliver at the
Closing
a list
of
the names and addresses of its shareholders and the number
and
percentage
ownership of outstanding shares owned by each such
shareholder
immediately
prior to the Closing, certified on behalf of the Acquired
Fund
by the
President of the Trust. The Acquiring Fund shall issue and
deliver a
confirmation evidencing the Acquiring Fund Shares to be
credited to the
Acquired Fund's account on the Closing Date to the Secretary
of
the
Trust,
on behalf of the Acquired Fund, or provide evidence
satisfactory to the
Trust and the Acquired Fund that such Acquiring Fund Shares
have been
credited to the Acquired Fund's account on the books of the
Acquiring
Fund.
At the Closing, each party shall deliver to the other such
bills of
sale,
checks, assignments, share certificates, if any, receipts or
other
documents as such other party or its counsel may reasonably
request.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Trust and the Acquired Fund represent
and
warrant
to
the Income Trust and the Acquiring Fund as follows:
(a) The Trust is a business trust, duly
organized,
validly
existing and in good standing under the laws of The
Commonwealth of
Massachusetts;
(b) The Trust is a registered investment company
classified
as
a management company of the open-end type, and its
registration
with the
Securities and Exchange Commission (the "Commission") as an
investment
company under the Investment Company Act of 1940, as amended
(the "1940
Act") is in full force and effect;
(c) The Trust is not, and the execution, delivery
and
performance of this Agreement will not result, in a material
violation
of
its Master Trust Agreement or By-laws or of any agreement,
indenture,
instrument, contract, lease or other undertaking to which
the
Trust or
the
Acquired Fund is a party or by which it is bound;
(d) The Trust has no material contracts or other
commitments
(other than this Agreement) which will be terminated with
liability to
the
Acquired Fund prior to the Closing Date;
(e) Except as otherwise disclosed in writing to
and
accepted
by the Income Trust on behalf of the Acquiring Fund, no
litigation or
administrative proceeding or investigation of or before any
court or
governmental body is presently pending or to its knowledge
threatened
against the Trust with respect to the Acquired Fund or any
of
the
Acquired
Fund's properties or assets (other than that previously
disclosed to the
other party to the Agreement) which, if adversely
determined,
would
materially and adversely affect the financial condition or
the
conduct
of
the business of the Acquired Fund. The Trust and the
Acquired
Fund know
of
no facts which might form the basis for the institution of
such
proceedings
and neither is a party to or subject to the provisions of
any
order,
decree
or judgment of any court or governmental body which
materially
and
adversely affects its business or its ability to consummate
the
transactions herein contemplated;
(f) The Statements of Assets and Liabilities of
the
Acquired
Fund as of March 4, 1994 have been audited by KPMG Peat
Marwick
LLP.,
independent certified public accountants, and, together with
the
unaudited
Statement of Assets and Liabilities of the Acquired Fund as
of
September
30, 1994, are in accordance with generally accepted
accounting
principles
consistently applied, and such statements (copies of which
have
been
furnished to the Income Trust and the Acquiring Fund) fairly
reflect the
financial condition of the Acquired Fund as of such dates,
and
there are
no
known contingent liabilities of the Acquired Fund as of such
dates not
disclosed therein;
(g) At the Closing Date, all federal and other
tax
returns
and
reports of the Trust and the Acquired Fund required by law
then
to have
been filed by such dates shall have been filed, and all
federal
and
other
taxes shown as due on such returns shall have been paid so
far
as due,
or
provision shall have been made for the payment thereof and,
to
the best
of
the knowledge of the Acquired Fund and the Trust, no such
return is
currently under audit and no assessment has been asserted
with
respect
to
such returns;
(h) For the most recent fiscal year of its
operation, the
Acquired Fund has met the requirements of Subchapter M of
the
Code for
qualification and treatment as a regulated investment
company;
(i) All issued and outstanding shares of the
Acquired Fund
are, and at the Closing Date will be, duly and validly
issued
and
outstanding, fully paid and non-assessable. All of the
issued
and
outstanding shares of the Acquired Fund will, at the time of
Closing, be
held by the persons and in the amounts set forth in the
records
of the
transfer agent as provided in paragraph 3.4. The Acquired
Fund
does not
have outstanding any options, warrants or other rights to
subscribe for
or
purchase any shares of the Acquired Fund, nor is there
outstanding any
security convertible into any shares of the Acquired Fund;
(j) At the Closing Date, the Acquired Fund will
have
good
and
marketable title to the assets to be transferred to the
Acquiring Fund
pursuant to paragraph 1.2 and full right, power and
authority
to sell,
assign, transfer and deliver such assets hereunder and, upon
delivery
and
payment for such assets, the Acquiring Fund will acquire
good
and
marketable title thereto, subject to no restrictions on the
full
transfer
thereof, including such restrictions as might arise under
the
Securities
Act of 1933, as amended (the "1933 Act"), other than as
disclosed to the
Income Trust and the Acquiring Fund;
(k) The execution, delivery and performance of
this
Agreement
has been duly authorized by all necessary action on the part
of
the
Trust's
Board of Trustees, and subject to the approval of the
Acquired
Fund's
shareholders, this Agreement, assuming due authorization,
execution and
delivery by the Income Trust on behalf of the Acquiring
Fund,
will
constitute a valid and binding obligation of the Trust and
the
Acquired
Fund, enforceable in accordance with its terms, subject as
to
enforcement,
to bankruptcy, insolvency, reorganization, moratorium and
other
laws
relating to or affecting creditors' rights and to general
equity
principles;
(l) The information to be furnished by the Trust
and
the
Acquired Fund for use in no-action letters, applications for
exemptive
orders, registration statements, proxy materials and other
documents
which
may be necessary in connection with the transactions
contemplated hereby
shall be accurate and complete in all material respects and
shall comply
in
all material respects with federal securities and other laws
and
regulations thereunder applicable thereto; and
(m) The proxy statement of the Acquired Fund (the
"Proxy
Statement") to be included in the Registration Statement
referred to in
paragraph 5.7 (other than information therein that relates
to
the
Acquiring
Fund) will, on the effective date of the Registration
Statement
and on
the
Closing Date, not contain any untrue statement of a material
fact or
omit
to state a material fact required to be stated therein or
necessary to
make
the statements therein, in light of the circumstances under
which such
statements were made, not materially misleading.
4.2. The Income Trust and the Acquiring Fund
represent and
warrant to the Trust and the Acquired Fund as follows:
(a) The Acquiring Fund is a portfolio of the
Income
Trust,
which is a business trust, duly organized, validly existing
and
in good
standing under the laws of The Commonwealth of
Massachusetts;
(b) The Income Trust is a registered investment
company
classified as a management company of the open-end type and
its
registration with the Commission as an investment company
under
the 1940
Act is in full force and effect;
(c) The current prospectus of the Acquiring Fund
and
statement
of additional information of the Income Trust conform in all
material
respects to the applicable requirements of the 1933 Act and
the
1940 Act
and the rules and regulations of the Commission thereunder
and
do not
include any untrue statement of a material fact or omit to
state any
material fact required to be stated therein or necessary to
make the
statements therein, in light of the circumstances under
which
they were
made, not materially misleading;
(d) At the Closing Date, the Acquiring Fund will
have good
and
marketable title to its assets;
(e) The Income Trust is not, and the execution,
delivery
and
performance of this Agreement on behalf of the Acquiring
Fund
will not
result, in a material violation of its Master Trust
Agreement
or By-laws
or
of any agreement, indenture, instrument, contract, lease or
other
undertaking with respect to the Acquiring Fund to which the
Income Trust
is
a party or by which it is bound;
(f) No material litigation or administrative
proceeding or
investigation of or before any court or governmental body is
presently
pending or threatened against the Income Trust with respect
to
the
Acquiring Fund or any of the Acquiring Fund's properties or
assets,
except
as previously disclosed in writing to the Trust and the
Acquired Fund.
The
Income Trust and the Acquiring Fund know of no facts which
might form
the
basis for the institution of such proceedings and neither
the
Income
Trust
nor the Acquiring Fund is a party to or subject to the
provisions of any
order, decree or judgment of any court or governmental body
which
materially and adversely affects the Acquiring Fund's
business
or the
Income Trust's ability on behalf of the Acquiring Fund to
consummate the
transactions contemplated herein;
(g) The Statements of Assets and Liabilities of
the
Acquiring
Fund as of November 30, 1994 have been audited by Coopers &
Lybrand
L.L.P.,
independent certified public accountants, and are in
accordance
with
generally accepted accounting principles consistently
applied,
and such
statements (copies of which have been furnished to the Trust
and the
Acquired Fund) fairly reflect the financial condition of the
Acquiring
Fund
as of such date, and there are no known contingent
liabilities
of the
Acquiring Fund as of such date not disclosed therein;
(h) At the Closing Date, all federal and other
tax
returns
and
reports of the Income Trust and the Acquiring Fund required
by
law then
to
have been filed by such date shall have been filed, and all
federal and
other taxes shown as due on said returns and reports shall
have
been
paid
so far as due, or provision shall have been made for the
payment thereof
and, to the best of the knowledge of the Income Trust and
the
Acquiring
Fund, no such return is currently under audit and no
assessment
has been
asserted with respect to such returns;
(i) For the most recent fiscal year of its
operation, the
Acquiring Fund has met the requirements of Subchapter M of
the
Code for
qualification and treatment as a regulated investment
company
and the
Acquiring Fund intends to do so in the future;
(j) At the date hereof, all issued and
outstanding
shares
of
the Acquiring Fund are, and at the Closing Date will be,
duly
and
validly
issued and outstanding, fully paid and non-assessable, with
no
personal
liability attaching to the ownership thereof. The Acquiring
Fund does
not
have outstanding any options, warrants or other rights to
subscribe for
or
purchase any shares of the Acquiring Fund, nor is there
outstanding any
security convertible into shares of the Acquiring Fund;
(k) The execution, delivery and performance of
this
Agreement
has been duly authorized by all necessary action, if any, on
the part of
the Income Trust's Board of Trustees and assuming due
authorization,
execution and delivery by the Trust on behalf of the
Acquired
Fund, this
Agreement constitutes a valid and binding obligation of the
Income Trust
and the Acquiring Fund, enforceable in accordance with its
terms,
subject
as to enforcement, to bankruptcy, insolvency,
reorganization,
moratorium
and other laws relating to or affecting creditors' rights
and
to general
equity principles;
(l) The Acquiring Fund Shares to be issued and
delivered to
the Acquired Fund, for the account of the Acquired Fund
Shareholders,
pursuant to the terms of this Agreement, will at the Closing
Date have
been
duly authorized and, when so issued and delivered, will be
duly
and
validly
issued Acquiring Fund Shares, and will be fully paid and non-
assessable
with no personal liability attaching to the ownership
thereof;
(m) The information to be furnished by the Income
Trust and
the Acquiring Fund for use in no-action letters,
applications
for
exemptive
orders, registration statements, proxy materials and other
documents
which
may be necessary in connection with the transactions
contemplated hereby
shall be accurate and complete in all material respects and
shall comply
in
all material respects with federal securities and other laws
and
regulations applicable thereto;
(n) The Proxy Statement to be included in the
Registration
Statement (only insofar as it relates to the Acquiring Fund
and
the
Income
Trust) will, on the effective date of the Registration
Statement and on
the
Closing Date, not contain any untrue statement of a material
fact or
omit
to state a material fact required to be stated therein or
necessary to
make
the statements therein, in light of the circumstances under
which such
statements were made, not materially misleading; and
(o) The Income Trust and the Acquiring Fund agree
to
use
all
reasonable efforts to obtain the approvals and
authorizations
required
by
the 1933 Act, the 1940 Act and such of the state Blue Sky or
securities
laws as they may deem appropriate in order to continue the
Acquiring
Fund's
operations after the Closing Date.
5. COVENANTS OF THE ACQUIRED FUND, THE TRUST, THE
ACQUIRING
FUND AND
THE
INCOME TRUST
5.1. The Acquiring Fund and the Acquired Fund
each
will
operate its business in the ordinary course between the date
hereof and
the
Closing Date. It is understood that such ordinary course of
business
will
include the declaration and payment of customary dividends
and
distributions and any other dividends and distributions
deemed
advisable,
in each case payable either in cash or in additional shares.
5.2. The Trust, on behalf of the Acquired Funds,
will call
a
meeting of its shareholders to consider and act upon this
Agreement and
to
take all other action necessary to obtain approval of the
transactions
contemplated herein.
5.3. The Trust and the Acquired Fund covenant
that
the
Acquiring Fund Shares to be issued hereunder are not being
acquired for
the
purpose of making any distribution thereof other than in
accordance with
the terms of this Agreement.
5.4. The Trust and the Acquired Fund will assist
the
Income
Trust and the Acquiring Fund in obtaining such information
as
the Income
Trust and the Acquiring Fund reasonably request concerning
the
beneficial
ownership of the Acquired Fund's shares.
5.5. Subject to the provisions of this Agreement,
the Trust
on
behalf of the Acquired Fund and the Income Trust on behalf
of
the
Acquiring
Fund, each will take, or cause to be taken, all action, and
do
or cause
to
be done, all things reasonably necessary, proper or
advisable
to
consummate
and make effective the transactions contemplated by this
Agreement.
5.6. As promptly as practicable, but in any case
within
sixty
days after the Closing Date, the Trust and the Acquired Fund
shall
furnish
to the Income Trust and the Acquiring Fund, in such form as
is
reasonably
satisfactory to the Income Trust and the Acquiring Fund, a
statement of
the
earnings and profits of the Acquired Fund for federal income
tax
purposes
which will be carried over to the Acquiring Fund as a result
of
Section
381
of the Code, and which will be certified by the President
and
Treasurer
of
the Trust.
5.7. The Trust and the Acquired Fund will provide
the
Income
Trust and the Acquiring Fund with information reasonably
necessary for
the
preparation of a prospectus (the "Prospectus") which will
include the
Proxy
Statement, referred to in paragraph 4.1(m), all to be
included
in a
Registration Statement on Form N-14 of the Acquiring Fund
(the
"Registration Statement"), in compliance with the 1933 Act,
the
Securities
Exchange Act of 1934 (the "1934 Act") and the 1940 Act in
connection
with
the meeting of the Acquired Fund's shareholders to consider
approval of
this Agreement and the transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUST AND
THE
ACQUIRED
FUND
The obligations of the Trust and the Acquired Fund
to
consummate the transactions provided for herein shall be
subject, at
their
election, to the performance by Income Trust and the
Acquiring
Fund of
all
of the obligations to be performed by them hereunder on or
before the
Closing Date and, in addition thereto, the following further
conditions:
6.1. All representations and warranties of the
Income Trust
and the Acquiring Fund contained in this Agreement shall be
true and
correct in all material respects as of the date hereof and,
except as
they
may be affected by the transactions contemplated by this
Agreement, as
of
the Closing Date with the same force and effect as if made
on
and as of
the
Closing Date;
6.2. The Income Trust, on behalf of the Acquiring
Fund,
shall
have delivered to the Trust and the Acquired Fund a
certificate
executed
in
its name by its President or Vice President and its
Treasurer
or
Assistant
Treasurer, in a form reasonably satisfactory to the Trust
and
the
Acquired
Fund and dated as of the Closing Date, to the effect that
the
representations and warranties of Income Trust and the
Acquiring Fund
made
in this Agreement are true and correct at and as of the
Closing
Date,
except as they may be affected by the transactions
contemplated
by this
Agreement; and
6.3. The Trust and the Acquired Fund shall have
received on
the Closing Date a favorable opinion from Willkie Farr &
Gallagher,
counsel
to the Acquiring Fund, dated as of the Closing Date, in a
form
reasonably
satisfactory to Christina T. Sydor, Esq., Secretary of the
Trust,
covering
the following points:
That (a) the Income Trust is duly organized and
validly
existing under the laws of The Commonwealth of
Massachusetts;
(b) the
Income Trust is an open-end management investment company
registered
under
the 1940 Act; (c) this Agreement, the reorganization
provided
for
thereunder and the execution of this Agreement have been
duly
authorized
and approved by all requisite action of the Income Trust and
the
Acquiring
Fund, and this Agreement has been duly executed and
delivered
by the
Income
Trust on behalf of the Acquiring Fund and is a valid and
binding
obligation
of the Income Trust and the Acquiring Fund enforceable in
accordance
with
its terms against the assets of the Acquiring Fund; and (d)
the
Acquiring
Fund Shares to be issued to the Acquired Fund for
distribution
to its
shareholders pursuant to this Agreement have been, to the
extent of the
number of Acquiring Fund Shares authorized to be issued by
the
Income
Trust
in respect of the Acquiring Fund in the Master Trust
Agreement
of the
Income Trust and then unissued, duly authorized and, subject
to
the
receipt
by the Income Trust of consideration equal to the net asset
value
thereof
(but in no event less than the par value thereof), such
Acquiring Fund
Shares, when issued in accordance with this Agreement, will
be
validly
issued and fully paid and non-assessable. Such opinion may
state that
it
is solely for the benefit of the Trust, its Trustees and its
officers,
and
the Acquired Fund. Such counsel may rely, as to matters
governed by the
laws of The Commonwealth of Massachusetts, on an opinion of
Massachusetts
counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE INCOME TRUST
AND THE
ACQUIRING FUND
The obligations of the Income Trust and the
Acquiring
Fund
to
complete the transactions provided for herein shall be
subject,
at their
election, to the performance by the Income Trust and the
Acquired Fund
of
all the obligations to be performed by them hereunder on or
before the
Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of the
Trust
and
the
Acquired Fund contained in this Agreement shall be true and
correct in
all
material respects as of the date hereof and, except as they
may
be
affected
by the transactions contemplated by this Agreement, as of
the
Closing
Date
with the same force and effect as if made on and as of the
Closing Date;
7.2. The Trust, on behalf of the Acquired Fund,
shall have
delivered to the Income Trust and the Acquiring Fund a
statement of the
Acquired Fund's assets and liabilities, together with a list
of
the
Acquired Fund's portfolio securities showing the tax costs
of
such
securities by lot and the holding periods of such
securities,
as of the
Closing Date, certified by the Treasurer or Assistant
Treasurer
of the
Trust in respect of the Acquired Fund;
7.3. The Trust, on behalf of the Acquired Fund,
shall have
delivered to the Income Trust and the Acquiring Fund on the
Closing Date
a
certificate executed in its name by its President or Vice
President and
its
Treasurer or Assistant Treasurer, in form and substance
satisfactory to
the
Income Trust and the Acquiring Fund and dated as of the
Closing
Date, to
the effect that the representations and warranties of the
Trust
and the
Acquired Fund made in this Agreement are true and correct at
and as of
the
Closing Date, except as they may be affected by the
transactions
contemplated by this Agreement; and
7.4. The Income Trust on behalf of the Acquiring
Fund shall
have received on the Closing Date a favorable opinion of
Sullivan &
Cromwell, counsel to the Trust and the Acquired Fund, in a
form
satisfactory to Christina T. Sydor, Esq., Secretary of the
Income Trust,
covering the following points:
That (a) the Trust is duly organized and validly
existing
under
the
laws of The Commonwealth of Massachusetts; (b) the Trust is
an
open-end
management investment company registered under the 1940 Act;
and (c)
this
Agreement, the reorganization provided for thereunder and
the
execution
of
this Agreement have been duly authorized and approved by all
requisite
action of the Trust and the Acquired Fund, and this
Agreement
has been
duly
executed and delivered by the Trust on behalf of the
Acquired
Fund and
is a
valid and binding obligation of the Trust and the Acquired
Fund
enforceable
in accordance with its terms against the assets of the
Acquired
Fund.
Such
opinion may state that it is solely for the benefit of the
Income Trust,
its Trustees, its officers and the Acquiring Fund. Such
counsel may
rely,
as to matters governed by the laws of The Commonwealth of
Massachusetts,
on
an opinion of Massachusetts counsel.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
TRUST,
ACQUIRED
FUND, THE ACQUIRING FUND AND THE INCOME TRUST
If any of the conditions set forth below do not
exist
on or
before the Closing Date with respect to the Income Trust
and
the
Acquiring
Fund, or the Trust and the Acquired Fund, the other parties
to
this
Agreement shall, at their option, not be required to
consummate
the
transactions contemplated by this Agreement:
8.1. This Agreement and the transactions
contemplated
herein
shall have been approved by the requisite vote of the
holders
of the
outstanding shares of the Acquired Fund in accordance with
the
provisions
of the Trust's Master Trust Agreement and By-laws and
certified
copies
of
the votes evidencing such approval shall have been delivered
to
the
Income
Trust and the Acquiring Fund. Notwithstanding anything
herein
to the
contrary, neither the Income Trust on behalf of the
Acquiring
Fund nor
the
Trust on behalf of the Acquired Fund may waive the
conditions
set forth
in
this paragraph 8.1;
8.2. On the Closing Date, no action, suit or
other
proceeding
shall be pending before any court or governmental agency in
which it is
sought to restrain or prohibit, or obtain damages or other
relief in
connection with, this Agreement or the transactions
contemplated herein;
8.3. All consents of other parties and all other
consents,
orders and permits of federal, state and local regulatory
authorities
(including those of the Commission and of state Blue Sky and
securities
authorities, including "no-action" positions of and
exemptive
orders
from
such federal and state authorities) deemed necessary by the
Income Trust
and the Acquiring Fund or the Trust and the Acquired Fund to
permit
consummation, in all material respects, of the transactions
contemplated
hereby shall have been obtained, except where failure to
obtain
any such
consent, order or permit would not involve a risk of a
material
adverse
effect on the assets or properties of the Acquiring Fund or
the
Acquired
Fund, provided that either party hereto may, for itself,
waive
any of
such
conditions;
8.4. The Registration Statement shall have become
effective
under the 1933 Act and no stop orders suspending the
effectiveness
thereof
shall have been issued and, to the best knowledge of the
parties hereto,
no
investigation or proceeding for that purpose shall have been
instituted
or
be pending, threatened or contemplated under the 1933 Act;
8.5. A dividend or dividends on the outstanding
shares of
the
Acquired Fund, shall have been declared and paid which,
together with
all
previous such dividends, shall have the effect of
distributing
to the
shareholders of the Acquired Fund all of the investment
company
taxable
income and exempt-interest income of the Acquired Fund for
all
taxable
years ending on or prior to the Closing Date. The dividend
declared and
paid by the Acquired Fund shall also include all of such
fund's
net
capital
gain realized in all taxable years ending on or prior to the
Closing
Date
(after reduction for any capital loss carryforward);
8.6. The parties shall have received a favorable
opinion of
Willkie Farr & Gallagher, addressed to Income Trust in
respect
of the
Acquiring Fund and the Trust in respect of the Acquired Fund
and
satisfactory to Christina T. Sydor, Esq., as Secretary of
each
of the
Funds, substantially to the effect that for federal income
tax
purposes:
(a) the transfer of all or substantially all of the
Acquired
Fund's
assets in exchange for the Acquiring Fund Shares and the
assumption by
the
Acquiring Fund of certain scheduled liabilities of the
Acquired
Fund
will
constitute a "reorganization" within the meaning of Section
368(a)(1)(C)
of
the Code, and the Acquiring Fund and the Acquired Fund are
each
a "party
to
a reorganization" within the meaning of Section 368(b) of
the
Code; (b)
no
gain or loss will be recognized by the Acquiring Fund upon
the
receipt
of
the assets of the Acquired Fund in exchange for the
Acquiring
Fund
Shares
and the assumption by the Acquiring Fund of certain
scheduled
liabilities
of the Acquired Fund; (c) no gain or loss will be recognized
by
the
Acquired Fund upon the transfer of the Acquired Fund's
assets
to the
Acquiring Fund in exchange for the Acquiring Fund Shares and
the
assumption
by the Acquiring Fund of certain scheduled liabilities of
the
Acquired
Fund
or upon the distribution (whether actual or constructive) of
the
Acquiring
Fund Shares to the Acquired Fund's shareholders; (d) no gain
or
loss
will
be recognized by shareholders of the Acquired Fund upon the
exchange of
their Acquired Fund shares for the Acquiring Fund Shares and
the
assumption
by the Acquiring Fund of certain scheduled liabilities of
the
Acquired
Fund; (e) the aggregate tax basis for the Acquiring Fund
Shares
received
by
each of the Acquired Fund's shareholders pursuant to the
Reorganization
will be the same as the aggregate tax basis of the Acquired
Fund shares
held by such shareholder immediately prior to the
Reorganization, and
the
holding period of the Acquiring Fund Shares to be received
by
each
Acquired
Fund shareholder will include the period during which the
Acquired Fund
shares exchanged therefor were held by such shareholder
(provided that
the
Acquired Fund shares were held as capital assets on the date
of
the
Reorganization); and (f) the tax basis of the Acquired
Fund's
assets
acquired by the Acquiring Fund will be the same as the tax
basis of such
assets to the Acquired Fund immediately prior to the
Reorganization, and
the holding period of the assets of the Acquired Fund in the
hands of
the
Acquiring Fund will include the period during which those
assets were
held
by the Acquired Fund.
Notwithstanding anything herein to the contrary,
neither the
Income Trust on behalf of the Acquiring Fund nor the Trust
on
behalf of
the
Acquired Fund may waive the conditions set forth in this
paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. The Income Trust and the Acquiring Fund
represent and
warrant to the Trust and the Acquired Fund, and the Trust
and
the
Acquired
Fund hereby represent and warrant to the Income Trust and
the
Acquiring
Fund, that there are no brokers or finders entitled to
receive
any
payments
in connection with the transactions provided for herein.
9.2. (a) Except as may be otherwise provided
herein,
Smith Barney Inc. shall each be liable for the expenses
Incurred in connection with entering into
and carrying out the provisions of this Agreement, including
the
expenses
of: (i) counsel and independent accountants associated with
the
Reorganization; (ii) printing and mailing the
Prospectus/Proxy
Statement
and soliciting proxies in connection with the meeting of
shareholders of
the Acquired Fund referred to in paragraph 5.2 hereof; (iii)
any special
pricing fees associated with the valuation of the Acquired
Fund's or the
Acquiring Fund's portfolio on the Closing Date; (iv)
expenses
associated
with preparing this Agreement and preparing and filing the
Registration
Statement under the 1933 Act covering the Acquiring Fund
Shares
to be
issued in the Reorganization; (v) registration or
qualification
fees and
expenses of preparing and filing such forms, if any,
necessary
under
applicable state securities laws to qualify the Acquiring
Fund
Shares to
be
issued in connection with the Reorganization. The Acquired
Fund shall
be
liable for: (i) all fees and expenses related to the
liquidation,
dissolution and termination of the Acquired Fund; and (ii)
fees
and
expenses of the Acquired Fund's custodian and transfer agent
incurred in
connection with the Reorganization. The Acquiring Fund
shall
be liable
for
any fees and expenses of the Acquiring Fund's custodian and
transfer
agent
incurred in connection with the Reorganization.
(b) Consistent with the provisions of paragraph
1.3,
the
Acquired Fund, prior to the Closing, shall pay for or
include
in the
unaudited Statement of Assets and Liabilities prepared
pursuant
to
paragraph 1.3 all of its known and reasonably estimated
expenses
associated
with the transactions contemplated by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has
made any
representation, warranty or covenant not set forth herein
and
that this
Agreement constitutes the entire agreement between the
parties.
10.2. The representations, warranties and
covenants
contained
in this Agreement or in any document delivered pursuant
hereto
or in
connection herewith shall survive the consummation of the
transactions
contemplated hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any
time
prior to
the Closing Date by: (1) the mutual agreement of the Trust,
on
behalf
of
the Acquired Fund, and the Income Trust, on behalf of the
Acquiring
Fund;
(2) the Trust on behalf of the Acquired Fund in the event
that
the
Income
Trust in respect of the Acquiring Fund shall, or the Income
Trust in
respect of the Acquiring Fund in the event that the Trust in
respect of
the
Acquired Fund shall, materially breach any representation,
warranty or
agreement contained herein to be performed at or prior to
the
Closing
Date;
or (3) a condition herein expressed to be precedent to the
obligations
of
the terminating party has not been met and it reasonably
appears that it
will not or cannot be met.
11.2. In the event of any such termination, there
shall be
no
liability for damages on the part of the Trust on behalf of
the
Acquired
Fund or the Income Trust on behalf of the Acquiring Fund or
their
respective Trustees or officers to the other party, but each
shall bear
the
expenses incurred by it incidental to the preparation and
carrying out
of
this Agreement as provided in paragraph 9.
12. AMENDMENTS
This Agreement may be amended, modified or
supplemented in
such
manner as may be mutually agreed upon in writing by the
authorized
officers
of the Trust on behalf of the Acquired Fund and the Income
Trust on
behalf
of the Acquiring Fund; provided, however, that following the
meeting of
the
Acquired Fund shareholders called by the Acquired Fund
pursuant
to
paragraph 5.2 of this Agreement, no such amendment may have
the
effect
of
changing the provisions for determining the number of the
Acquiring Fund
Shares to be issued to the Acquired Fund's shareholders
under
this
Agreement to the detriment of such shareholders without
their
further
approval.
13. NOTICES
Any notice, report, statement or demand required
or
permitted
by any provisions of this Agreement shall be in writing and
shall be
given
by prepaid telegraph, telecopy or certified mail addressed
to
the Trust
on
behalf of the Acquired Fund, 388 Greenwich Street, New York,
New York
10013, Attention: Heath B. McLendon; or to the Income Trust
on
behalf
of
the Acquiring Fund, 388 Greenwich Street, New York, New York
10013,
Attention: Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF
LIABILITY
14.1 The article and paragraph headings contained
in
this
Agreement are for reference purposes only and shall not
affect
in any
way
the meaning or interpretation of this Agreement.
14.2 This Agreement may be executed in any number
of
counterparts, each of which shall be deemed an original.
14.3 This Agreement shall be governed by and
construed in
accordance with the laws of the State of New York.
14.4 This Agreement shall bind and inure to the
benefit of
the
parties hereto and their respective successors and assigns,
but
no
assignment or transfer hereof or of any rights or
obligations
hereunder
shall be made by any party without the written consent of
the
other
parties. Nothing herein expressed or implied is intended or
shall be
construed to confer upon or give any person, firm,
corporation
or other
entity, other than the parties hereto and their respective
successors
and
assigns, any rights or remedies under or by reason of this
Agreement.
14.5 It is expressly agreed that the obligations
of
the
Trust
in respect of the Acquired Fund and the Income Trust in
respect
of the
Acquired Fund shall not be binding upon any of their
respective
Trustees,
shareholders, nominees, officers, agents or employees
personally, but
bind
only the trust property of the Acquired Fund or the
Acquiring
Fund as
provided in the trust instruments of the Trust and the
Income
Trust.
The
execution and delivery of this Agreement have been
authorized
by the
Trustees of each of the Trust on behalf of the Acquired Fund
and the
Income
Trust on behalf of the Acquiring Fund and this Agreement has
been
executed
by authorized officers of the Trust on behalf of the
Acquired
Fund and
the
Income Trust on behalf of the Acquiring Fund, acting as
such,
and
neither
such authorization by such Trustees nor such execution and
delivery by
such
officers shall be deemed to have been made by any of them
individually
or
to impose any liability on any of them personally, but shall
bind only
the
trust property of the Acquired Fund or the Acquiring Fund as
provided in
the Trust's or Income Trust's Master Trust Agreement, as the
case may
be.
IN WITNESS WHEREOF, each of the parties hereto has
caused
this
Agreement to be executed by its Chairman of the Board,
President or Vice
President and attested by its Secretary or Assistant
Secretary.
Attest: SMITH BARNEY INCOME TRUST
on behalf of the SMITH BARNEY INTERMEDIATE
MATURITY
CALIFORNIA
MUNICIPALS FUND
By:
Name: Heath B. McLendon
Title: Chairman of the Board
Attest: SMITH BARNEY MUNI FUNDS
on behalf of the CALIFORNIA
LIMITED TERM PORTFOLIO
By:
Name: Heath B. McLendon
Title: Chairman of the Board
SMITH BARNEY
INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
PROSPECTUS
January 29,
1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Intermediate Maturity California Municipals
Fund
(the
"Fund")
seeks to provide California investors with as high a level
of
current
in-
come exempt from Federal income taxes and California State
personal
income
tax as is consistent with preservation of principal by
investing in in-
vestment grade obligations issued by the State of California
and its po-
litical subdivisions, agencies and public authorities. The
Fund
is one
of
a number of funds, each having distinct investment
objectives
and
policies
making up the Smith Barney Income Trust (the "Trust"). The
Trust is an
open-end management investment company commonly referred to
as
a mutual
fund.
This Prospectus sets forth concisely certain information
about
the Fund,
including sales charges and service and distribution fees
and
expenses,
that prospective investors will find helpful in making an
investment
deci-
sion. Investors are encouraged to read this Prospectus
carefully and re-
tain it for future reference. Shares of the other funds
offered
by the
Trust are described in separate prospectuses that may be
obtained by
call-
ing or writing the Trust at the telephone number or address
set
forth
above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is
contained in a
Statement of Additional Information dated January 29, 1995,
as
amended
or
supplemented from time to time, that is available upon
request
and
without
charge by calling or writing the Trust at the telephone
number
or
address
set forth above or by contacting a Smith Barney Financial
Consultant.
The
Statement of Additional Information has been filed with the
Securities
and
Exchange Commission (the "SEC") and is incorporated by
reference into
this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR
HAS THE
SE-
CURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION
PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<S>
<C>
PROSPECTUS SUMMARY
3
FINANCIAL HIGHLIGHTS
10
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
12
VALUATION OF SHARES
26
DIVIDENDS, DISTRIBUTIONS AND TAXES
26
PURCHASE OF SHARES
30
EXCHANGE PRIVILEGE
36
REDEMPTION OF SHARES
39
MINIMUM ACCOUNT SIZE
41
PERFORMANCE
41
MANAGEMENT OF THE TRUST AND THE FUND
43
DISTRIBUTOR
44
ADDITIONAL INFORMATION
45
</TABLE>
No person has been authorized to give any information or to
make any
representations in connection with this offering other than
those con-
tained in this Prospectus and, if given or made, such other
information
or
representations must not be relied upon as having been
authorized by the
Fund or the distributor. This Prospectus does not constitute
an
offer by
the Fund or the distributor to sell or a solicitation of an
offer to buy
any of the securities offered hereby in any jurisdiction to
any
person
to
whom it is unlawful to make such offer or solicitation in
such
jurisdic-
tion.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the
detailed
infor-
mation appearing elsewhere in this Prospectus and in the
Statement of
Ad-
ditional Information. Cross references in this summary are
to
headings
in
the Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is a non-diversified
intermediate-
term mu-
nicipal bond fund that seeks to provide California investors
with as
high
a level of current income exempt from Federal income taxes
and
California
State personal income tax as is consistent with the
preservation of
prin-
cipal by investing in investment-grade obligations issued by
the State
of
California and its political subdivisions, agencies and
public
authori-
ties. The weighted average maturity of the Fund's portfolio
securities
will normally not be less than three nor more than 10 years.
The maximum
remaining maturity of the securities in which the Fund will
normally in-
vest will be no greater than 20 years. See "Investment
Objective and
Man-
agement Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers three
classes
of
shares
("Classes") to investors designed to provide them with the
flexibility
of
selecting an investment best suited to their needs. The
general
public
is
offered two Classes of shares: Class A shares and Class C
shares, which
differ principally in terms of sales charges and rates of
expenses to
which they are subject. A third Class of shares, Class Y
shares, is of-
fered only to investors meeting an initial investment
minimum
of
$5,000,000. See "Purchase of Shares" and "Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset value
plus
an ini-
tial sales charge of 2.00% and are subject to an annual
service
fee of
0.15% of the average daily net assets of the Class. The
initial
sales
charge may be waived for certain purchases. Purchases of
Class
A shares,
which when combined with current holdings of Class A shares
offered with
a
sales charge equal or exceed $500,000 in the aggregate, will
be
made at
net asset value with no initial sales charge, but will be
subject to a
contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made
within 12 months of purchase. See "Prospectus Summary -- No
Initial
Sales
Charge."
Class C Shares. Class C shares are sold at net asset value
with
no ini-
tial sales charge. They are subject to an annual service fee
of
0.15%
and
an annual distribution fee of 0.20% of the average daily net
assets of
the
Class, and investors pay a CDSC of 1.00% if they redeem
Class C
shares
within 12 months of purchase. The CDSC may be waived for
certain redemp-
tions. The Class C shares' distribution fee may cause that
Class to have
higher expenses and pay lower dividends than Class A shares.
Purchases
of
Class C shares, which when combined with current holdings of
Class C
shares of the Fund equal or exceed $500,000 in the
aggregate,
should be
made in Class A shares at net asset value with no sales
charge,
and will
be subject to a CDSC of 1.00% on redemptions made within 12
months of
pur-
chase.
Class Y Shares. Class Y shares are available only to
investors
meeting
an
initial investment minimum of $5,000,000. Class Y shares are
sold at net
asset value with no initial sales charge or CDSC. They are
not
subject
to
any service or distribution fees.
In deciding which Class of Fund shares to purchase,
investors
should
con-
sider the following factors, as well as any other relevant
facts and
cir-
cumstances:
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 to purchase shares
without
an
initial
sales charge and the shares are subject to lower ongoing
expenses over
the
term of the investment. As an alternative, Class C shares
are
sold
without
any initial sales charge so the entire purchase price is
immediately in-
vested in the Fund. Any investment return on these
additional
invested
amounts may partially or wholly offset the higher annual
expenses of
this
Class. Because the Fund's future return cannot be predicted,
however,
there can be no assurance that this would be the case.
Finally,
investors
should consider the effect of the CDSC period in the context
of
their
own
investment time frame.
Investors investing a minimum of $5,000,000 must purchase
Class
Y
shares,
which are not subject to an initial sales charge, CDSC or
service or
dis-
tribution fees. The maximum purchase amount for Class A
shares
is
$4,999,999 and Class C shares is $499,999. There is no
maximum
purchase
amount for Class Y shares.
No Initial Sales Charge. The initial sales charge on Class A
shares may
be waived for certain eligible purchasers, and the entire
purchase price
would be immediately invested in the Fund. In addition,
Class A
share
pur-
chases, which when combined with current holdings of Class A
shares of-
fered with a sales charge equal or exceed $500,000 in the
aggregate,
will
be made at net asset value with no initial sales charge, but
will be
sub-
ject to a CDSC of 1.00% on redemptions made within 12 months
of
purchase.
The $500,000 aggregate investment may be met by adding the
purchase to
the
net asset value of all Class A shares offered with a sales
charge held
in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed
under "Ex-
change Privilege." See "Purchase of Shares." Because the
ongoing
expenses
of Class A shares may be lower than those for Class C
shares,
purchasers
eligible to purchase Class A shares at net asset value
should
consider
doing so.
Smith Barney Financial Consultants may receive different
compensation
for
selling each Class of shares. Investors should understand
that
the
purpose
of the CDSC on the Class C shares is the same as that of the
initial
sales
charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and
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,
Dis-
tributions and Taxes" and "Exchange Privilege" for other
differences be-
tween the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the
Fund's
distribu-
tor, Smith Barney, a broker that clears securities
transactions
through
Smith Barney on a fully disclosed basis (an "Introducing
Broker") or an
investment dealer in the selling group. See "Purchase of
Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares
may
open an
account by making an initial investment of at least $1,000
for
each ac-
count. Investors in Class Y shares may open an account for
an
initial
in-
vestment of $5,000,000. Subsequent investments of at least
$50
may be
made
for all Classes. The minimum initial investment requirement
for
Class A
and Class C shares and the subsequent investment requirement
for all
Classes through the Systematic Investment Plan described
below
is $100.
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 Fund offers shareholders a
Systematic In-
vestment Plan under which they may authorize the automatic
placement of
a
purchase order each month or quarter for Fund shares in an
amount of at
least $100. 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 TRUST AND THE FUND Smith Barney Mutual
Funds
Management
Inc. ("SBMFM") serves as the Fund's investment adviser.
SBMFM
(formerly
known as Smith, Barney Advisers, Inc.) is a wholly owned
subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly
owned sub-
sidiary of The Travelers Inc. ("Travelers"), a diversified
financial
ser-
vices holding company engaged, through its subsidiaries,
principally in
four business segments: Investment Services, Consumer
Finance
Services,
Life Insurance Services and Property & Casualty Insurance
Services.
SBMFM also serves as the Fund's administrator. The Boston
Company Advi-
sors, Inc. ("Boston Advisors") serves as the Fund's sub-
administrator.
Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc.
("TBC"), which in turn is a wholly owned subsidiary of
Mellon
Bank
Corpo-
ration ("Mellon"). See "Management of the Trust and the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the
same Class of certain other funds of the Smith Barney Mutual
Funds at
the
respective net asset values next determined, plus any
applicable sales
charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the
prior
day gener-
ally is quoted daily in the financial section of most
newspapers and
also
is available from a Smith Barney Financial Consultant. See
"Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment
income are de-
clared daily and generally paid on the 10th day of the
calendar
month.
Distributions of net realized capital gains, if any, are
paid
annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on
shares of
any Class will be reinvested automatically, unless otherwise
specified
by
an investor, in additional shares of the same Class at
current
net asset
value. Shares acquired by reinvestments will not be subject
to
any sales
charge or CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS No assurance can be
given that
the Fund will achieve its investment objective. Shares of
the
Fund,
unlike
certain bank deposit accounts, are not guaranteed or insured
by
any Fed-
eral or state authority. Changes in interest rates generally
will result
in increases or decreases in the market value of the
obligations held by
the Fund. The yield of the Fund may not be as high as those
of
other
funds
that invest in lower quality and/or longer term securities.
The
Fund is
not a tax-exempt money market fund and therefore its
investment
portfolio
can be expected to experience greater volatility than that
of a
tax-
exempt
money market fund. The net asset value of the Fund will be
subject to
greater fluctuation to the extent that the Fund invests in
zero
coupon
se-
curities. The Fund's net asset value per share will
fluctuate
depending
on
a combination of factors such as current market interest
rates
and the
creditworthiness of the issuers in whose securities the Fund
invests.
The
Fund will not invest in obligations that are rated lower
than
Baa by
Moody's Investors Service, Inc. ("Moody's"), BBB by Standard
&
Poor's
Cor-
poration ("S&P") or BBB by Fitch Investors Service, Inc.
("Fitch"), at
the
time of purchase. The ratings of Moody's, S&P and Fitch
represent their
opinions as to the quality of the obligations that they
undertake to
rate;
the ratings are relative and subjective and are not absolute
standards
of
quality.
The Fund may invest up to 20% of its total assets in unrated
securities
that SBMFM determines to be of comparable quality to the
securities
rated
investment grade in which the Fund may invest. Dealers may
not
maintain
daily markets in unrated securities and retail secondary
markets for
many
of them may not exist; lack of markets may affect the Fund's
ability to
sell these securities when SBMFM deems it appropriate. The
Fund
has the
right to invest without limitation in state and local
obligations that
are
"private activity bonds," the income from which may be
taxable
as a spe-
cific preference item for purposes of the Federal
alternative
minimum
tax.
Thus, the Fund may not be a suitable investment for
investors
who are
sub-
ject to the alternative minimum tax.
Certain of the instruments held by the Fund, and certain of
the
investment
techniques that the Fund may employ, might expose the Fund
to
certain
risks. The instruments presenting the Fund with risks are
municipal
leases, zero coupon securities, custodial receipts,
municipal
obligation
components, floating and variable rate demand notes and
bonds,
and
partic-
ipation interests. Entering into securities transactions on
a
when-
issued
or delayed-delivery basis are investment techniques
involving
risks to
the
Fund. See "Investment Objective and Management Policies --
Investment
Techniques -- Risk Factors and Special Considerations" and
"Dividends,
Distributions and Taxes."
Investment in the Fund which is classified as a non-
diversified
fund,
may
present a greater risk than an investment in a diversified
fund. See
"In-
vestment Objective and Management Policies -- Risk Factors
and
Special
Considerations." Investment in the Fund involves risks and
special
consid-
erations applicable to the State of California. See
"Investment
Objective
and Management Policies -- Risk Factors and Special
Considerations."
THE FUND'S EXPENSES The following expense table lists the
costs
and ex-
penses an investor will incur, either directly or
indirectly,
as a
share-
holder of the Fund, based upon the maximum sales charge or
maximum CDSC
that may be incurred at the time of purchase or redemption
and,
unless
otherwise noted, the Fund's operating expenses for its most
recent
fiscal
year:
<TABLE>
<CAPTION>
CLASS A*
CLASS C
CLASS Y
<S> <C>
<C>
<C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00%
None
None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) 1.00%
1.00%
None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (net of waivers) 0.06%
0.06%
0.06%
12b-1 fees** 0.15%
0.35%
None
Other expenses*** 0.54%
0.54%
0.54%
TOTAL OPERATING EXPENSES
(after waivers) 0.75%
0.95%
0.60%
<FN>
*Purchases of Class A shares, which when combined with
current
holdings
of Class A shares offered with a sales charge, equal or
exceed
$500,000
in the aggregate, will be made at net asset value with no
sales
charge,
but may be subject to a CDSC of 1.00% on redemptions made
within 12
months.
**Class C shares are subject to an ongoing distribution fee
and, as a
re-
sult, long-term shareholders of Class C shares may pay
more
than the
economic equivalent of the maximum front-end sales charge
permitted
by
the National Association of Securities Dealers, Inc.
***For Class Y shares, "Other expenses" have been estimated
based on ex-
penses incurred by Class A shares because prior to
November
30, 1994
no
Class Y shares were sold.
</TABLE>
The sales charge and CDSC set forth in the above table are
the
maximum
charges imposed on purchases or redemptions of Fund shares
and
investors
actually may pay lower or no charges, depending on the
amount
purchased
and the length of time the shares are held. See "Purchase of
Shares" and
"Redemption of Shares." Smith Barney receives an annual 12b-
1
service
fee
of 0.15% of the value of average daily net assets of Class A
shares.
Smith
Barney also receives with respect to Class C shares an
annual
12b-1 fee
of
0.35% of the value of average daily net assets of that
Class,
consisting
of a 0.20% distribution fee and a 0.15% service fee. The
nature
of the
services for which the Fund pays management fees is
described
under
"Man-
agement of the Trust and the Fund." "Other expenses" in the
above table
includes fees for shareholder services not provided by Smith
Barney,
cus-
todial fees, legal and accounting fees, printing costs and
registration
fees, the costs of regulatory compliance, the costs
associated
with
main-
taining the Trust's legal existence and the costs involved
in
communicat-
ing with shareholders of the Fund.
During the fiscal year ended November 30, 1994, the Fund's
investment
ad-
viser and administrator voluntarily waived portions of their
respective
fees in the aggregate amount equal to 0.49% of the value of
the
Fund's
av-
erage daily net assets. This had the effect of lowering the
Fund's
overall
expenses ratio and increasing the returns available to
investors. If
these
fees had not been waived, the Fund's total operating
expenses
for Class
A
and Class C shares for the fiscal year ended November 30,
1994,
would
have
been 1.24% and 1.44%, respectively, as a percentage of the
value of the
Fund's average daily net assets.
EXAMPLE The following example is intended to assist an
investor
in
under-
standing the various costs that an investor in the Fund will
bear
directly
or indirectly. The example assumes payment by the Fund of
operating ex-
penses at the levels set forth in the table above. See
"Purchase of
Shares," "Redemption of Shares" and "Management of the Trust
and the
Fund."
<TABLE>
<CAPTION>
1 YEAR 3
YEARS
5 YEARS
10 YEARS
<S> <C> <C>
<C>
<C>
An investor would pay the following ex-
penses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemp-
tion at the end of each time period:
Class A $38 $44
$61
$111
Class C 20 30
53
117
Class Y 6 19
33
75
An investor would pay the following ex-
penses on the same investment, assuming
the same annual return and no redemp-
tion:
Class A $28 $44
$61
$111
Class C 10 30
53
117
Class Y 6 19
33
75
</TABLE>
The example also provides a means for the investor to
compare
expense
lev-
els of funds with different fee structures over varying
investment peri-
ods. To facilitate such comparison, all funds are required
to
utilize a
5.00% annual return assumption. However, the Fund'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.
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers &
Lybrand
L.L.P.,
independent accountants, whose report thereon appears in the
Fund's
Annual
Report dated November 30, 1994. This information should be
read
in con-
junction with the financial statements and related notes
that
also
appear
in the Fund's Annual Report, which is incorporated by
reference
into the
Statement of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR
YEAR YEAR
ENDED
ENDED ENDED
11/30/94*
11/30/93 11/30/92*
<S>
<C>
<C> <C>
Net asset value, beginning of year $
8.50 $
8.04 $ 7.90
Income from investment operations:
Net investment income+
0.39
0.39 0.35
Net realized and unrealized gain/(loss) on investments
(0.69)
0.46 0.14
Total from investment operations
(0.30)
0.85 0.49
Less distributions:
Distributions from net investment income
(0.39)
(0.39) (0.35)
Distributions from net realized capital gains
(0.01)
- -- --
Total distributions
(0.40)
(0.39) (0.35)
Net asset value, end of year $
7.80 $
8.50 $ 8.04
Total return++
(3.65)%
10.70% 6.33%
Ratios/supplemental data:
Net assets, end of year (in 000's)
$25,359
$32,514 $10,667
Ratio of operating expenses to average net assets+++
0.75%
0.72% 0.65%**
Ratio of net investment income to average net assets
4.73%
4.45% 4.81%**
Portfolio turnover rate
39%
16% 46%
<FN>
* The Fund commenced operations on December 31, 1991.
** Annualized.
+ Net investment income before waiver of fees by
investment
adviser,
ad-
ministrator and distributor for the year ended November
30,
1994 and
waiver of fees and reimbursement of expenses by
investment
adviser,
sub-investment adviser and administrator and/or
custodian
and
distribu-
tor for the year ended November 30, 1993 and the period
ended
November
30, 1992 was $0.35, $0.32 and $0.24, respectively.
++ Total return represents aggregate total returns for the
periods
indi-
cated and does not reflect any applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees
by
investment
adviser, administrator and distributor for the year
ended
November
30,
1994 and before waiver of fees and reimbursement of
expenses by in-
vestment adviser, sub-investment adviser and
administrator
and/or
cus-
todian and distributor for the year ended November 30,
1993
and the
period ended November 30, 1992 were 1.24%, 1.49% and
2.18%
respectively.
</TABLE>
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
YEAR
ENDED
11/30/94*
<S>
<C>
Net asset value, beginning of period
$ 7.76
Income from investment operations:
Net investment income+
0.01
Net realized and unrealized gain on investments
0.05#
Total from investment operations
0.06
Less distributions:
Distributions from net investment income
(0.02)
Total distributions
(0.02)
Net asset value, end of period
$ 7.80
Total return++
0.72%
Ratios/Supplemental data:
Net assets, end of period (in 000's)
$ 45
Ratio of operating expenses to average net assets+++
0.95%**
Ratio of net investment income to average net assets
4.53%**
Portfolio turnover rate
39%
<FN>
* The Fund commenced selling Class C shares on November 8,
1994.
** Annualized.
+ Net investment income before waiver of fees by
investment
adviser
and
administrator for the period ended November 30, 1994 was
$0.01.
++ Total return represents aggregate total return for the
period indi-
cated and does not reflect any
applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees
by
investment
adviser and administrator for the period ended November
30,
1994 was
1.44%.
# The amount in this caption for each share outstanding
throughout the
period may not accord with the change in aggregate gains
and losses
in
the portfolio securities for the period because of the
timing of
pur-
chases and withdrawals of shares in relation to the
fluctuating
market
values of the portfolio.
</TABLE>
As of November 30, 1994 the Fund had not sold any Class Y
shares, and
ac-
cordingly, no comparable financial information is available
at
this time
for that Class.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set out below is a description of the investment objective
and
principal
investment policies of the Fund. No assurance can be given
that
the Fund
will be able to achieve its investment objective, which may
be
changed
only with the approval of a majority of the Fund's
outstanding
shares.
The Fund's investment objective is to provide California
investors with
as
high a level of current income exempt from Federal income
taxes
and
Cali-
fornia State personal income taxes as is consistent with
preservation of
principal. Under normal market conditions, the Fund attempts
to
invest
100% in a portfolio of investment grade debt obligations
issued
by or on
behalf of the State of California and other states,
territories
and pos-
sessions of the United States, the District of Columbia and
their
respec-
tive authorities, agencies, instrumentalities and political
subdivisions
("Municipal Obligations"). For purposes of this Prospectus,
debt obliga-
tions issued by the State of California and its political
subdivisions,
agencies and public authorities (together with certain other
governmental
issuers such as the Commonwealth of Puerto Rico), the
interest
from
which
debt obligations is, in the opinion of bond counsel to the
issuer, ex-
cluded from gross income for Federal income tax purposes and
exempt from
California State personal income tax are defined as
"California
Exempt
Ob-
ligations." The Fund will operate subject to a fundamental
investment
pol-
icy providing that, under normal market conditions, the Fund
will invest
at least 80% of its net assets in California Exempt
Obligations.
The Fund is classified as a non-diversified fund under the
Investment
Com-
pany Act of 1940, as amended (the "1940 Act"), which means
that
the Fund
is not limited by the 1940 Act in the proportion of its
assets
that it
may
invest in the obligations of a single issuer. The Fund
intends
to
conduct
its operations, however, so as to qualify as a "regulated
investment
com-
pany" for purposes of the Internal Revenue Code of 1986, as
amended (the
"Code"), which will relieve the Fund of any liability for
Federal income
tax and California State franchise tax to the extent that
its
earnings
are
distributed to shareholders. To qualify as a regulated
investment
company,
the Fund will, among other things, limit its investments so
that, at the
close of each quarter of the taxable year (a) not more than
25%
of the
market value of the Fund's total assets will be invested in
the
securities
of a single issuer and (b) with respect to 50% of the market
value of
its
total assets, not more than 5% of the market value of its
total
assets
will be invested in the securities of a single issuer and
the
Fund will
not own more than 10% of the outstanding voting securities
of a
single
is-
suer.
The Fund will invest at least 80% of its total assets in
California
Exempt
Obligations rated investment grade, that is, rated no lower
than Baa,
MIG
3 or Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-
1
by Fitch.
Up to 20% of the Fund's total assets may be invested in
unrated
securities
that are deemed by SBMFM to be of a quality comparable to
investment
grade. The Fund will not invest in California Exempt
Obligations that
are
rated lower than Baa by Moody's, BBB by S&P or BBB by Fitch,
at
the time
of purchase. Although California Exempt Obligations rated
Baa
by
Moody's,
BBB by S&P or BBB by Fitch are considered to be investment
grade, they
may
be viewed as being subject to greater risks than other
investment grade
securities. California Exempt Obligations rated Baa by
Moody's,
for
exam-
ple, are considered medium grade obligations that lack
outstanding
invest-
ment characteristics and have speculative characteristics as
well. Cali-
fornia Exempt Obligations rated BBB by S&P are regarded as
having an
ade-
quate capacity to pay principal and interest. California
Exempt
Obligations rated BBB by Fitch are deemed to be subject to a
higher
like-
lihood that their rating will fall below investment grade
than
higher
rated bonds.
The ratings of Moody's, S&P and Fitch represent their
opinions
as to the
quality of the California Exempt Obligations that they
undertake to
rate;
the ratings are relative and subjective and are not absolute
standards
of
quality. SBMFM's judgment as to credit quality of a
California
Exempt
Ob-
ligation, thus, may differ from that suggested by the
ratings
published
by
a rating service. A description of Moody's, S&P and Fitch
ratings
relevant
to the Fund's investments is included as an appendix to the
Statement of
Additional Information. The policies of the Fund described
above as to
ratings of portfolio investments will apply only at the time
of
the pur-
chase of a security, and the Fund will not be required to
dispose of a
se-
curity in the event Moody's, S&P or Fitch downgrades its
assessment of
the
credit characteristics of the security's issuer.
California Exempt Obligations are classified as general
obligation
bonds,
revenue bonds and notes. General obligation bonds are
secured
by the
issu-
er's pledge of its full faith, credit and taxing power for
the
payment
of
principal and interest. Revenue bonds are payable from the
revenue
derived
from a particular facility or class of facilities or, in
some
cases,
from
the proceeds of a special excise or other specific revenue
source, but
not
from the general taxing power. Notes are short-term
obligations
of
issuing
municipalities or agencies and are sold in anticipation of a
bond sale,
collection of taxes or receipt of other revenues. California
Exempt
Obli-
gations bear fixed, floating and variable rates of interest,
and varia-
tions exist in the security of California Exempt
Obligations,
both
within
a particular classification and between classifications.
The yields on, and values of, California Exempt Obligations
are
dependent
on a variety of factors, including general economic and
monetary condi-
tions, conditions in the California Exempt Obligation
markets,
size of a
particular offering, maturity of the obligation and rating
of
the issue.
Consequently, California Exempt Obligations with the same
maturity,
coupon
and rating may have different yields or values, whereas
obligations of
the
same maturity and coupon with different ratings may have the
same yield
or
value. See "Risk Factors and Special Considerations --
California Exempt
Obligations."
Issuers of California Exempt Obligations may be subject to
the
provisions
of bankruptcy, insolvency and other laws, such as the
Federal
Bankruptcy
Reform Act of 1978, affecting the rights and remedies of
creditors. In
ad-
dition, the obligations of those issuers may become subject
to
laws en-
acted in the future by Congress, state legislatures or
referenda
extending
the time for payment of principal and/or interest, or
imposing
other
con-
straints upon enforcement of the obligations or upon the
ability of
munic-
ipalities to levy taxes. The possibility also exists that,
as a
result
of
litigation or other conditions, the power or ability of any
issuer to
pay,
when due, the principal of, and interest on, its obligations
may be
mate-
rially affected.
MATURITY OF OBLIGATIONS HELD BY THE FUND
SBMFM believes that the Fund may offer an attractive
investment
opportu-
nity for investors seeking a higher effective tax yield than
a
tax-
exempt
money market fund or a tax-exempt short-term bond fund and
less
fluctua-
tion in net asset value than a longer term tax-exempt bond
fund. The
Fund
will normally invest in intermediate maturity securities;
the
weighted
av-
erage maturity of the Fund will normally be not less than
three
nor more
than 10 years. The maximum remaining maturity of the
securities
in which
the Fund will normally invest will be no greater than 20
years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in California Obligations
that are
tax-
exempt "private activity bonds," as defined in the Code,
which
are in
most
cases revenue bonds. Private activity bonds generally do not
carry the
pledge of the credit of the issuing municipality, but are
guaranteed by
the corporate entity on whose behalf they are issued.
Interest
income on
certain types of private activity bonds issued after August
7,
1986 to
fi-
nance nongovernmental activities is a specific tax
preference
item for
purposes of the Federal individual and corporate alternative
minimum
taxes. Individual and corporate shareholders may be subject
to
a Federal
alternative minimum tax to the extent the Fund's dividends
are
derived
from interest on these bonds. Dividends derived from
interest
income on
California Exempt Obligations are a "current earnings"
adjustment item
for
purposes of the Federal corporate alternative minimum tax.
See
"Dividends,
Distributions and Taxes." Private activity bonds held by the
Fund will
be
included in the term California Exempt Obligations for
purposes
of
deter-
mining compliance with the Fund's policy of investing at
least
80% of
its
total assets in California Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in California Exempt
Obligations that
are repayable out of revenues generated from economically
related
projects
or facilities or debt obligations whose issuers are located
in
the same
state. Sizeable investments in these obligations could
involve
an in-
creased risk to the Fund should any of the related projects
or
facilities
experience financial difficulties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to an aggregate amount equal to 10%
of
its net
as-
sets in illiquid securities, which term includes securities
subject to
contractual or other restrictions on resale and other
instruments that
lack readily available markets. In addition, up to 5% of the
value of
the
Fund's assets may be invested in securities of entities that
have been
in
continuous operation for fewer than three years.
TYPES OF CALIFORNIA EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in
"municipal
leases." Municipal leases may take the form of a lease or an
installment
purchase contract issued by state and local government
authorities to
ob-
tain funds to acquire a wide variety of equipment and
facilities such as
fire and sanitation vehicles, computer equipment and other
capital
assets.
Interest payments on qualifying municipal leases are exempt
from Federal
income taxes and state income taxes within the state of
issuance.
Although
lease obligations do not constitute general obligations of
the
municipal-
ity for which the municipality's taxing power is pledged, a
lease
obliga-
tion is ordinarily backed by the municipality's covenant to
budget for,
appropriate and make the payments due under the lease
obligation.
However,
certain lease obligations contain "non-appropriation"
clauses
which pro-
vide 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 addition to the "non-
appropriation" risk,
these securities represent a relatively new type of
financing
that has
not
yet developed the depth of marketability associated with
more
conventional
bonds. Although "non-appropriation" lease obligations are
often
secured
by
the underlying property, disposition of the property in the
event of
fore-
closure might prove difficult. The Fund may invest in
municipal
leases
without non-appropriation clauses only when the municipality
is
required
to continue the lease under all circumstances except
bankruptcy. There
is
no limitation on the percentage of the Fund's assets that
may
be
invested
in municipal lease obligations. In evaluating municipal
lease
obligations,
SBMFM will consider such factors as it deems appropriate,
which
may in-
clude: (a) whether the lease can be canceled; (b) the
ability
of the
lease
obligee to direct the sale of the underlying assets; (c) the
general
cred-
itworthiness of the lease obligor; (d) the likelihood that
the
municipal-
ity will discontinue appropriating funding for the leased
property in
the
event such property is no longer considered essential by the
municipality;
(e) the legal recourse of the lease obligee in the event of
such a
failure
to appropriate funding; (f) whether the security is backed
by a
credit
en-
hancement such as insurance; and (g) any limitations which
are
imposed
on
the lease obligor's ability to utilize substitute property
or
services
other than those covered by the lease obligation.
Municipal leases that the Fund may acquire will be both
rated
and
unrated.
Rated leases include those rated investment grade at the
time
of invest-
ment or those issued by issuers whose senior debt is rated
investment
grade at the time of investment. The Fund may acquire
unrated
issues
that
SBMFM deems to be comparable in quality to rated issues in
which the
Fund
is authorized to invest. A determination that an unrated
lease
obligation
is comparable in quality to a rated lease obligation will be
subject to
oversight and approval by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered
illiquid
securities
unless the Trust's Board of Trustees determines on an
ongoing
basis that
the leases are readily marketable. An unrated municipal
lease
with a
non-
appropriation risk that is backed by an irrevocable bank
letter
of
credit
or an insurance policy issued by a bank or insurer deemed by
SBMFM to be
of high quality and minimal credit risk, will not be deemed
to
be
illiquid
solely because the underlying municipal lease is unrated, if
SBMFM
deter-
mines that the lease is readily marketable because it is
backed
by the
letter of credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its
assets in
zero coupon California Exempt Obligations. Zero coupon
California Exempt
Obligations are generally divided into two categories: pure
zero obliga-
tions, which are those that pay no interest for their entire
life and
zer-
o/fixed obligations, which pay no interest for some initial
period and
thereafter pay interest currently. In the case of a pure
zero
obligation,
the failure to pay interest currently may result from the
obligation's
having no stated interest rate, in which case the obligation
pays only
principal at maturity and is issued at a discount from its
stated
princi-
pal amount. A pure zero obligation may, in the alternative,
provide for
a
stated interest rate, but provide that no interest is
payable
until
matu-
rity, in which case accrued, unpaid interest on the
obligation
may be
cap-
italized as incremental principal. The value to the investor
of
a zero
coupon California Exempt Obligation consists of the economic
accretion
ei-
ther of the difference between the purchase price and the
nominal
princi-
pal amount (if no interest is stated to accrue) or of
accrued,
unpaid
in-
terest during the California Exempt Obligation's life or
payment
deferral
period.
Custodial Receipts. The Fund may acquire custodial receipts
or
certifi-
cates underwritten by securities dealers or banks that
evidence
ownership
of future interest payments, principal payments, or both, on
certain
Cali-
fornia Exempt Obligations. The underwriter of these
certificates or re-
ceipts typically purchases California Exempt Obligations and
deposits
the
obligations in an irrevocable trust or custodial account
with a
custodian
bank, which then issues receipts or certificates that
evidence
ownership
of the periodic unmatured coupon payments and the final
principal
payment
on the obligations. Custodial receipts evidencing specific
coupon or
prin-
cipal payments have the same general attributes as zero
coupon
California
Exempt Obligations described above. Although under the terms
of
a custo-
dial receipt, the Fund would be typically authorized to
assert
its
rights
directly against the issuer of the underlying obligation,
the
Fund could
be required to assert through the custodian bank those
rights
as may
exist
against the underlying issuer. Thus, in the event the
underlying issuer
fails to pay principal and/or interest when due, the Fund
may
be subject
to delays, expenses and risks that are greater than those
that
would
have
been involved if the Fund had purchased a direct obligation
of
the
issuer.
In addition, in the event that the trust or custodial
account
in which
the
underlying security has been deposited is determined to be
an
association
taxable as a corporation, instead of a non-taxable entity,
the
yield on
the underlying security would be reduced in recognition of
any
taxes
paid.
California Exempt Obligation Components. The Fund may invest
in
Califor-
nia Exempt Obligations, the interest rate on which has been
divided by
the
issuer into two different and variable components, which
together result
in a fixed interest rate. Typically, the first of the
components (the
"Auction Component") pays an interest rate that is reset
periodically
through an auction process, whereas the second of the
components (the
"Re-
sidual Component") pays a residual interest rate based on
the
difference
between the total interest paid by the issuer on the
California
Exempt
Ob-
ligation and the auction rate paid on the Auction Component.
The Fund
may
purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual
Components is
gener-
ally determined by subtracting the interest rate paid to the
holders of
Auction Components from a fixed amount, the interest rate
paid
to
Residual
Component holders will decrease as the Auction Component's
rate
increases
and increase as the Auction Component's rate decreases.
Moreover, the
mag-
nitude of the increases and decreases in market value of
Residual Compo-
nents may be larger than comparable changes in the market
value
of an
equal principal amount of a fixed rate California Exempt
Obligation
having
similar credit quality, redemption provisions and maturity.
Floating and Variable Rate Instruments. The Fund may
purchase
floating
and variable rate demand notes and bonds, which are
California
Exempt
Ob-
ligations normally having a stated maturity in excess of one
year, but
which permit their holder to demand payment of principal at
any
time, or
at specified intervals. The maturity of a floating or
variable
rate
demand
note or bond will not be deemed shortened by virtue of a
demand
feature
for purposes of calculating the Fund's net asset value or
determining
its
weighted average maturity.
The issuer of floating and variable rate demand obligations
normally has
a
corresponding right, after a given period, to prepay at its
discretion
the
outstanding principal amount of the obligations plus accrued
interest
upon
a specified number of days' notice to the holders of these
obligations.
The interest rate on a floating rate demand obligation is
based
on a
known
lending rate, such as a bank's prime rate, and is adjusted
automatically
each time that rate is adjusted. The interest rate on a
variable rate
de-
mand obligation is adjusted automatically at specified
intervals. Fre-
quently, floating and variable rate obligations are secured
by
letters
of
credit or other credit support arrangements provided by
banks.
Use of
let-
ters of credit or other credit support arrangements will not
adversely
af-
fect the tax-exempt status of these obligations. Because
they
are direct
lending arrangements between the lender and borrower,
floating
and vari-
able rate obligations will generally not be traded. In
addition, no sec-
ondary market generally exists for these obligations,
although
their
hold-
ers may demand their payment at face value. For these
reasons,
when
float-
ing and variable rate obligations held by the Fund are not
secured by
letters of credit or other credit support arrangements, the
Fund's right
to demand payment is dependent on the ability of the
borrower
to pay
prin-
cipal and interest on demand. SBMFM on behalf of the Fund,
will
consider
the creditworthiness of the issuers of floating and variable
rate demand
obligations in the Fund on an ongoing basis.
Participation Interests. The Fund may purchase from
financial
institu-
tions tax-exempt participation interests in California
Exempt
Obligations.
A participation interest gives the Fund an undivided
interest
in the
Cali-
fornia Exempt Obligation in the proportion that the Fund's
participation
interest bears to the total amount of the California Exempt
Obligation.
These instruments may have floating or variable rates of
interest. If
the
participation interest is unrated, it will be backed by an
irrevocable
letter of credit or guarantee of a bank that the Trust's
Board
of
Trustees
has determined meets certain quality standards or the
payment
obligation
otherwise will be collateralized by obligations of the
United
States
gov-
ernment and its agencies and instrumentalities ("U.S.
government securi-
ties"). The Fund will have the right, with respect to
certain
participa-
tion interests, to demand payment, on a specified number of
days'
notice,
for all or any part of the Fund's interest in the California
Exempt
Obli-
gation, plus accrued interest. The Fund intends to exercise
its
right
with
respect to these instruments to demand payment only upon a
default under
the terms of the California Exempt Obligation or to maintain
or
improve
the quality of its investment portfolio.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its
total assets
in cash or money market instruments, including taxable money
market in-
struments (collectively, "Taxable Investments"). In
addition,
when SBMFM
believes that market conditions warrant, the Fund may take a
temporary
de-
fensive posture and invest without limitation in short-term
California
Ex-
empt Obligations and Taxable Investments. To the extent the
Fund holds
Taxable Investments and, under certain market conditions,
certain
floating
and variable rate demand obligations or Auction Components,
the
Fund may
not achieve its investment objective.
Money market instruments in which the Fund may invest
include:
U.S. gov-
ernment securities; tax-exempt notes of municipal issuers
rated, at the
time of purchase, no lower than MIG 1 by Moody's, SP-1 by
S&P
or F-1 by
Fitch or, if not rated, by issuers having outstanding,
unsecured debt
then
rated within the three highest rating categories; bank
obligations (in-
cluding certificates of deposit, time deposits and bankers'
acceptances
of
domestic banks, domestic savings and loan associations and
similar
insti-
tutions); commercial paper rated no lower than P-1 by
Moody's,
A-1 by
S&P
or F-1 by Fitch or the equivalent from another major rating
service or,
if
unrated, of an issuer having an outstanding, unsecured debt
issue then
rated within the three highest rating categories; and
repurchase agree-
ments. At no time will the Fund's investments in bank
obligations,
includ-
ing time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest
include
direct
ob-
ligations of the United States and obligations issued by
U.S.
government
agencies and instrumentalities. Included among direct
obligations of the
United States are Treasury Bills, Treasury Notes and
Treasury
Bonds,
which
differ principally in terms of their maturities. Included
among
the
secu-
rities issued by U.S. government agencies and
instrumentalities
are:
secu-
rities that are supported by the full faith and credit of
the
United
States (such as Government National Mortgage Association
certificates);
securities that are supported by the right of the issuer to
borrow from
the United States Treasury (such as securities of Federal
Home
Loan
Banks); and securities that are supported by the credit of
the
instrumen-
tality (such as Federal National Mortgage Association and
Federal Home
Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques
described
below, which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may
purchase secu-
rities on a when-issued basis, or may purchase or sell
securities for
de-
layed delivery. In when-issued or delayed-delivery
transactions,
delivery
of the securities occurs beyond normal settlement periods,
but
no
payment
or delivery will be made by the Fund prior to the actual
delivery or
pay-
ment by the other party to the transaction. The Fund will
not
accrue in-
come with respect to a when-issued or delayed-delivery
security
prior to
its stated delivery date. The Fund will establish with
Boston
Safe
Deposit
and Trust Company ("Boston Safe"), the Trust's custodian, a
segregated
ac-
count consisting of cash or U.S. government securities in an
amount
equal
to the amount of the when-issued and delayed-delivery
purchase
commit-
ments. Placing securities rather than cash in a segregated
account may
have a leveraging effect on the Fund's net assets.
Stand-By Commitments. The Fund may acquire "stand-by
commitments" with
respect to California Exempt Obligations held in its
portfolio.
Under a
stand-by commitment, a broker, dealer or bank is obligated
to
repurchase
at the Fund's option specified securities at a specified
price
and, in
this way, stand-by commitments are comparable to put
options.
Each exer-
cise of a stand-by commitment, therefore, is subject to the
ability of
the
seller to make payment on demand. The Fund will acquire
stand-
by commit-
ments solely to facilitate portfolio liquidity and does not
intend to
ex-
ercise the rights afforded by the commitments for trading
purposes. The
Trust anticipates that stand-by commitments will be
available
from bro-
kers, dealers and banks without the payment of any direct or
indirect
con-
sideration. The Fund may pay for stand-by commitments if
payment is
deemed
necessary, thus increasing to a degree the cost of the
underlying
Califor-
nia Exempt Obligation and similarly decreasing the
security's
yield to
in-
vestors.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment
restrictions with
re-
spect to the Fund that may not be changed without approval
of a
majority
of the Fund's outstanding voting securities as defined in
the
1940 Act.
Included among those fundamental restrictions are the
following:
1. The Fund will not purchase securities other than
Municipal
and Cali-
fornia Exempt Obligations and Taxable Investments as those
terms are de-
fined in this Prospectus or the Statement of Additional
Information.
2. The Fund will not borrow money, except that the Fund may
borrow from
banks for temporary or emergency (not leveraging) purposes,
including
the
meeting of redemption requests and cash payments of
dividends
and
distri-
butions that might otherwise require the untimely
disposition
of securi-
ties, in an amount not to exceed 10% of the value of the
Fund's
total
as-
sets (including the amount borrowed) valued at market less
liabilities
(not including the amount borrowed) at the time the
borrowing
is made.
Whenever the Fund's borrowings exceed 5% of the value of its
total
assets,
the Fund will not make any additional investments.
3. The Fund will not lend money to other persons, except
through
purchas-
ing Municipal and California Exempt Obligations or Taxable
Investments
and
entering into repurchase agreements in a manner consistent
with
the
Fund's
investment objective.
4. The Fund will not invest more than 25% of the value of
its
total as-
sets in securities of issuers in any one industry, except
that
this
limi-
tation is not applicable to a Fund's investments in U.S.
government
secu-
rities.
5. The Fund will not pledge, hypothecate, mortgage or
otherwise
encumber
its assets, except to secure permitted borrowings.
Certain other investment restrictions adopted by the Fund
are
described
in
the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special
considerations,
such as those described below:
California Exempt Obligations. Even though California Exempt
Obligations
are interest-bearing investments that promise a stable
stream
of income,
their prices are inversely affected by changes in interest
rates and,
therefore, are subject to the risk of market price
fluctuations. The
val-
ues of California Exempt Obligations with longer remaining
maturities
typ-
ically fluctuate more than those of similarly rated
California
Exempt
Ob-
ligations with shorter remaining maturities such as the Fund
intends to
hold. The values of fixed- income securities also may be
affected by
changes in the credit rating or financial condition of the
issuing enti-
ties.
Opinions relating to the validity of Municipal Obligations
and
to the
ex-
emption of interest on them from Federal income taxes (and,
with respect
to California Exempt Obligations, to the exemption of
interest
on them
from California state personal income taxes) are rendered by
bond
counsel
to the respective issuers at the time of issuance. Neither
the
Fund nor
SBMFM will review the proceedings relating to the issuance
of
California
Exempt Obligations or the basis for opinions of counsel.
Potential Legislation. In past years, the United States
government has
enacted various laws that have restricted or diminished the
income tax
ex-
emption on various types of Municipal Obligations and may
enact
other
sim-
ilar laws in the future. If any such laws are enacted that
would reduce
the availability of California Exempt Obligations for
investment by the
Fund so as to affect the Fund's shareholders adversely, the
Trust will
re-
evaluate the Fund's investment objective and policies and
might
submit
possible changes in the Fund's structure to shareholders for
their
consid-
eration. If legislation were enacted that would treat a type
of
California
Exempt Obligation as taxable for Federal income tax
purposes,
the Fund
would treat the security as a permissible Taxable Investment
within the
applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated
securities
that SBMFM
determines to be of comparable quality to the rated
securities
in which
the Fund may invest. Dealers may not maintain daily markets
in
unrated
se-
curities and retail secondary markets for many of them may
not
exist. As
a
result, the Fund's ability to sell these securities when
SBMFM
deems it
appropriate may be diminished.
Municipal Leases. Municipal leases in which the Fund may
invest
have
spe-
cial risks not normally associated with Municipal
Obligations.
These
obli-
gations frequently contain non-appropriation clauses that
provide that
the
governmental issuer of the obligation need not make future
payments
under
the lease or contract unless money is appropriated for that
purpose by a
legislative body annually or on another periodic basis.
Municipal leases
have additional risks because they represent a type of
financing that
has
not yet developed the depth of marketability generally
associated with
other Municipal Obligations. Moreover, although a municipal
lease will
be
secured by financed equipment or facilities, the disposition
of
the
equip-
ment or facilities in the event of foreclosure might prove
difficult. In
addition, in certain instances the tax-exempt status of the
municipal
lease will not be subject to the legal opinion of a
nationally
recognized
bond counsel, although in all cases the Fund will require
that
a
municipal
lease purchased by the Fund be covered by a legal opinion to
the effect
that, as of each effective date of the municipal lease, the
lease is the
valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-
payment.
The
ability
of issuers of municipal leases to make timely lease payments
may be ad-
versely impacted in general economic downturns and as
relative
governmen-
tal cost burdens are allocated and reallocated among
Federal,
state and
local governmental units. Such non-payment would result in a
reduction
of
income to the Fund, and could result in a reduction in the
value of the
municipal lease experiencing non- payment and a potential
decrease in
the
net asset value of the Fund. Issuers of municipal securities
might seek
protection under the bankruptcy laws. In the event of
bankruptcy of such
an issuer, the Fund could experience delays and limitations
with respect
to the collection of principal and interest on such
municipal
leases and
the Fund may not, in all circumstances, be able to collect
all
principal
and interest to which it is entitled. To enforce its rights
in
the event
of a default in the lease payments, the Fund may take
possession of and
manage the assets securing the issuer's obligations on such
securities,
which may increase the Fund's operating expenses and
adversely
affect
the
net asset value of the Fund. Any income derived from the
Fund's
ownership
or operation of such assets may not be tax-exempt. In
addition,
the
Fund's
intention to qualify as a "regulated investment company"
under
the Code,
may limit the extent to which the Fund may exercise its
rights
by taking
possession of such assets, because as a regulated investment
company the
Fund is subject to certain limitations on its investments
and
on the na-
ture of its income.
Non-Publicly Traded Securities. As suggested above, the Fund
may, from
time to time, invest a portion of its assets in non-publicly
traded
Cali-
fornia Exempt Obligations. Non-publicly traded securities
may
be less
liq-
uid than publicly traded securities. Although non-publicly
traded
securi-
ties may be resold in privately negotiated transactions, the
prices
real-
ized from these sales could be less than those originally
paid
by the
Fund.
When-Issued and Delayed-Delivery Transactions. Securities
purchased on a
when-issued or delayed-delivery basis may expose the Fund to
risk
because
the securities may experience fluctuations in value prior to
their
deliv-
ery. Purchasing securities on a when-issued or delayed-
delivery
basis
can
involve the additional risk that the yield available in the
market when
the delivery takes place may be higher than that obtained in
the
transac-
tion itself.
Non-Diversified Classification. Investment in the Fund,
which
is classi-
fied as a non-diversified fund under the 1940 Act, may
present
greater
risks to investors than an investment in a diversified fund.
The invest-
ment return on a non-diversified fund typically is dependent
upon the
per-
formance of a smaller number of securities relative to the
number of
secu-
rities held in a diversified fund. The Fund's assumption of
large posi-
tions in the obligations of a small number of issuers will
affect the
value of its portfolio to a greater extent than that of a
diversified
fund
in the event of changes in the financial condition, or in
the
market's
as-
sessment, of the issuers.
Special Considerations Affecting the Fund. In seeking to
achieve its ob-
jective, the Fund may invest without limit in Municipal
Obligations
which
are private activity bonds. Moreover, although the Fund does
not
currently
intend to do so on a regular basis, it may invest more than
20%
of its
as-
sets in Municipal Obligations which are repayable out of
revenue streams
generated from economically related projects or facilities,
if
such in-
vestment is deemed necessary or appropriate by SBMFM. To the
extent the
Fund's assets are concentrated in Municipal Obligations
payable
from
reve-
nues on economically related projects and facilities, the
Fund
will be
subject to the particular risks presented by such projects
to a
greater
extent than it would be if the Fund's assets were not so
concentrated.
The payment of principal and interest on most securities
purchased by
the
Fund will depend on the ability of the issuers to meet their
obligations.
The Fund's portfolio will be affected by general changes in
interest
rates, which will result in increases or decreases in the
value
of the
ob-
ligations held by the Fund. The market value of the
obligations
in the
Fund's portfolio can be expected to vary inversely to
changes
in
prevail-
ing interest rates. On July 15, 1994, Moody's and S&P,
citing
the
State's
deteriorating financial position, lowered California's
general
obligation
bond rating from Aa to A1 and from A+ to A, respectively.
Investors should be aware that certain California
constitutional amend-
ments, legislative measures, executive orders,
administrative
regulations
and voter initiatives could result in certain adverse
consequences
affect-
ing California Exempt Obligations. For instance, certain
provisions of
the
California Constitution and statutes that limit the taxing
and
spending
authority of California governmental entities may impair the
ability of
the issuers of some California Exempt Obligations to
maintain
debt
service
on their obligations. Other measures affecting the taxing or
spending
au-
thority of California or its political sub-divisions may be
approved or
enacted in the future. Some of the significant financial
considerations
relating to the Fund's investments in California Exempt
Obligations are
summarized in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased
from
and sold
to
parties acting as either principal or agent. Newly issued
securities
ordi-
narily 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 Fund for
purchases and
sales undertaken through principal transactions, although
the
price paid
usually includes an undisclosed compensation to the dealer
acting as
agent.
The Fund cannot accurately predict its portfolio turnover
rate,
but
antic-
ipates that the annual turnover will not exceed 100%. An
annual
turnover
rate of 100% would occur when all of the securities held by
the
Fund are
replaced once during a period of one year. SBMFM will not
consider turn-
over rate a limiting factor in making investment decisions
consistent
with
the investment objective and policies of the Fund.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the
close of
reg-
ular trading on the NYSE on each day that the NYSE is open,
by
dividing
the value of the Fund's net assets attributable to each
Class
by the
total
number of shares of that Class outstanding.
Generally, the Fund's investments are valued at market value
or, in the
absence of a market value with respect to any securities, at
fair value
as
determined by or under the direction of the Trust's Board of
Trustees.
Short- term investments that mature in 60 days or less are
valued at
amor-
tized cost. Amortized cost involves valuing an investment at
its cost
ini-
tially 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. Further
information
regarding
the Fund's valuation policies is contained in the Statement
of
Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's policy to declare daily and distribute
monthly,
generally
on the 10th day of each calendar month, substantially all of
the Fund's
net investment income (that is, its income other than net
realized
capital
gains) and declare and distribute the Fund's net realized
capital gains,
if any, annually, normally at the end of the calendar year
in
which
earned
or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends or
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. In
order to avoid the application of a 4% nondeductible excise
tax
on
certain
undistributed amounts of ordinary income and capital gains,
the
Fund may
make a distribution shortly before December 31 of each year
of
any
undis-
tributed ordinary income or capital gains and expects to pay
any other
distributions as are necessary to avoid the application of
this
tax.
The per share dividends on Class C shares of the Fund may be
lower than
the per share dividends on Class A and Class Y shares
principally as a
re-
sult of the distribution fee applicable with respect to
Class C
shares.
The per share dividends on Class A shares of the Fund may be
lower than
the per share dividends on Class Y shares principally as a
result of the
service fee applicable to Class A shares. Distributions of
capital
gains,
if any, will be in the same amount for Class A, Class C and
Class Y
shares.
TAXES
The Fund has qualified and intends to continue to qualify
each
year as a
regulated investment company under the Code. Dividends paid
from the
Fund's net investment income (other than dividends derived
from
interest
earned on qualifying tax-exempt obligations as described
below)
and dis-
tributions of the Fund's net realized short-term capital
gains
are
taxable
to shareholders as ordinary income, regardless of how long
shareholders
in
the Fund have held their shares and whether the dividends or
distributions
are received in cash or reinvested in additional shares of
the
Fund.
Dis-
tributions of the Fund's net realized long-term capital
gains
will be
tax-
able to shareholders as long-term capital gains, regardless
of
how long
shareholders have held their shares of the Fund and whether
the
distribu-
tions are received in cash or are reinvested in additional
Fund
shares.
In
addition, as a general rule, a shareholder's gain or loss on
a
sale or
re-
demption of shares of the Fund will be a long-term capital
gain
or loss
if
the shareholder has held the shares for more than one year
and
will be a
short-term capital gain or loss if the shareholder has held
the
shares
for
one year or less.
Dividends paid by the Fund that are derived from interest
earned on
quali-
fying tax-exempt obligations are expected to be "exempt-
interest" divi-
dends that shareholders may exclude from their gross incomes
for Federal
income tax purposes if the Fund satisfies certain asset
percentage re-
quirements. Any exempt- interest dividends of the Fund
derived
from
inter-
est on California Exempt Obligations, the interest on which
is
a
specific
tax preference item for Federal income tax purposes, will be
a
specific
tax preference item for purposes of the Federal individual
and
corporate
alternative minimum taxes. In addition, all exempt-interest
dividends
will
be a component of the "current earnings" adjustment item for
purposes of
the Federal corporate alternative minimum income tax and
corporate
share-
holders may incur a larger Federal environmental tax
liability
through
the
receipt of Fund dividends and distributions from the Fund.
Dividends of
the Fund derived from interest on California Exempt
Obligations
will be
exempt from California State personal income (but not
corporate
franchise
or income) taxes.
Statements as to the tax status of the dividends and
distributions re-
ceived by shareholders of the Fund are mailed annually.
These
statements
set forth the dollar amount of income excluded from Federal
income taxes
and the dollar amount, if any, subject to Federal income
taxes.
Statements
from the Fund will also show the dollar amount of income
excluded or ex-
empted from California State personal income taxes and the
dollar
amount,
if any, subject to these taxes. These statements will also
designate the
amount of exempt- interest dividends that are a specific
preference item
for purposes of the Federal individual and corporate
alternative minimum
taxes and will indicate the shareholder's share of the
investment
expenses
of the Fund.
Shareholders of the Fund should consult their tax advisors
with
specific
reference to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows California taxpayers how to translate
Federal and
California State tax savings from investments such as the
Fund
into an
equivalent return from a taxable investment. To the extent
that
the
equiv-
alent taxable yields illustrated in this table are based on
an
effective
tax rate which combines the Federal and California marginal
income tax
rates, the table is not applicable to individuals who do not
pay
Califor-
nia State personal income (but not corporate franchise or
income) taxes.
The yields used below are for illustration only and are not
intended to
represent current or future yields for the Fund, which may
be
higher or
lower than those shown.
A CALIFORNIA
TAX-
EXEMPT
INCOME FUND
YIELD OF:
1995
COMBINED
CALIFORNIA
STATE FEDERAL AND
FEDERAL
TAXABLE INCOME* RATE*** RATE TAX BRACKET** 2.00% 3.00%
4.00%
5.00%
SINGLE JOINT
$ 0-23,350 $ 0-39,000 6.00% 15.00% 20.10%
2.50%
3.75%
5.01%6.25%
23,351-56,550 39,001-94,250 9.30 28.00 34.70 3.06
4.59 6.13
7.65
56,551-117,950 94,251-143,600 9.65 31.00 37.66 3.21
4.81 6.42
6.02
117,951-256,500 143,601-256,500 10.50 36.00 42.72 4.49
5.24 6.98
8.73
over 256,500 over 256,500 10.50 39.60 45.94 3.70
5.55 7.40
9.25
<TABLE>
<CAPTION>
A CALIFORNIA
TAX-
EXEMPT
INCOME FUND
YIELD
OF:
1995
COMBINED
CALIFORNIA
STATE FEDERAL
AND
FEDERAL
TAXABLE INCOME* RATE*** RATE
TAX
BRACKET** 6.00% 7.00% 8.00% 9.00%
SINGLE JOINT
<S> <C> <C> <C>
<C>
<C> <C> <C> <C>
$ 0-23,350 $ 0-39,000 6.00% 15.00%
20.10%
7.51% 8.76% 10.01% 11.26%
23,351-56,550 39,001-94,250 9.30 28.00
34.70
9.19 10.72 12.25 13.78
56,551-117,950 94,251-143,600 9.65 31.00
37.66
9.62 11.23 12.83 14.44
117,951-256,500 143,601-256,500 10.50 36.00
42.72
10.47 12.22 13.97 15.71
over 256,500 over 256,500 10.50 39.60
45.94
11.10 12.95 14.80 16.65
<FN>
* This amount represents taxable income as defined in the
Code. It is
assumed that taxable income as defined in the Code is
the
same as
under the California personal income tax law, however,
California
tax-
able income may differ due to differences in exemptions,
itemized
de-
ductions, and other items.
** For Federal tax purposes, these combined rates reflect
the
applicable
marginal rates for 1995, including indexing for
inflation.
These
rates
include the effect of deducting state and city taxes on
your Federal
return.
*** These rates represent the highest California personal
income tax
rates
within the applicable Federal income tax brackets for
1995.
Where
there is a difference between the California personal
income tax
rates
for single and married filing joint, an average rate was
used.
</TABLE>
PURCHASE OF SHARES
GENERAL
The Fund offers three Classes of shares. Class A shares are
sold to
inves-
tors with an initial sales charge and Class C shares are
sold
without an
initial sales charge but are subject to a CDSC payable upon
certain re-
demptions. Class Y shares are sold without an initial sales
charge or a
CDSC and are available only to investors investing a minimum
of
$5,000,000. See "Prospectus Summary -- Alternative Purchase
Arrangements"
for a discussion of factors to consider in selecting which
Class of
shares
to purchase.
Purchases of Fund shares must by made through a brokerage
account main-
tained with Smith Barney, an Introducing Broker or an
investment dealer
in
the selling group. When purchasing shares of the Fund,
investors must
specify whether the purchase is for Class A, Class C or
Class Y
shares.
No
maintenance fee will be charged by the Fund in connection
with
a
brokerage
account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account
by
making an
initial investment of at least $1,000 for each account in
the
Fund.
Inves-
tors in Class Y shares may open an account by making an
initial
investment
of $5,000,000. Subsequent investments of at least $50 may be
made for
all
Classes. For participants in the Fund's Systematic
Investment
Plan, the
minimum initial investment requirement for Class A and Class
C
shares
and
the subsequent investment requirement for all Classes is
$100.
There are
no minimum investment requirements in Class A shares for
employees of
Travelers and its subsidiaries, including Smith Barney,
Trustees of the
Trust and their spouses and children and unitholders who
invest
distribu-
tions from a UIT sponsored by Smith Barney. 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, The
Shareholder Services Group, Inc. ("TSSG"), a subsidiary of
First Data
Cor-
poration. Share certificates are issued only upon a
shareholder's
written
request to TSSG.
Purchase orders received by Smith Barney prior to the close
of
regular
trading on the NYSE, on any day the Fund calculates its net
asset value,
are priced according to the net asset value determined on
that
day.
Orders
received by dealers or Introducing Brokers prior to the
close
of regular
trading on the NYSE on any day the Fund calculates its net
asset value,
are priced according to the net asset value determined on
that
day, pro-
vided the order is received by Smith Barney prior to Smith
Barney's
close
of business (the "trade date"). Currently, payment for Fund
shares is
due
on the fifth business day after the trade date (the
"settlement
date").
The Fund anticipates that, in accordance with regulatory
changes, begin-
ning on or about June 1, 1995, the settlement date will be
the
third
busi-
ness day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any
time
by
purchas-
ing shares through a service known as the Systematic
Investment
Plan.
Under the Systematic Investment Plan, Smith Barney or TSSG
is
authorized
through preauthorized transfers of $100 or more to charge
the
regular
bank
account or other financial institution indicated by the
shareholder on a
monthly or quarterly basis to provide systematic additions
to
the share-
holder's Fund account. A shareholder who has insufficient
funds
to com-
plete the transfer will be charged a fee of up to $25 by
Smith
Barney or
TSSG. The Systematic Investment Plan also authorizes Smith
Barney to
apply
cash held in the shareholder's Smith Barney brokerage
account
or redeem
the shareholder's shares of a Smith Barney money market fund
to
make
addi-
tions 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 Fund
are as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES
CHARGE AS
REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF
AMOUNT
INVESTED % OF OFFERING PRICE
<S> <C> <C>
<C>
Less than $500,000 2.00%
2.04%
1.80%
$500,000 and over *
*
*
<FN>
* Purchases of Class A shares, which when combined with
current
holdings
of Class A shares offered with a sales charge equal or
exceed
$500,000
in the aggregate, will be made at net asset value without
any
initial
sales charge, but will be subject to a CDSC of 1.00% on
redemptions
made
within 12 months of purchase. The CDSC on Class A shares
is
payable to
Smith Barney, which compensates Smith Barney Financial
Consultants and
other dealers whose clients make purchases of $500,000 or
more. The
CDSC
is waived in the same circumstances in which the CDSC
applicable to
Class C shares is waived. See "Deferred Sales Charge
Alternatives" and
"Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the
sales
charge
and
may be deemed to be underwriters of the Fund as defined in
the
Securities
Act of 1933, as amended.
The $500,000 investment may be met by aggregating the
purchases
of Class
A
shares of the Fund made at one time by "any person," which
includes an
in-
dividual, his or her spouse and children, or a trustee or
other
fiduciary
of a single trust estate or single fiduciary account. It may
also be met
by aggregating the purchase with the net asset value of all
Class A
shares
offered with a sales charge held in funds sponsored by Smith
Barney
listed
under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value
without a
sales
charge in the following circumstances: (a) sales of Class A
shares to
Trustees of the Trust and employees of Travelers and its
subsidiaries,
or
to the spouses and children of such persons (including the
surviving
spouse of a deceased Trustee or employee, and retired
Trustees
or
employ-
ees); (b) offers of Class A shares to any other investment
company in
con-
nection with the combination of such company with the Fund
by
merger,
ac-
quisition 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
employ-
ment with Smith Barney), on the condition the purchase of
Class
A shares
is made with the proceeds of the redemption of shares of a
mutual fund
which (i) was sponsored by the Financial Consultant's prior
employer,
(ii)
was sold to the client by the Financial Consultant and (iii)
was subject
to a sales charge; (d) shareholders who have redeemed Class
A
shares in
the Fund (or Class A shares of another fund of the Smith
Barney
Mutual
Funds that are offered with a sales charge equal to or
greater
than the
maximum sales charge of the Fund) and who wish to reinvest
their redemp-
tion proceeds in the Fund, provided the reinvestment is made
within 60
calendar days of the redemption; (e) accounts managed by
registered in-
vestment advisory subsidiaries of Travelers; and (f)
investments of dis-
tributions from a UIT sponsored by Smith Barney. In order to
obtain such
discounts, the purchaser must provide sufficient information
at
the time
of purchase to permit verification that the purchase would
qualify for
the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund 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 Fund and of funds sponsored by Smith Barney which are
offered with a
sales charge listed under "Exchange Privilege" then held by
such person
and applying the sales charge applicable to such aggregate.
In
order to
obtain such discount, the purchaser must provide sufficient
information
at
the time of purchase to permit verification that the
purchase
qualifies
for purchase at net asset value. The right of accumulation
is
subject to
modification or discontinuance at any time with respect to
all
shares
pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, purchases 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, if any, 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 the
Smith Barney
Mutual Funds offered with a sales charge to, and share
holdings
of, all
members of the group. To be eligible for such purchase at
net
asset
value,
all purchases must be pursuant to an employer- or
partnership-
sanctioned
plan meeting certain requirements. One such requirement is
that
the plan
must be open to specified partners or employees of the
employer
and its
subsidiaries, if any. Such plan may, but is not required to,
provide for
payroll deductions. Smith Barney also may offer net asset
value
purchase
for aggregating related fiduciary accounts under such
conditions that
Smith Barney will realize economies of sales efforts and
sales
related
ex-
penses. An individual who is a member of a qualified group
may
also pur-
chase 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 Fund
shares
at a dis-
count and (c) satisfies uniform criteria which enable Smith
Barney to
re-
alize 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 Fund and the
members, and
must agree to include sales and other materials related to
the
Fund in
its
publications and mailings to members at no cost to Smith
Barney. In
order
to purchase at net asset value, the purchaser must provide
sufficient
in-
formation at the time of purchase to permit verification
that
the
purchase
qualifies for purchase at net asset value. Approval of group
purchases
at
net asset value is subject to the discretion of Smith
Barney.
LETTER OF INTENT
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 Fund 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
Consult-
ant or TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined
without an
ini-
tial sales charge so that the full amount of an investor's
purchase pay-
ment may be immediately invested in the Fund. A CDSC,
however,
may be
im-
posed on certain redemptions of these shares. "CDSC Shares"
are: (a)
Class
C shares; and (b) Class A shares, which when combined with
Class A
shares
offered with a sales charge currently held by an investor,
equal or
exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to
the
lesser of
the cost of the shares being redeemed or their net asset
value
at the
time
of redemption. CDSC Shares that are redeemed will not be
subject to a
CDSC
to the extent that the value of such shares represents: (a)
capital
appre-
ciation of Fund assets; (b) reinvestment of dividends or
capital gain
dis-
tributions; or (c) shares redeemed more than 12 months after
their pur-
chase. CDSC Shares are subject to a 1.00% CDSC if redeemed
within 12
months of purchase.
In determining the applicability of any CDSC, it will be
assumed that a
redemption is made first of shares representing capital
appreciation,
next
of shares representing the reinvestment of dividends and
capital gain
dis-
tributions 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 Fund shares being redeemed will be
considered
to
represent, as applicable, capital appreciation or dividend
and
capital
gain distribution reinvestments in such other funds. For
Federal income
tax purposes, the amount of the CDSC will reduce the gain or
increase
the
loss, as the case may be, on the amount realized on
redemption.
The
amount
of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100
Class C
shares
at
$10 per share for a cost of $1,000. Subsequently, the
investor
acquired
5
additional shares through dividend reinvestment. During the
tenth month
after the purchase, the investor decided to redeem $500 of
his
or her
in-
vestment. 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 rein-
vested dividend shares ($60). Therefore, $240 of the $500
redemption
pro-
ceeds ($500 minus $260) would be charged at a rate of 1.00%
(the
applica-
ble rate for Class C shares) for a total deferred sales
charge
of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege");
(b)
automatic cash withdrawals in amounts equal to or less than
1.00% per
month of the value of the shareholder's shares at the time
the
withdrawal
plan commences (see below) (provided, however, that
automatic
cash with-
drawals 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)
invol-
untary redemptions; and (e) redemptions of shares in
connection
with a
combination of the Fund with any investment company by
merger,
acquisition
of assets or otherwise. In addition, a shareholder who has
redeemed
shares
from other funds of the Smith Barney Mutual Funds may, under
certain
cir-
cumstances, reinvest all or part of the redemption proceeds
within 60
days
and receive pro rata credit for any CDSC imposed on the
prior
redemption.
CDSC waivers will be granted subject to confirmation (by
Smith
Barney in
the case of shareholders who are also Smith Barney clients
or
by TSSG in
the case of all other shareholders) of the shareholder's
status
or hold-
ings, 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 re-
quirements of the fund into which exchanges are made and a
sales charge
differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation
Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity
Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced
Portfolio
Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income Return Account
Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government
Portfolio
*Smith Barney Funds, Inc. -- Short-Term U.S. Treasury
Securities
Portfo-
lio
Smith Barney Funds, Inc. -- U.S. Government Securities
Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond
Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Limited Term
Portfolio
Smith Barney Muni Funds -- California Portfolio
Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
*Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
**Smith Barney Exchange Reserve Fund
*Smith Barney Money Funds, Inc. -- Cash Portfolio
*Smith Barney Money Funds, Inc. -- Government Portfolio
***Smith Barney Money Funds, Inc. -- Retirement Portfolio
*Smith Barney Municipal Money Market Fund, Inc.
*Smith Barney Muni Funds -- California Money Market
Portfolio
*Smith Barney Muni Funds -- New York Money Market
Portfolio
*Available for exchange with Class A and Class Y shares of
the Fund.
**Available for exchange with Class C shares of the Fund.
***Available for exchange with Class A shares of the Fund.
Class A Exchanges. Class A shares of the Smith Barney Mutual
Funds sold
without a sales charge or with a maximum sales charge of
less
than the
maximum charged by other Smith Barney Mutual Funds will be
subject to
the
appropriate "sales charge differential" upon the exchange of
such shares
for Class A shares of a fund sold with a higher sales
charge.
The "sales
charge differential" is limited to a percentage rate no
greater
than the
excess of the sales charge rate applicable to purchases of
shares of the
mutual fund being acquired in the exchange over the sales
charge rate(s)
actually paid on the mutual fund shares relinquished in the
exchange and
on any predecessor of those shares. For purposes of the
exchange privi-
lege, shares obtained through automatic reinvestment of
dividends and
cap-
ital gain distributions are treated as having paid the same
sales
charges
applicable to the shares on which the dividends or
distributions were
paid; however, if no sales charge was imposed upon the
initial
purchase
of
the shares, any shares obtained through automatic
reinvestment
will be
subject to a sales charge differential upon exchange. Class
A
shares
held
in the Fund prior to November 7, 1994, will be deemed to
have
paid a
maxi-
mum sales charge of 2.00% for exchange purposes.
Class C Exchanges. Upon an exchange, the new Class C shares
will be
deemed to have been purchased on the same date as the Class
C
shares of
the Fund that have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish
to
exchange
all or a portion of their Class Y shares for Class Y shares
in
any of
the
funds identified above may do so without imposition of any
charge.
Additional Information Regarding the Exchange Privilege.
Although the
ex-
change privilege is an important benefit, excessive exchange
transactions
can be detrimental to the Fund's performance and its
shareholders. SBMFM
may determine that a pattern of frequent exchanges is
excessive
and con-
trary to the best interests of the Fund's other
shareholders.
In this
event, SBMFM will notify Smith Barney, and Smith Barney may,
at
its dis-
cretion, decide to limit additional purchases and/or
exchanges
by the
shareholder. Upon such a determination, Smith Barney 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
share-
holder will be required to (a) redeem his or her shares in
the
Fund or
(b)
remain invested in the Fund or exchange into any of the
funds
of the
Smith
Barney Mutual Funds ordinarily available, which position the
shareholder
would expect to maintain for a significant period of time.
All
relevant
factors will be considered in determining what constitutes
an
abusive
pat-
tern of exchanges.
Exchanges will be processed at the net asset value next
determined, plus
any applicable sales charge differential. Redemption
procedures
discussed
below are also applicable for exchanging shares, and
exchanges
will be
made upon receipt of all supporting documents in proper
form.
If the ac-
count 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
re-
alized upon the exchange, depending upon the cost or other
basis of
shares
redeemed. Before exchanging shares, investors should read
the
current
pro-
spectus describing the shares to be acquired. The Fund
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 Fund
tendered
to it, as
described below, at a redemption price equal to the 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
re-
demption 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 di-
rectly. The redemption proceeds will be remitted on or
before
the
seventh
day following receipt of proper tender, except on any day on
which the
NYSE is closed or as permitted under the 1940 Act in
extraordinary
circum-
stances. The Fund anticipates that, in accordance with
regulatory
changes,
beginning on or about June 1, 1995, payment will be made on
the
third
business day after receipt of proper tender. 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 in-
struction and Smith Barney will benefit from the use of
temporarily
unin-
vested 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
inves-
tor's Financial Consultant, Introducing Broker or dealer in
the
selling
group or by submitting a written request for redemption to:
Smith Barney Intermediate Maturity California Municipals
Fund
Class A, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or
dollar
amount of shares to be redeemed, (b) identify the
shareholder's
account
number and (c) be signed by each registered owner exactly as
the shares
are registered. If the shares to be redeemed were issued in
certificate
form, the certificates must be endorsed for transfer (or be
accompanied
by
an endorsed stock power) and must be submitted to TSSG
together
with the
redemption request. Any signature appearing on a redemption
request,
share
certificate or stock power must be guaranteed by an eligible
guarantor
in-
stitution such as a domestic bank, savings and loan
institution,
domestic
credit union, member bank of the Federal Reserve System or
member firm
of
a national securities exchange. TSSG may require additional
supporting
documents for redemptions made by corporations, executors,
administrators,
trustees or guardians. A redemption request will not be
deemed
properly
received until TSSG receives all required documents in
proper
form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal
plan,
under
which shareholders who own shares with a value of at least
$10,000 may
elect to receive periodic cash payments of at least $100
monthly or
quar-
terly. The withdrawal plan will be carried over on exchanges
between
funds
or Classes of the Fund. 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 a shareholder's
shares
subject
to the CDSC.) For further information regarding the
automatic
cash with-
drawal plan, shareholders should contact a Smith Barney
Financial
Consult-
ant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any
shareholder's
account in the Fund if the aggregate net asset value of the
shares held
in
the Fund account is less than $500. (If a shareholder has
more
than one
account in this Fund, each account must satisfy the minimum
account
size.)
The Fund, however, will not redeem shares based solely on
market reduc-
tions in net asset value. Before the Fund exercises such
right,
sharehold-
ers will receive written notice and will be permitted 60
days
to bring
ac-
counts up to the minimum to avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30 day "yield"
and
"equiva-
lent taxable yield" for each Class of shares. The yield
refers
to the
in-
come generated by an investment in those shares over the 30
day
period
identified in the advertisement and is computed by dividing
the
net in-
vestment income per share earned by the Class during the
period
by the
maximum public offering price per share on the last day of
the
period.
This income is "annualized" by assuming the amount of income
is
generated
each month over a one-year period and is compounded semi-
annually. The
an-
nualized income is then shown as a percentage of the net
asset
value.
The equivalent taxable yield demonstrates the yield on a
taxable invest-
ment necessary to produce an after-tax yield equal to the
Fund's tax-
exempt yield for each Class. It is calculated by increasing
the
yield
shown for the Class to the extent necessary to reflect the
payment of
taxes at specified tax rates. Thus, the equivalent taxable
yield always
will exceed the Fund's yield. For more information on
equivalent taxable
yields, refer to the table under "Dividends, Distributions
and
Taxes."
TOTAL RETURN
From time to time, the Fund may include its total return,
average annual
total return and current dividend return in advertisements
and/or other
types of sales literature. These figures are computed
separately for
Class
A, Class C and Class Y shares of the Fund. These figures are
based on
his-
torical earnings and are not intended to indicate future
performance.
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 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 calcu-
lated 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
stan-
dard 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
ac-
count. The Fund calculates current dividend return for each
Class by
annu-
alizing the most recent monthly distribution and dividing by
the net
asset
value or the maximum public offering price (including sales
charge) on
the
last day of the period for which current dividend return is
presented.
The
current dividend return for each Class may vary from time to
time
depend-
ing on market conditions, the composition of its investment
portfolio
and
operating expenses. These factors and possible differences
in
the
methods
used in calculating current dividend return should be
considered when
com-
paring a Class' current return to yields published for other
investment
companies and other investment vehicles. The Fund may also
include
compar-
ative performance information in advertising or marketing
its
shares.
Such
performance information may include data from Lipper
Analytical
Services,
Inc. or similar independent services that monitor the
performance of mu-
tual funds or other industry publications. The Fund will
include perfor-
mance data for each Class in any advertisement or
information
including
performance data of the Fund.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the
Trust and
the
Fund rests with the Trust's Board of Trustees. The Trustees
approve all
significant agreements between the Trust and the persons and
companies
that furnish services to the Fund, including agreements with
the Fund's
investment adviser, administrator, sub-administrator,
distributor,
custo-
dian and transfer agent. The day-to-day operations of the
Fund
have been
delegated to the Fund's investment adviser, administrator
and
sub-
administrator. The Statement of Additional Information
contains
background
information regarding each Trustee of the Trust and the
executive
officers
of the Fund.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York
10013, serves
as the Fund's investment adviser pursuant to a transfer of
the
investment
advisory agreement, effective November 7, 1994, from its
affiliate,
Mutual
Management Corp. (Mutual Management Corp. and SBMFM are both
wholly
owned
subsidiaries of Holdings.) Investment advisory services
continue to be
provided to the Fund by the same portfolio managers who had
provided
ser-
vices under the agreement with Mutual Management Corp. SBMFM
(through
pre-
decessor entities) has been in the investment counseling
business since
1934 and is a registered investment adviser. SBMFM renders
investment
ad-
vice to investment companies that had aggregate assets under
management
as
of December 31, 1994, in excess of $50.4 billion.
Subject to the supervision and direction of the Trust's
Board
of
Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's stated
investment objective and policies, makes investment
decisions
for the
Fund, places orders to purchase and sell securities and
employs
profes-
sional portfolio managers and securities analysts who
provide
research
services to the Fund. For investment advisory services
rendered
to the
Fund, the Fund pays SBMFM a fee at the annual rate of 0.35%
of
the value
of the Fund's average daily net assets. For the fiscal year
ended
November
30, 1994, the Fund paid investment advisory fees to SBMFM
(and
its
prede-
cessor) in an amount equal to 0.04% of the Fund's average
daily
net as-
sets. During the same period, the Fund's investment adviser
waived
invest-
ment advisory fees in an amount equal to 0.31% of the value
of
the
Fund's
average daily net assets.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Portfolio Manager of SBMFM, has served as
Vice
President
and Investment Officer of the Fund since it commenced
operations on
Decem-
ber 31, 1991, and manages the day-to-day operations of the
Fund,
including
making all investment decisions.
Management's discussion and analysis, and additional
performance
informa-
tion regarding the Fund during the fiscal year ended
November
30, 1994,
is
included in the Annual Report dated November 30, 1994. A
copy
of the An-
nual Report may be obtained upon request without charge from
a
Smith
Bar-
ney Financial Consultant or by writing or calling the Fund
at
the
address
or phone number listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees
all
aspects
of
the Fund's administration. For administration services
rendered
to the
Fund, the Fund pays SBMFM a fee at the annual rate of 0.20%
of
the value
of the Fund's average daily net assets. For the fiscal year
ended
November
30, 1994, the Fund paid an administration fee of 0.02% of
the
value of
its
average daily net assets and the administrator voluntarily
waived 0.18%.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston,
Massachusetts
02108,
serves as the Fund's sub-administrator. Boston Advisors
provides invest-
ment management, investment advisory, administrative and/or
sub-
administrative services to investment companies which had
aggregate
assets
under management as of December 31, 1994, in excess of $69.2
billion.
Boston Advisors calculates the net asset value of the Fund's
shares and
generally assists in all aspects of the Fund's
administration
and opera-
tion. Under a sub-administration agreement dated July 20,
1994,
Boston
Ad-
visors is paid a portion of the administration fee paid by
the
Fund to
SBMFM at a rate agreed upon from time to time between Boston
Advisors
and
SBMFM. Prior to July 20, 1994, Boston Advisors served as the
Fund's
admin-
istrator.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York,
New
York
10013.
Smith Barney distributes shares of the Fund as principal
underwriter and
as such conducts a continuous offering pursuant to a "best
efforts" ar-
rangement 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 Fund under Rule 12b-1 under the 1940 Act (the
"Plan"),
Smith
Barney
is paid a service fee with respect to Class A and Class C
shares of the
Fund at the annual rate of 0.15% of the average daily net
assets of the
respective Class. Smith Barney is also paid a distribution
fee
with re-
spect to Class C shares at the annual rate of 0.20% of the
average daily
net assets attributable to that Class. The fees are used by
Smith Barney
to pay its Financial Consultants for servicing shareholder
accounts and,
in the case of Class C shares, to cover expenses primarily
intended to
re-
sult in the sale of those shares. These expenses include:
advertising
ex-
penses; the cost of printing and mailing prospectuses to
potential
inves-
tors; payments to and expenses of Smith Barney Financial
Consultants and
other persons who provide support services in connection
with
the
distri-
bution of shares; interest and/or carrying charges; and
indirect and
over-
head costs of Smith Barney associated with the sale of Fund
shares, in-
cluding 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 C shares, a
continuing fee
for
servicing shareholder accounts for as long as a shareholder
remains a
holder of that Class. Smith Barney Financial Consultants may
receive
dif-
ferent levels of compensation for selling different Classes
of
shares.
Payments under the Plan are not tied exclusively to the
shareholder dis-
tribution and service expenses actually incurred by Smith
Barney, and
the
payments may exceed expenses actually incurred by Smith
Barney.
The
Trust's Board of Trustees will evaluate the appropriateness
of
the Plan
and its payment terms with respect to the Fund on a
continuing
basis and
in doing so will consider all relevant factors, including
expenses borne
by Smith Barney and amounts it receives under the Plan.
ADDITIONAL INFORMATION
Each Class of the Fund represents an identical interest in
the
Fund's
in-
vestment portfolio. As a result, the Classes have the same
rights,
privi-
leges and preferences, except with respect to: (a) the
designation of
each
Class; (b) the effect of the respective sales charges for
each
Class;
(c)
the distribution and/or service fees borne by each Class
pursuant to the
Plan; (d) the expenses allocable exclusively to each Class;
(e)
voting
rights on matters exclusively affecting a single Class; and
(f)
the ex-
change privilege of each Class. The Trust's Board of
Trustees
does not
an-
ticipate that there will be any conflicts among the
interests
of the
hold-
ers of the different Classes. The Trustees, on an ongoing
basis, will
con-
sider whether any such conflict exists and, if so, take
appropriate
action.
When matters are submitted for shareholder vote,
shareholders
of each
Class will have one vote for each full share owned and a
proportionate,
fractional vote for any fractional share held of that Class.
Generally,
shares of the Fund will be voted on a Fund-wide basis on all
matters ex-
cept matters affecting only the interests of one Class, in
which case
only
shares of the affected Class would be entitled to vote.
The Fund does not hold annual shareholder meetings. There
normally will
be
no meetings of shareholders for the purpose of electing
Trustees unless
and until such time as less than a majority of the Trustees
holding
office
have been elected by shareholders, at which time the
Trustees
then in
of-
fice will call a shareholders' meeting for the election of
Trustees.
Shareholders of record of no less than two-thirds of the
outstanding
shares of the Trust may remove a Trustee through a
declaration
in
writing
or by vote cast in person or by proxy at a meeting called
for
that pur-
pose. The Trustees will call a meeting for any purpose upon
written re-
quest of shareholders holding at least 10% of the Trust's
outstanding
shares and the Trust will assist shareholders in calling
such a
meeting
as
required by the 1940 Act.
Boston Safe, an indirect wholly owned subsidiary of Mellon,
is
located
at
One Boston Place, Boston, Massachusetts 02108, and serves as
custodian
of
the Fund's investments.
TSSG is located at Exchange Place, Boston, Massachusetts
02109,
and
serves
as the Trust's transfer agent.
The Fund sends shareholders a semi-annual report and an
audited
annual
re-
port, each of which includes a listing of investment
securities
held by
the Fund. 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
sin-
gle copy of each report. In addition, the Fund also plans to
consolidate
the mailing of its Prospectus so that a shareholder having
multiple ac-
counts will receive a single Prospectus annually.
Shareholders
who do
not
want this consolidation to apply to their accounts should
contact their
Financial Consultants or TSSG.
STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY --,
1995
Acquisition Of The Assets Of
CALIFORNIA LIMITED TERM PORTFOLIO
a separate series of
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
(800) -
By And In Exchange For Class A, Class C and Class Y
Shares
Of
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS
FUND
a separate series of
SMITH BARNEY INCOME TRUST
388 Greenwich Street
New York, New York 10013
(800) -
This Statement of Additional Information, relating
specifically to
the proposed transfer of all or substantially all of the
assets
of
California Limited Term Portfolio (the "Acquired Fund"), a
separate
series
of Smith Barney Muni Funds (the "Trust") to Smith Barney
Income
Trust
("Income Trust") on behalf of Smith Barney Intermediate
Maturity
California
Municipals Fund (the "Acquiring Fund") in exchange for Class
A,
Class C
and
Class Y shares of the Acquiring Fund and the assumption by
the
Income
Trust
on behalf of the Acquiring Fund of certain scheduled
liabilities of the
Acquired Fund, consists of this cover page and the following
described
documents, each of which accompanies this Statement of
Additional
Information and is incorporated herein by reference.
1. Statement of Additional Information of Smith
Barney
Muni
Funds
dated November 7, 1994.
2. Statement of Additional Information of Smith
Barney
Income
Trust dated January 29, 1995.
3. Annual Report of Smith Barney Muni Funds -
California
Limited
Term Portfolio dated March 31, 1994.
4. Semi-Annual Report of Smith Barney Muni Funds -
California
Limited Term Portfolio dated September 30, 1994.
5. Annual Report of Smith Barney Intermediate
Maturity
California
Municipals Fund dated November 30, 1994.
6. Pro Forma Financial Statements.
This Statement of Additional Information is not a
prospectus.
A Prospectus/Proxy Statement, dated February --, 1995,
relating
to the
above-referenced matter may be obtained without charge by
calling or
writing either the Acquiring Fund or the Acquired Fund at
the
telephone
numbers or addresses set forth above or by contacting any
Smith
Barney
Financial Consultant or by calling toll-free 1-800- - .
This
Statement of Additional Information should be read in
conjunction with
the
Prospectus/Proxy Statement dated February --, 1995.
The date of this Statement of Additional
Information
is
February --, 1995.
STATEMENT OF ADDITIONAL INFORMATION
January 29, 1995
SMITH BARNEY
INCOME TRUST
[LOGO]
388 GREENWICH STREET NEW YORK, NEW YORK
10013__(212)
723-9218
This Statement of Additional Information supplements
the
information contained in the current Prospectuses of
Smith Barney
Limited Maturity Municipals Fund (the "Municipal
Fund"),
Smith
Barney Intermediate Maturity California Municipals
Fund
(the
"California Fund") and Smith Barney Intermediate
Maturity New
York
Municipals Fund (the "New York Fund") dated January
29,
1995, as
amended or supplemented from time to time and should
be
read in
conjunction with the Prospectuses. The Prospectuses
may
be
obtained by contacting a Smith Barney Financial
Consultant, or by
writing or calling Smith Barney Income Trust (the
"Trust"), of
which each of the Municipal Fund, California Fund and
New York
Fund (individually referred to as a "Fund" and
collectively
referred to as the "Funds") is a series, at the
address
or
telephone number set forth above. This Statement of
Additional
Information, although not in itself a prospectus, is
incorporated
by reference into each Prospectus in its entirety.
The executive officers of the Funds are employees
of
certain
of the organizations that provide services to the
Fund.
These
organizations are as follows:
<TABLE>
<CAPTION>
NAME
SERVICE
- --------------------------------------------------------- -
- ---
- ---------
- --------------------------------------------
<S>
<C>
Smith Barney Inc.
("Smith Barney").......................................
Distributor
Smith Barney Mutual Funds
Management Inc. ("SBMFM")..............................
Investment
Adviser and Administrator
The Boston Company Advisors, Inc.
("Boston Advisors")....................................
Sub-
Administrator
The Boston Safe Deposit and Trust Company
("Boston Safe")........................................
Custodian
The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation...................
Transfer
Agent
</TABLE>
These organizations and the functions that they
perform for
the Funds are discussed in the Prospectuses and in
this
Statement
of Additional Information.
<PAGE>
CONTENTS
For ease of reference, the section headings used in
this
Statement
of Additional Information are identical to those used
in
each
Prospectus except as noted in parentheses below.
<TABLE>
<S>
<C>
Management of the Trust and the
Funds............................
2
Investment Objectives and Management
Policies....................
5
Purchase of
Shares...............................................
30
Redemption of
Shares.............................................
31
Distributor.................................................
...
..
32
Valuation of
Shares..............................................
33
Exchange
Privilege...............................................
33
Performance
Data.................................................
34
(See in the Prospectuses "Performance")
Taxes.......................................................
...
..
36
(See in the Prospectuses "Dividends, Distributions and
Taxes")
Additional
Information...........................................
38
Financial
Statements.............................................
38
Appendix....................................................
...
..
A-1
</TABLE>
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUNDS
TRUSTEES AND OFFICERS OF THE TRUST
The names of the Trustees of the Trust and executive
officers
of the
Funds,
together with information as to their principal business
occupations,
are set
forth below. The executive officers of the Funds are
employees
of
organizations
that provide services to the Funds. Each Trustee who is an
"interested
person"
of the Trust, as defined in the Investment Company Act of
1940,
as
amended (the
"1940 Act"), is indicated by an asterisk.
Burt N. Dorsett, Trustee (age 64). Managing Partner of
Dorsett
McCabe
Management,
Inc., an investment counselling firm; Director of Research
Corporation
Technologies, Inc., a non-profit patent-clearing and
licensing
firm. His
address
is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (age 68). Chairman of the Board
and
President of
The Dress
Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New
York
10901.
*Heath B. McLendon, Chairman of the Board and Investment
Officer.
Managing
Director of SBMFM; Executive Vice President and Chairman of
Smith Barney
Strategy Advisers Inc.; prior to July 1993, Senior Executive
Vice
President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers");
Vice
Chairman of
Shearson Asset Management; a Director of PanAgora Asset
Management, Inc.
and
PanAgora Asset Management Limited. His address is 388
Greenwich
Street,
New
York, New York 10013.
Cornelius C. Rose, Jr., Trustee (age 61). President,
Cornelius C.
Rose
Associates,
Inc., Financial Consultants, and Chairman and Director of
Performance
Learning
Systems, an educational consultant. His address is P.O. Box
355, Fair
Oaks,
Enfield, New Hampshire 03748.
Stephen J. Treadway, President. Managing Director of
Smith
Barney;
Director
and President of Mutual Management Corp. and SBMFM; and
Trustee
of
Corporate
Income Realty Trust I. His address is 388 Greenwich Street,
New
York,
New York
10013.
____Joseph P. Deane, Vice President and Investment Officer.
Investment
Officer
of SBMFM; prior to November 7, 1994, Managing Director of
Greenwich
Street
Advisors; prior to July 1993, Managing Director of Shearson
Lehman
Advisors. His
address is 388 Greenwich Street, New York, New York 10013.
____Lawrence T. McDermott, Vice President and Investment
Officer.
Investment
Officer of SBMFM; prior to November 7, 1994, Managing
Director
of
Greenwich
Street Advisors; prior to July 1993, Managing Director of
Shearson
Lehman
Advisors, the predecessor to Greenwich Street Advisors. His
address is
388
Greenwich Street, New York, New York 10013.
____Lewis E. Daidone, Senior Vice President and Treasurer.
Managing
Director and
Chief Financial Officer of Smith Barney; Director and Senior
Vice
President of
SBMFM. His address is 388 Greenwich Street, New York, New
York
10013.
____Christina T. Sydor, Secretary. Managing Director of
Smith
Barney;
General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich
Street, New
York,
New York 10013.
____Each of the Trust's Trustees serves as a trustee,
general
partner
and/or
director of other mutual funds for which Smith Barney serves
as
distributor. As
of January 1, 1995, the Trustees and Officers owned less
than
1.00% of
each
Fund's outstanding shares.
____No officer, director or employee of Smith Barney or any
of
its
affiliates
receives any compensation from the Trust for serving as an
officer or
Trustee of
the Trust. The Trust pays each Trustee who is not an
officer,
director
or
employee of Smith Barney or any of its affiliates, a fee of
$4,000 per
annum
plus $500 per meeting attended, and reimburses them for
travel
and
2
<PAGE>
out-of-pocket expenses. For the calendar year ended December
31, 1994,
the
Trustees of the Trust were paid the following compensation:
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE
COMPENSATION
COMPENSATION FROM
THE
FROM THE SMITH
BARNEY
TRUSTEE TRUST MUTUAL FUNDS
----------------------------------- --------- -----------
- -
<S> <C> <C>
Burt N. Dorsett................... $ 6,500 $ 34,300
Elliot S. Jaffe....................... 6,500
33,300
Cornelius C. Rose, Jr........... 6,500 33,300
</TABLE>
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Trust pursuant to
a
transfer
of the
investment advisory agreement effective November 7, 1994
from
its
affiliate,
Mutual Management Corp. (Mutual Management Corp. and SBMFM
are
both
wholly owned
subsidiaries of Smith Barney Holdings Inc. ("Holdings").)
Holdings is a
wholly
owned subsidiary of The Travelers Inc. ("Travelers"). The
investment
advisory
agreement is dated July 30, 1993 (the "Advisory Agreement"),
and was
first
approved by the Trustees, including a majority of those
Trustees who are
not
"interested persons" of the Trust or Smith Barney, on April
7,
1993. The
services provided by SBMFM under the Advisory Agreement are
described in
the
Prospectuses under "Management of the Trust and the Fund."
SBMFM pays
the salary
of any officer and employee who is employed by both it and
the
Trust.
SBMFM
bears all expenses in connection with the performance of its
services.
____For the fiscal period from December 31, 1991 through
November 30,
1992, the
Funds paid Shearson Lehman Advisors, the Fund's predecessor
investment
adviser,
investment advisory fees and Shearson Lehman Advisors waived
fees and
reimbursed
expenses as follows:
<TABLE>
<CAPTION>
FEES
WAIVED
AND
EXPENSES
FUND FEES PAID
REIMBURSED
----------------------------------- --------- ---------
- ---
<S> <C> <C>
Municipal Fund..................... $ 0 $
67,265
California Fund.................... $ 0 $
58,703
New York Fund...................... $ 0 $
46,577
</TABLE>
____For the fiscal year ended November 30, 1993, the Funds
paid
Shearson
Lehman
Advisors and Greenwich Street Advisors investment advisory
fees
and
Shearson
Lehman Advisors and Greenwich Street Advisors waived fees
and
reimbursed
expenses as follows:
<TABLE>
<CAPTION>
FEES
WAIVED
AND
EXPENSES
FUND FEES PAID
REIMBURSED
----------------------------------- --------- ---------
- ---
<S> <C> <C>
Municipal Fund..................... $ 93,010
$135,127
California Fund.................... $ 0 $
83,727
New York Fund...................... $ 28,605
$130,230
</TABLE>
____For the fiscal year ended November 30, 1994, the Funds
paid
SBMFM
and/or its
predecessor investment adviser, investment advisory fees and
SBMFM
waived fees
and reimbursed expenses as follows:
<TABLE>
<CAPTION>
FEES
WAIVED
AND
EXPENSES
FUND FEES PAID
REIMBURSED
----------------------------------- --------- ---------
- ---
<S> <C> <C>
Municipal Fund..................... $245,303 $
82,149
California Fund.................... $ 12,828 $
98,519
New York Fund...................... $ 97,097
$144,592
</TABLE>
____SBMFM also serves as administrator to the Trust pursuant
to
a
written
agreement dated April 20, 1994 (the "Administration
Agreement"), which
was most
recently approved by the Trustees of the Trust, including a
majority of
Trustees
who are not "interested persons" of the Trust or SBMFM, on
July
20,
1994. The
services provided by SBMFM under the Administration
Agreement
are
described in
the Prospectuses under "Management of the Trust and the
Fund."
SBMFM
pays the
salary of any officer and employee who is employed by both
it
and the
Trust and
bears all expenses in connection with the performance of its
services.
____For the fiscal period from December 31, 1991 through
November 30,
1992, the
Funds paid Boston Advisors sub-investment advisory and
administration
fees and
Boston Advisors waived fees as follows:
<TABLE>
<CAPTION>
FUND FEES PAID FEES
WAIVED
----------------------------------- --------- ---------
- ---
<S> <C> <C>
Municipal Fund..................... $ 0 $
38,437
California Fund.................... $ 0 $
10,927
New York Fund...................... $ 0 $
23,884
</TABLE>
3
<PAGE>
____For the fiscal year ended November 30, 1993 the Funds
paid
Boston
Advisors
administration fees and Boston Advisors waived fees as
follows:
<TABLE>
<CAPTION>
FUND FEES PAID FEES
WAIVED
----------------------------------- --------- ---------
- ---
<S> <C> <C>
Municipal Fund..................... $ 52,571 $
77,793
California Fund.................... $ 0 $
39,799
New York Fund...................... $ 16,167 $
74,596
</TABLE>
____For the fiscal year ended November 30, 1994, the Funds
paid
administration
fees and fees were waived as follows:
<TABLE>
<CAPTION>
FUND FEES PAID FEES
WAIVED
----------------------------------- --------- ---------
- ---
<S> <C> <C>
Municipal Fund..................... $140,173 $
46,942
California Fund.................... $ 7,330 $
56,297
New York Fund...................... $ 55,483 $
82,625
</TABLE>
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors serves as sub-administrator to the Trust
pursuant to a
written
agreement (the "Sub-Administration Agreement") dated April
20,
1994,
which was
most recently approved by the Trust's Board of Trustees,
including a
majority of
Trustees who are not "interested persons" of the Trust or
Boston
Advisors, on
July 20, 1994. Under the Sub-Administration Agreement,
Boston
Advisors
is paid a
portion of the administration fee paid by the Trust to SBMFM
at
a rate
agreed
upon from time to time between Boston Advisors and SBMFM.
Boston
Advisors is a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"),
a
financial
services holding company, which is in turn a wholly owned
subsidiary of
Mellon
Bank Corporation ("Mellon").
____Certain of the services provided to the Trust by Boston
Advisors
pursuant to
the Sub-Administration Agreement are described in the
Prospectuses under
"Management of the Trust and the Fund." In addition to those
services,
Boston
Advisors pays the salaries of all officers and employees who
are
employed by
both it and the Trust, maintains office facilities for the
Trust,
furnishes the
Trust with statistical and research data, clerical help and
accounting,
data
processing, bookkeeping, internal auditing and legal
services
and
certain other
services required by the Trust, prepares reports to the
Trust's
shareholders and
prepares tax returns and reports to and filings with the
Securities and
Exchange
Commission (the "SEC") and state Blue Sky authorities.
Boston
Advisors
bears all
expenses in connection with the performance of its services.
____The Trust bears expenses incurred in its operation,
including:
taxes,
interest, brokerage fees and commissions, if any; fees of
Trustees who
are not
officers, directors, shareholders or employees of Smith
Barney,
SBMFM or
Boston
Advisors; SEC fees and state Blue Sky qualification fees;
charges of
custodians;
transfer and dividend disbursing agent fees; certain
insurance
premiums;
outside
auditing and legal expenses; costs of maintaining corporate
existence;
costs of
investor services (including allocated telephone and
personnel
expenses); costs
of preparing and printing prospectuses for regulatory
purposes
and for
distribution to existing shareholders; costs of
shareholders'
reports
and
shareholder meetings; and meetings of the officers or Board
of
Trustees
of the
Trust.
____SBMFM and Boston Advisors have agreed that if in any
fiscal
year the
aggregate expenses of the Trust (including fees pursuant to
the
Advisory
Agreement, Administration and Sub-Administration Agreements,
but
excluding
interest, taxes, brokerage fees paid pursuant to the Trust's
services
and
distribution plan, and, with the prior written consent of
the
necessary
state
securities commissions, extraordinary expenses) exceed the
expense
limitation of
any state having jurisdiction over the Trust, SBMFM and
Boston
Advisors
will, to
the extent required by state law, reduce their fees by the
amount of
such excess
expenses, such amount to be allocated between them in the
proportion
that their
respective fees bear to the aggregate of such fees paid by
the
Trust.
Such fee
reductions, if any, will be reconciled on a monthly basis.
The
most
restrictive
state limitation currently applicable to the Trust would
require SBMFM
and
Boston Advisors to reduce their fees in any year that such
expenses
exceed 2.50%
of the first $30 million of average daily net assets, 2.00%
of
the next
$70
million of average daily net assets and 1.50% of the
remaining
average
4
<PAGE>
daily net assets. No fee reduction was required for the
fiscal
period
ended
November 30, 1992, and the 1993 and 1994 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the
Trust.
O'Melveny
& Myers
acts as special California counsel for the California Fund
and
has
reviewed
the portions of
the Prospectus and this Statement of Additional Information
concerning
California taxes and the description of the special
considerations
relating to
investments in California municipal securities. The Trustees
who are not
"interested persons" of the Trust have selected Stroock &
Stroock &
Lavan as
their counsel.
____KPMG Peat Marwick LLP, independent accountants, 345 Park
Avenue, New
York,
New York 10154, have been selected to serve as auditors of
the
Trust and
to
render an opinion on the Trust's financial statements for
the
fiscal
year ended
November 30, 1995. Coopers & Lybrand L.L.P., independent
auditors,
served as
auditors of the Trust and rendered an opinion on the
financial
statements for
the fiscal year ended November 30, 1994.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objective of each
Fund
and the
principal
policies to be employed to achieve that objective.
Supplemental
information is
set out below concerning the types of securities and other
instruments
in which
the Funds may invest, the investment policies and strategies
that the
Funds may
utilize and certain risks attendant to those investments,
policies and
strategies.
UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States
government
or one
of its
agencies, authorities or instrumentalities ("U.S. government
securities") in
which each of the Municipal Fund, the California Fund and
the
New York
Fund may
invest include debt obligations of varying maturities issued
by
the
United
States Treasury or issued or guaranteed by an agency or
instrumentality
of the
United States government, including the Federal Housing
Administration,
Export-Import Bank of the United States, Small Business
Administration,
Government National Mortgage Association, General Services
Administration,
Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal
Intermediate Credit Banks, Federal National Mortgage
Association,
Maritime
Administration, Tennessee Valley Authority, District of
Columbia Armory
Board,
Student Loan Marketing Association, Resolution Trust
Corporation and
various
institutions that previously were or currently are part of
the
Farm
Credit
System (which has been undergoing a reorganization since
1987).
Direct
obligations of the United States Treasury include a variety
of
securities that
differ in their interest rates, maturities and dates of
issuance.
Because the
United States government is not obligated by law to provide
support to
an
instrumentality that it sponsors, none of the Funds will
invest
in
obligations
issued by an instrumentality of the United States government
unless
SBMFM
determines that the instrumentality's credit risk does not
make
its
securities
unsuitable for investment by the Fund.
MUNICIPAL OBLIGATIONS
Each of the Funds invests principally in debt obligations
issued by, or
on
behalf of, states, territories and possessions of the United
States and
the
District of Columbia and their political subdivisions,
agencies
and
instrumentalities or multistate agencies or authorities, the
interest
from which
debt obligations is, in the opinion of bond counsel to the
issuer,
excluded from
gross income for Federal income tax purposes ("Municipal
Obligations").
Municipal Obligations generally are understood to include
debt
obligations
issued to obtain funds for various public purposes,
including
the
construction
of a wide range of public facilities, refunding of
outstanding
obligations,
payment of general operating expenses and extensions of
loans
to public
institutions and facilities. Private activity bonds that are
issued by
or on
behalf of public authorities to finance privately operated
facilities
are
considered to be Municipal Obligations if the interest paid
on
them
qualifies as
excluded from gross income
5
<PAGE>
(but not necessarily from alternative minimum taxable
income)
for
Federal income
tax purposes in the opinion of bond counsel to the issuer.
Municipal Obligations may be issued to finance life care
facilities,
which
are an alternative form of long-term housing for the elderly
that offer
residents the independence of a condominium life-style and,
if
needed,
the
comprehensive care of nursing home services. Bonds to
finance
these
facilities
have been issued by various state industrial development
authorities.
Because
the bonds are secured only by the revenues of each facility
and
not by
state or
local government tax payments, they are subject to a wide
variety of
risks,
including a drop in occupancy levels, the difficulty of
maintaining
adequate
financial reserves to secure estimated actuarial
liabilities,
the
possibility of
regulatory cost restrictions applied to health care delivery
and
competition
from alternative health care or conventional housing
facilities.
MUNICIPAL LEASES
Municipal leases are Municipal Obligations that may take the
form of a
lease or
an installment purchase issued by state and local government
authorities
to
obtain funds to acquire a wide variety of equipment and
facilities such
as fire
and sanitation vehicles, computer equipment and other
capital
assets.
These
obligations have evolved to make it possible for state and
local
government
authorities to acquire property and equipment without
meeting
constitutional and
statutory requirements for the issuance of debt. Thus,
municipal leases
have
special risks not normally associated with Municipal
Obligations. These
obligations frequently contain "non-appropriation" clauses
that
provide
that the
governmental issuer of the municipal lease has no obligation
to
make
future
payments under the lease or contract unless money is
appropriated for
such
purposes by the legislative body on a yearly or other
periodic
basis. In
addition to the non-appropriation risk, municipal leases
represent a
type of
financing that has not yet developed the depth of
marketability
associated with
Municipal Obligations; moreover, although the obligations
will
be
secured by the
leased equipment, the disposition of the equipment in the
event
of
foreclosure
might prove difficult. In order to limit the risks, the Fund
will
purchase
either (a) municipal leases that are rated in the four
highest
categories by
Moody's Investor Services, Inc. ("Moody's") or Standard &
Poor's
Corporation
("S&P") or (b) unrated municipal leases that are purchased
principally
from
domestic banks or other responsible third parties that have
entered into
an
agreement with the Fund providing the seller will either
remarket or
repurchase
the municipal leases within a short period after demand by
the
Fund.
From time to time, proposals to restrict or eliminate
the
Federal
income tax
exemption for interest on Municipal Obligations have been
introduced
before
Congress. Similar proposals may be introduced in the future.
In
addition, the
Internal Revenue Code of 1986, as amended, (the "Code")
currently
provides that
small issue private activity bonds will not be tax-exempt if
the bonds
were
issued after December 31, 1986, and the proceeds were used
to
finance
projects
other than manufacturing facilities.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA
EXEMPT OBLIGATIONS
As indicated in the California Fund's Prospectus, the Fund
seeks its
objective
by investing principally in a portfolio of Municipal
Obligations, the
interest
from which is exempt from California State personal income
taxes
("California
Exempt Obligations").
Some of the significant financial considerations
relating
to the
Fund's
investments in California Exempt Obligations are summarized
below. This
summary
information is derived principally from official statements
and
prospectuses
relating to securities offerings of the State of California
and
various
local
agencies in California, available as of the date of this
Statement of
Additional
Information and does not purport to be a complete
description
of any of
the
considerations mentioned herein. The accuracy and
completeness
of the
information contained in such official statements has not
been
independently
verified.
6
<PAGE>
ECONOMIC FACTORS. The Governor's 1993-1994 Budget,
introduced
on January
8,
1993, proposed general fund expenditures of $37.3 billion,
with
projected
revenues of $39.9 billion. To balance the budget in the face
of
declining
revenues, the Governor proposed a series of revenue shifts
from
local
government, reliance on increased federal aid, and
reductions
in state
spending.
The Department of Finance of the State of California's
May
Revision
of
General Fund Revenues and Expenditures (the "May Revision"),
released on
May 20,
1993, projected the State would have an accumulated deficit
of
about
$2.75
billion by June 30, 1993 essentially unchanged from the
prior
year. The
Governor
proposed to eliminate this deficit over an 18-month period.
Unlike
previous
years, the Governor's Budget and May Revision did not
calculate
a "gap"
to be
closed, but rather set forth revenue and expenditure
forecasts
and
proposals
designed to produce a balanced budget.
The 1993-94 budget act (the "1993-94 Budget Act") was
signed by the
Governor
on June 30, 1993, along with implementing legislation. The
Governor
vetoed about
$71 million in spending.
The 1993-94 Budget Act is predicated on general fund
revenues and
transfers
estimated at $40.6 billion, $400 million below 1992-93 (and
the
second
consecutive year of actual decline). The principal reasons
for
declining
revenue
are the continued weak economy and the expiration (or
repeal)
of three
fiscal
steps taken in 1991 -- a half cent temporary sales tax, a
deferral of
operating
loss carryforwards, and repeal by initiative of a sales tax
on
candy and
snack
foods.
The 1993-94 Budget Act also assumes special fund
revenues
of $11.9
billion,
an increase of 2.9% over 1992-93.
The 1993-94 Budget Act includes general fund
expenditures
of $38.5
billion
(a 6.3% reduction from projected 1992-93 expenditures of
$41.1
billion),
in
order to keep a balanced budget within the available
revenues.
The 1993-
94
Budget Act also includes special fund expenditures of $12.1
billion, a
4.2%
increase. The 1993-94 Budget Act reflects the following
major
adjustments:
1. Changes in local government financing to shift about
$2.6
billion in
property taxes from cities, counties, special districts
and
redevelopment
agencies to school and community college districts,
thereby
reducing
general
fund support by an equal amount. About $2.5 billion
would
be
permanent,
reflecting termination of the State's "bailout" of local
governments
following the property tax cuts of Proposition 13 in
1978
(See
"Constitutional, Legislative and Other Factors" below).
The property tax revenue losses for cities and
counties
are
offset in
part by additional sales tax revenues and mandate
relief.
The
temporary 0.5%
sales tax was extended through December 31, 1993, for
allocation to
counties
for public safety programs. The voters approved
Proposition
172 in
November
1993 and the 0.5% sales tax was extended permanently for
public
safety
purposes.
Legislation also has been enacted to eliminate state
mandates in
order
to provide local governments flexibility in making their
programs
responsive
to local needs. Legislation provides mandate relief for
local
justice
systems which affect county audit requirements, court
reporter fees,
and
court consolidation; health and welfare relief involving
advisory
boards,
family planning, state audits and realignment
maintenance
efforts;
and
relief in areas such as county welfare department self-
evaluations,
noise
guidelines and recycling requirements.
2. The 1993-94 Budget Act projected K-12 Proposition 98
funding on
a cash
basis at the same per-pupil level as 1992-93 by
providing
schools a
$609
million loan payable from future years' Proposition 98
funds.
3. The 1993-94 Budget Act assumed receipt of about $692
million of
aid to
the State from the Federal government to offset health
and
welfare
costs
associated with foreign immigrants living in the
7
<PAGE>
State, which would reduce a like amount of general fund
expenditures. About
$411 million of this amount was one-time funding.
Congress
ultimately
appropriated only $450 million.
4. Reductions of $600 million in health and welfare
programs, and
$400
million in support for higher education (partly offset
by
fee
increases at
all three units of higher education) and various
miscellaneous cuts
(totalling approximately $150 million) in State
government
services
in many
agencies, up to 15%.
5. A 2-year suspension of the renters' tax credit ($390
million
expenditure
reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of
payment to
the
Public Employees Retirement Fund ($339 million) and a
change in
accounting
for debt service from accrual to cash basis, saving $107
million.
The 1993-94 Budget Act contains no general fund
tax/revenue
increases other
than a two-year suspension of the renters' tax credit. The
1993-
94
Budget Act
suspended the 4% automatic budget reduction "trigger," as
was
done in
1992-93 so
that cuts could be focused.
Administration reports during the course of the 1993-94
Fiscal Year
have
indicated that while economic recovery appears to have
started
in the
second
half of the fiscal year, recessionary conditions continued
longer than
has been
anticipated when the 1993-94 Budget Act was adopted.
Overall,
revenues
for the
1993-94 Fiscal Year were about $800 million lower than
original
projections, and
expenditures were about $780 million higher, primarily
because
of higher
health
and welfare caseloads, lower property taxes which require
greater State
support
for K-14 education to make up the shortfall, and lower than
anticipated
Federal
government payments for immigration-related costs. The
reports
in May
and June,
1994, indicated that revenues in the second half of the 1993-
94
Fiscal
Year have
been very close to the projections made in the Governor's
Budget of
January 10,
1994, which is consistent with a slow turnaround in the
economy.
The Department of Finance's July 1994 Bulletin,
including
the final
June
receipts, reported that June revenues were $114 million
(2.5%)
above
projection,
with final end-of-year results at $377 million (about 1%)
above
the May
Revision
projections. Part of this result was due to end-of-year
adjustments and
reconciliations. Personal income tax and sales tax continued
to
track
projections very well. The largest factor in the higher than
anticipated
revenues was from bank and corporation taxes, which were
$140
million
(18.4%)
above projection in June. While the higher June receipts are
reflected
in the
actual 1993-94 Fiscal Year cash flow results, and help the
starting cash
balance
for the 1994-95 Fiscal Year, the Department of Finance has
not
adjusted
any of
its revenue projections for the 1994-95 or 1995-96 Fiscal
Years.
During the 1993-94 Fiscal Year, the State implemented
the
deficit
retirement
plan, which was part of the 1993-94 Budget Act, by issuing
$1.2
billion
of
revenue anticipation warrants in February 1994 maturing
December 21,
1994. This
borrowing reduced the cash deficit at the end of the 1993-94
Fiscal
Year.
Nevertheless, because of the $1.5 billion variance from the
original
1993-94
Budget Act assumptions, the General Fund ended the fiscal
year
at June
30, 1994
carrying forward an accumulated deficit of approximately $2
billion.
Because of the revenue shortfall and the State's reduced
internal
borrowable
cash resources, in addition to the $1.2 billion of revenue
anticipation
warrants
issued as part of the deficit retirement plan, the State
issued
an
additional
$2.0 billion of revenue anticipation warrants, maturing July
26, 1994,
which
were needed to fund the State's obligations and expenses
through the end
of the
1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an
estimated 6.8
on the
Richter Scale struck Los Angeles. Significant property
damage
to private
and
public facilities occurred in a four-county area including
northern Los
Angeles
County, Ventura County, and parts of Orange and San
Bernardino
Counties,
which
were
8
<PAGE>
declared as State and Federal disaster areas by January 18.
Current
estimates of
total property damage (private and public) are in the range
of
$20
billion but
these estimates still are subject to change.
Despite such damage, on the whole, the vast majority of
structures
in the
areas, including large manufacturing and commercial
buildings
and all
modern
high-rise offices, survived the earthquake with minimal or
no
damage,
validating
the cumulative effect of strict building codes and thorough
preparation
for such
an emergency by the State and local agencies.
State-owned facilities, including transportation
corridors
and
facilities
such as Interstate Highways 5 and 10 and State Highways 14,
118
and 210
sustained damage. Most of the major highways (Interstate 5
and
10) have
now been
repaired. The campus of California State University at
Northridge (very
near the
epicenter) suffered an estimated $350 million damage,
resulting
in
temporary
closure of the campus. It has reopened using borrowed
facilities
elsewhere in
the area and many temporary structures. There was also some
damage to
the
University of California at Los Angeles and to an office
building in Van
Nuys
(now open after a temporary closure). Overall, except for
the
temporary
road and
bridge closures, and CSU-Northridge, the earthquake did not
and
is not
expected
to significantly affect State government operations.
The State in conjunction with the Federal government is
committed to
providing assistance to local governments, individuals and
businesses
suffering
damage as a result of the earthquake, as well as to provide
for
the
repair and
replacement of State-owned facilities. The Federal
government
will
provide
substantial earthquake assistance.
The President immediately allocated some available
disaster
funds,
and
Congress has approved additional funds for a total of at
least
$9.5
billion of
Federal funds for earthquake relief, including assistance to
homeowners
and
small businesses, and costs for repair of damaged public
facilities. The
Governor originally proposed that the State will have to pay
about $1.9
billion
for earthquake relief costs, including a 10% match to some
of
the
Federal funds,
and costs for some programs not covered by the Federal aid.
The
Governor
proposed to cover $1.05 billion of these costs from a
general
obligation
bond
issue which was on the June 1994 ballot, but it was not
approved by the
voters.
The Governor subsequently announced that the State's share
for
transportation
projects would come from existing Department of
Transportation
funds
(thereby
delaying other, non-earthquake related projects), that the
State's share
for
certain other costs (including local school building
repairs)
would come
from
reallocating existing bond funds, and that a proposed
program
for
homeowner and
small business aid supplemental to Federal aid would have to
be
abandoned. Some
other costs will be borrowed from the Federal government in
a
manner
similar to
that used by the State of Florida after Hurricane Andrew;
pursuant to
Senate
Bill 2383, repayment will have to be addressed in 1995-96 or
beyond.
The 1994-95 Fiscal Year will represent the fourth
consecutive year
the
Governor and Legislature will be faced with a very difficult
budget
environment
to produce a balanced budget. Many program cuts and
budgetary
adjustments have
already been made in the last three years. The Governor's
Budget
proposal, as
updated in May and June, 1994, recognized that the
accumulated
deficit
could not
be repaid in one year, and proposed a two-year solution. The
budget
proposal
sets forth revenue and expenditure forecasts and revenue and
expenditure
proposals which result in operating surpluses for the budget
for both
1994-95
and 1995-96, and lead to the elimination of the accumulated
budget
deficit,
estimated at about $2.0 billion at June 30, 1994, by June
30,
1996.
The 1994-95 Budget Act, signed by the Governor on July
8,
1994,
projects
revenues and transfers of $41.9 billion, $2.1 billion higher
than
revenues in
1993-94. This reflects the Administration's forecast of an
improving
economy.
Also included in this figure is a projected receipt of about
$360
million from
the Federal government to reimburse the State's cost of
incarcerating
9
<PAGE>
undocumented immigrants. The State will not know how much
the
Federal
government
will actually provide until the Federal fiscal year 1995
Budget
is
completed.
Completion of the Federal budget is expected by October
1994.
The
Legislature
took no action on a proposal in the January Governor's
Budget
to
undertake an
expansion of the transfer of certain programs to counties,
which would
also have
transferred to counties 0.5% of the State's current sales
tax.
The Budget Act projects Special Fund revenues of $12.1
billion, a
decrease
of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund
expenditures
of $40.9
billion,
an increase of $1.6 billion over 1993-94. The Budget Act
also
projects
Special
Fund expenditures of $13.7 billion, a 5.4% increase over
1993-
94
estimated
expenditures. The principal features of the Budget Act were
the
following:
1. Receipt of additional Federal aid in 1994-95 of
about
$400
million for
costs of refugee assistance and medical care for
undocumented
immigrants,
thereby offsetting a similar General Fund cost. The
State
will not
know how
much of these funds it will receive until the Federal
fiscal year
1995
Budget is passed.
2. Reductions of approximately $1.1 billion in health
and
welfare
costs. A
2.3% reduction in Aid to Families with Dependent
Children
("AFCD")
payments
(equal to about $56 million for the entire fiscal year)
has
been
suspended by court order.
3. A General Fund increase of approximately $38 million
in
support
for the
University of California and $65 million for California
State
University. It
is anticipated that student fees for both the U.C. and
the
C.S.U.
will
increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased
by
$526
million
from 1993-94 levels, representing an increase for
enrollment growth
and
inflation. Consistent with previous budget agreements,
Proposition
98
funding provides approximately $4,217 per student for K-
12
schools,
equal to
the level in the past three years.
5. Legislation enacted with the Budget clarifies laws
passed in
1992 and
1993 which require counties and other local agencies to
transfer
funds to
local school districts, thereby reducing State aid. Some
counties
had
implemented a method of making such transfers which
provided less
money for
schools if there were redevelopment agency projects. The
new
legislation
bans this method of transfer. If all counties had
implemented this
method,
General Fund aid to K-12 schools would have been $300
million higher
in each
of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for
anticipated
growth
in the
State's prison inmate population, including provisions
for
implementing
recent legislation (the so-called "Three Strikes" law)
which
requires
mandatory life prison terms for certain third-time
felony
offenders.
7. Additional miscellaneous cuts ($500 million) and
fund
transfers
($255
million) totalling in the aggregate approximately $755
million.
The 1994-95 Budget Act contains no tax increases. Under
legislation
enacted
for the 1993-94 Budget, the renters' tax credit was
suspended
for two
years
(1993 and 1994). A ballot proposition to permanently restore
the
renters' tax
credit after this year failed at the June, 1994 election.
The
Legislature
enacted a further one-year suspension of the renters' tax
credit, for
1995,
saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumes that the State will use a
cash
flow
borrowing
program in 1994-95 which combines one-year notes and two-
year
warrants,
which
have now been issued. Issuance of warrants allows the State
to
defer
repayment
of approximately $1.0 billion of its accumulated budget
deficit
into the
1995-96
Fiscal Year.
10
<PAGE>
The State's cash flow management plan for the 1994-95
fiscal year
included
the issuance of $4.0 billion of revenue anticipation
warrants
on July
26, 1994,
to mature on April 25, 1996, as part of a two-year plan to
retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-
96
Fiscal
Year is
necessarily more imprecise than for the current fiscal year
and
entails
greater
risks of variance from assumptions, and because the
Governor's
two-year
budget
plan assumes receipt of a large amount of Federal aid in the
1995-96
Fiscal Year
for immigration-related costs which is uncertain, the
Legislature
enacted a
backup budget adjustment mechanism to mitigate possible
deviations from
projected revenues, expenditures or internal borrowable
resources which
might
reduce available cash resources during the two-year plan, so
as
to
assure
repayment of the warrants.
Pursuant to Section 12467 of the California Government
Code, enacted
by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"),
the State
Controller was required to make a report by November 15,
1994
on whether
the
projected cash resources for the General Fund as of June 30,
1995 will
decrease
more than $430 million from the amount projected by the
State
in its
Official
Statement in July, 1994 for the sale of $4,000,000,000 of
Revenue
Anticipation
Warrants. On November 15, 1994, the State Controller issued
the
report
on the
State's cash position required by the Budget Adjustment Law.
The report
indicated that the cash position of the General Fund on June
30, 1995
would be
$581 million better than was estimated in the July, 1994
cash
flow
projections
and therefore, no budget adjustment procedures will be
invoked
for the
1994-95
fiscal year. The Law would only be implemented if the
State Controller estimated that borrowable resources on June
30, 1995
would be
at least $430 million LOWER than projected.
The State Controller's report identified a number of
factors which
have led
to the improved cash position of the State. Estimated
revenues
and
transfers for
the 1994-95 fiscal year other than Federal reimbursement for
immigration
costs
were up about $650 million. The largest portion of this was
in
higher
bank and
corporation tax receipts, but all major tax sources were
above
original
projections. However, most of the Federal immigration aid
revenues
projected in
connection with the 1994-95 Budget Act and in the July, 1994
cash flows
will not
be received, as indicated above, leaving a net increase in
revenues of
$322
million.
On the expenditure side, the State Controller reported
that
estimated
reduced caseload growth in health and welfare programs,
reduced
school
enrollment growth, and an accounting adjustment reducing a
transfer from
the
General Fund to the Special Fund for Economic Uncertainties
resulted in
overall
General Fund expenditure reductions (again before adjusting
for
Federal
aid) of
$672 million. However, the July, 1994 cash flows projected
that
General
Fund
health and welfare and education expenditures would be
offset
by the
anticipated
receipt of $407 million in Federal aid for illegal immigrant
costs. The
State
Controller now estimates that none of these funds will be
received, so
the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of
balances in
special
funds available for internal borrowing resulted in an
estimated
reduction of
such borrowable resources of $6 million. The combination of
these
factors
results in the estimated improvement of the General Fund's
cash
position
of $581
million. The State Controller's revised cash flow
projections
for 1994-
95 have
allocated this improvement to two line items: an increase
from
$0 to
$427
million in the estimated ending cash balance of the General
Fund on June
30,
1995, and an increase in unused borrowable resources of $154
million.
The State Controller's report indicated that there was
no
anticipated cash
impact in the 1994-95 fiscal year for recent initiative on
"three
strikes"
criminal penalties and illegal immigration which were
approved
by voters
on
November 8, 1994. At a hearing before a committee of the
Legislature on
November
15, 1994, both the Legislative Analyst and the Department of
11
<PAGE>
Finance concurred in the reasonableness of the State
Controller's
report. (The
Legislative Analyst had issued a preliminary analysis on
November 1,
1994 which
reached a conclusion very close to that of the State
Controller.) The
State
Controller's report makes no projections about whether the
Law
may have
to be
implemented in 1995-96. However, both the State Controller
and
the
Legislative
Analyst in the November 15 hearing noted that the July, 1994
cash flows
for the
1995-96 fiscal year place continued reliance on large
amounts
of federal
assistance for immigration costs, which did not materialize
this year,
indicating significant budget pressures for next year. The
Department of
Finance
indicated that the budgetary issues identified in the
hearing
would be
addressed
in the Governor's Budget proposal for the 1995-96 fiscal
year,
which
will be
released in early January, 1995.
The Director of Finance is required to include updated
cash-
flow
statements
for the 1994-95 and 1995-96 Fiscal Years in the May revision
to
the
1995-96
Fiscal Year budget proposal. By June 1, 1995, the State
Controller must
concur
with these updated statements or provide a revised estimate
of
the cash
condition of the General Fund for the 1994-95 and the 1995-
96
Fiscal
Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external
borrowing as
of June
30, 1996, thereby requiring the State to rely solely on
internal
borrowable
resources, expenditure reductions or revenue increases to
eliminate any
projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller
will,
in
conjunction
with the Legislative Analyst's Office, review the estimated
cash
condition of
the General Fund for the 1995-96 Fiscal Year. The "1996 cash
shortfall"
shall be
the amount necessary to bring the balance of unused
borrowable
resources
on June
30, 1996 to zero. On or before December 1, 1995, legislation
must be
enacted
providing for sufficient General Fund expenditure
reductions,
revenue
increases,
or both, to offset any such 1996 cash shortfall identified
by
the State
Controller. If such legislation is not enacted, within five
days
thereafter the
Director of Finance must reduce all General Fund
appropriations
for the
1995-96
Fiscal Year, except the Required Appropriations, by the
percentage equal
to the
ratio of said 1996 cash shortfall to total remaining General
Fund
appropriations
for the 1995-96 Fiscal Year, excluding the Required
Appropriations.
On December 6, 1994, Orange County, California and its
Investment
Pool (the
"Pool") filed for bankruptcy under Chapter 9 of the United
States
Bankruptcy
Code. Approximately 187 California public entities,
substantially all of
which
are public agencies within the County, are investors in the
Pool. Many
of the
agencies have various bonds, notes or other forms of
indebtedness
outstanding,
in some instances the proceeds of which have been invested
in
the Pool.
Such
agencies also have additional funds invested in the Pool.
Since
the
filing,
investor access to monies in the Pool has been by Court
order
only and
severely
limited. Various representatives of the County have
indicated
that the
Pool
expects to lose a substantial amount of its original
principal
invested.
The
County has employed various investment advisors to
restructure
the Pool.
Such
restructuring has resulted in the sale of a significant
amount
of the
Pool's
portfolio resulting in losses estimated to be in excess of
$2
billion.
The
County has indicated that further losses could be incurred
as
restructuring
continues. It is anticipated that such losses may result in
delays or
failures
of the County as well as investors in the Pool to make
scheduled debt
service
payments. Further, the County expects substantial budget
deficits to
occur in
Fiscal Year 1995 with possibly similar effects upon
operations
of
investors in
the Pool. The County failed to make certain deposits to a
fund
for
repayment of
$169,000,000 aggregate principal amount of its short term
indebtedness
resulting
in a technical default under its note resolution. There has
been no
default in
payment to noteholders. Principal and interest on such notes
is
due on
June 30,
1995. Additionally, the County has defaulted in its
obligation
to accept
tenders
of its $110,200,000 aggregate principal amount of its
Taxable
Pension
Obligation
Bonds, Series B used to finance
12
<PAGE>
County pension obligations. Interest at a rate set pursuant
to
the bond
documents has been timely paid on such Pension Bonds.
Principal
and
interest
payments on other indebtedness of the County and the
investors
will come
due at
various times and amounts throughout 1995. Both S&P and
Moody's
have
suspended
or downgraded ratings on various debt securities of the
County
and
certain of
the investors in the Pool. Such suspensions or downgradings
could affect
both
price and liquidity of such securities. The Fund is unable
to
predict
when funds
may be released from the Pool to investors, the amount of
such
funds, if
any,
whether additional technical and payment defaults by the
County
and/or
investors
in the pool and the financial impact upon the value of
securities of the
County
and the investors in the Pool.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain
California
constitutional
amendments, legislative measures, executive orders,
administrative
regulations
and voter initiatives could result in the adverse effects
described
below. The
following information constitutes only a brief summary, does
not purport
to be a
complete description, and is based on information drawn from
official
statements
and prospectuses relating to securities offerings of the
State
of
California and
various local agencies in California available as of the
date
of this
Statement
of Additional Information.
Certain of the California Municipal Obligations in which
the Fund
may invest
may be obligations of issuers which rely in whole or in part
on
California State
revenues for payment of these obligations. Property tax
revenues and a
portion
of the State's general fund surplus are distributed to
counties, cities
and
their various taxing entities and the State assumes certain
obligations
theretofore paid out of local funds. Whether and to what
extent
a
portion of the
State's general fund will be distributed in the future to
counties,
cities and
their various entities, is unclear.
In 1988, California enacted legislation providing for a
water's-edge
combined reporting method if an election fee was paid and
other
conditions met.
On October 6, 1993, California Governor Pete Wilson signed
Senate Bill
671
(Alquist) which modifies the unitary tax law by deleting the
requirements that a
taxpayer electing to determine its income on a water's-edge
basis pay a
fee and
file a domestic disclosure spreadsheet and instead requiring
an
annual
information return. Significantly, the Franchise Tax Board
can
no longer
disregard a taxpayer's election. The Franchise Tax Board is
reported to
have
estimated state revenue losses from the Legislation as
growing
from $27
million
in 1993-94 to $616 million in 1999-2000, but others,
including
Assembly
Speaker
Willie Brown, disagree with that estimate and assert that
more
revenue
will be
generated for California, rather than less, because of an
anticipated
increase
in economic activity and additional revenue generated by the
incentives
in the
Legislation.
Certain of the California Municipal Obligations may be
obligations
of
issuers who rely in whole or in part on ad valorem real
property taxes
as a
source of revenue. On June 6, 1978, California voters
approved
an
amendment to
the California Constitution known as Proposition 13, which
added Article
XIIIA
to the California Constitution. The effect of Article XIIIA
is
to limit
ad
valorem taxes on real property and to restrict the ability
of
taxing
entities to
increase real property tax revenues. On November 7, 1978,
California
voters
approved Proposition 8, and on June 3, 1986, California
voters
approved
Proposition 46, both of which amended Article XIIIA.
Section 1 of Article XIIIA limits the maximum ad valorem
tax on real
property to 1% of full cash value (as defined in Section 2),
to
be
collected by
the counties and apportioned according to law; provided that
the 1%
limitation
does not apply to ad valorem taxes or special assessments to
pay the
interest
and redemption charges on (a) any indebtedness approved by
the
voters
prior to
July 1, 1978, or (b) any bonded indebtedness for the
acquisition or
improvement
of real property approved on or after July 1, 1978, by two-
thirds of the
votes
cast by the voters voting on the proposition. Section 2 of
Article XIIIA
defines
"full cash value" to mean "the County Assessor's valuation
of
real
property as
shown on the
13
<PAGE>
1975/76 tax bill under 'full cash value' or, thereafter, the
appraised
value of
real property when purchased, newly constructed, or a change
in
ownership has
occurred after the 1975 assessment." The full cash value may
be
adjusted
annually to reflect inflation at a rate not to exceed 2% per
year, or
reduction
in the consumer price index or comparable local data, or
reduced in the
event of
declining property value caused by damage, destruction or
other
factors.
The
California State Board of Equalization has adopted
regulations,
binding
on
county assessors, interpreting the meaning of "change in
ownership" and
"new
construction" for purposes of determining full cash value of
property
under
Article XIIIA.
Legislation enacted by the California Legislature to
implement
Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that
notwithstanding any
other law, local agencies may not levy any ad valorem
property
tax
except to pay
debt service on indebtedness approved by the voters prior to
July 1,
1978, and
that each county will levy the maximum tax permitted by
Article
XIIIA of
$4.00
per $100 assessed valuation (based on the former practice of
using 25%,
instead
of 100%, of full cash value as the assessed value for tax
purposes). The
legislation further provided that, for the 1978/79 fiscal
year
only, the
tax
levied by each county was to be apportioned among all taxing
agencies
within the
county in proportion to their average share of taxes levied
in
certain
previous
years. The apportionment of property taxes for fiscal years
after
1978/79 has
been revised pursuant to Statutes of 1979, Chapter 282,
which
provides
relief
funds from State moneys beginning in fiscal year 1979/80 and
is
designed
to
provide a permanent system for sharing State taxes and
budget
funds with
local
agencies. Under Chapter 282, cities and counties receive
more
of the
remaining
property tax revenues collected under Proposition 13 instead
of
direct
State
aid. School districts receive a correspondingly reduced
amount
of
property
taxes, but receive compensation directly from the State and
are
given
additional
relief. Chapter 282 does not affect the derivation of the
base
levy
($4.00 per
$100 of assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition
4"
or the
"Gann
Initiative" was approved by the California voters, which
added
Article
XIIIB to
the California Constitution. Under Article XIIIB, State and
local
governmental
entities have an annual "appropriations limit" and are not
allowed to
spend
certain monies called "appropriations subject to limitation"
in
an
amount higher
than the "appropriations limit." Article XIIIB does not
affect
the
appropriation
of moneys which are excluded from the definition of
"appropriations
subject to
limitation," including debt service on indebtedness existing
or
authorized as of
January 1, 1979, or bonded indebtedness subsequently
approved
by the
voters. In
general terms, the "appropriations limit" is required to be
based on
certain
1978/79 expenditures, and is to be adjusted annually to
reflect
changes
in
consumer prices, population and certain services provided by
these
entities.
Article XIIIB also provides that if these entities' revenues
in
any year
exceed
the amounts permitted to be spent, the excess is to be
returned
by
revising tax
rates or fee schedules over the subsequent two years.
At the November 8, 1988 general election, California
voters
approved
an
initiative known as Proposition 98. This initiative amends
Article XIIIB
to
require that (a) the California Legislature establish a
prudent
state
reserve
fund in an amount as it shall deem reasonable and necessary
and
(b)
revenues in
excess of amounts permitted to be spent and which would
otherwise be
returned
pursuant to Article XIIIB by revision of tax rates or fee
schedules, be
transferred and allocated (up to a maximum of 4%) to the
State
School
Fund and
be expended solely for purposes of instructional improvement
and
accountability.
No such transfer or allocation of funds will be required if
certain
designated
state officials determine that annual student expenditures
and
class
size meet
certain criteria as set forth in Proposition 98. Any funds
allocated to
the
State School Fund shall
14
<PAGE>
cause the appropriation limits established in Article XIIIB
to
be
annually
increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that
the
State of
California provide a minimum level of funding for public
schools and
community
colleges. Commencing with the 1988-89 fiscal year, state
monies
to
support
school districts and community college districts shall equal
or
exceed
the
lesser of (a) an amount equalling the percentage of state
general
revenue bonds
for school and community college districts in fiscal year
1986-
87, or
(b) an
amount equal to the prior year's state general fund proceeds
of
taxes
appropriated under Article XIIIB plus allocated proceeds of
local taxes,
after
adjustment under Article XIIIB. The initiative permits the
enactment of
legislation, by a two-thirds vote, to suspend the minimum
funding
requirement
for one year.
On June 30, 1989, the California Legislature enacted
Senate
Constitutional
Amendment 1, a proposed modification of the California
Constitution to
alter the
spending limit and the education funding provisions of
Proposition 98.
Senate
Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition
111, was
approved by the voters and took effect on July 1, 1990.
Among a
number
of
important provisions, Proposition 111 recalculates spending
limits for
the State
and for local governments, allows greater annual increases
in
the
limits, allows
the averaging of two years' tax revenues before requiring
action
regarding
excess tax revenues, reduces the amount of the funding
guarantee in
recession
years for school districts and community college districts
(but
with a
floor of
40.9% of State general fund tax revenues), removes the
provision of
Proposition
98 which included excess moneys transferred to school
districts
and
community
college districts in the base calculation for the next year,
limits the
amount
of State tax revenue over the limit which would be
transferred
to school
districts and community college districts, and exempts
increased
gasoline taxes
and truck weight fees from the State appropriations limit.
Additionally,
Proposition 111 exempts from the State appropriations limit
funding for
capital
outlays.
Article XIIIB, like Article XIIIA, may require further
interpretation by
both the Legislature and the courts to determine its
applicability to
specific
situations involving the State and local taxing authorities.
Depending
upon the
interpretation, Article XIIIB may limit significantly a
governmental
entity's
ability to budget sufficient funds to meet debt service on
bonds and
other
obligations.
On November 4, 1986, California voters approved an
initiative
statute known
as Proposition 62. This initiative (a) requires that any tax
for general
governmental purposes imposed by local governments be
approved
by
resolution or
ordinance adopted by a two-thirds vote of the governmental
entity's
legislative
body and by a majority vote of the electorate of the
governmental
entity, (b)
requires that any special tax (defined as taxes levied for
other than
general
governmental purposes) imposed by a local governmental
entity
be
approved by a
two-thirds vote of the voters within that jurisdiction, (c)
restricts
the use of
revenues from a special tax to the purposes or for the
service
for which
the
special tax was imposed, (d) prohibits the imposition of ad
valorem
taxes on
real property by local governmental entities except as
permitted by
Article
XIIIA, (e) prohibits the imposition of transaction taxes and
sales taxes
on the
sale of real property by local governments, (f) requires
that
any tax
imposed by
a local government on or after August 1, 1985 be ratified by
a
majority
vote of
the electorate within two years of the adoption of the
initiative or be
terminated by November 15, 1988, (g) requires that, in the
event a local
government fails to comply with the provisions of this
measure,
a
reduction in
the amount of property tax revenue allocated to such local
government
occurs in
an amount equal to the revenues received by such entity
attributable to
the tax
levied in violation of the initiative, and (h) permits these
provisions
to be
amended exclusively by the voters of the State of
California.
15
<PAGE>
In September 1988, the California Court of Appeals in
CITY
OF
WESTMINSTER V.
COUNTY OF ORANGE 204 Cal. App. 3d 623, 215 Cal. Rptr. 511
(Cal.
Ct. App.
1988),
held that Proposition 62 is unconstitutional to the extent
that
it
requires a
general tax by a general law city, enacted on or after
August
1, 1985
and prior
to the effective date of Proposition 62, to be subject to
approval by a
majority
of voters. The Court held that the California Constitution
prohibits the
imposition of a requirement that local tax measures be
submitted to the
electorate by either referendum or initiative. It is not
possible to
predict the
impact of this decision on charter cities, on special taxes
or
on new
taxes
imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved
Proposition
87.
Proposition
87 amended Article XVI, Section 16, of the California
Constitution by
authorizing the California Legislature to prohibit
redevelopment
agencies from
receiving any of the property tax revenue raised by
increased
property
tax rates
levied to repay bonded indebtedness of local governments
which
is
approved by
voters on or after January 1, 1989. It is not possible to
predict
whether the
California Legislature will enact such a prohibition nor is
it
possible
to
predict the impact of Proposition 87 on redevelopment
agencies
and their
ability
to make payments on outstanding debt obligations.
Certain California Exempt Obligations in which the Fund
may
invest
may be
obligations that are payable solely from the revenues of
health
care
institutions. Certain provisions under California law may
adversely
affect such
revenues and, consequently, payment on those California
Exempt
Obligations.
The Federally sponsored Medicaid program for health care
services to
eligible welfare beneficiaries in California is known as the
Medi-Cal
program.
Historically, the Medi-Cal program has provided for a cost-
based system
of
reimbursement for inpatient care furnished to Medi-Cal
beneficiaries by
any
hospital wanting to participate in the Medi-Cal program,
provided such
hospital
met applicable requirements for participation. California
law
now
provides that
the State of California shall selectively contract with
hospitals to
provide
acute inpatient services to Medi-Cal patients. Medi-Cal
contracts
currently
apply only to acute inpatient services. Generally, such
selective
contracting is
made on a flat per diem payment basis for all services to
Medi-
Cal
beneficiaries, and generally such payment has not increased
in
relation
to
inflation, costs or other factors. Other reductions or
limitations may
be
imposed on payment for services rendered to Medi-Cal
beneficiaries in
the
future.
Under this approach, in most geographical areas of
California, only
those
hospitals which enter into a Medi-Cal contract with the
State
of
California will
be paid for non-emergency acute inpatient services rendered
to
Medi-Cal
beneficiaries. The State may also terminate these contracts
without
notice under
certain circumstances and is obligated to make contractual
payments only
to the
extent the California legislature appropriates adequate
funding
therefor.
In February 1987, the Governor of the State of
California
announced
that
payments to Medi-Cal providers for certain services (not
including
hospital
acute inpatient services) would be decreased by 10% through
June 1987.
However,
a Federal district court issued a preliminary injunction
preventing
application
of any cuts until a trial on the merits can be held. If the
injunction
is deemed
to have been granted improperly, the State of California
would
be
entitled to
recapture the payment differential for the intended
reduction
period. It
is not
possible to predict at this time whether any decreases will
ultimately
be
implemented.
California enacted legislation in 1982 that authorizes
private
health plans
and insurers to contract directly with hospitals for
services
to
beneficiaries
on negotiated terms. Some insurers have introduced plans
known
as
"preferred
provider organizations" ("PPOs"), which offer financial
incentives for
subscribers who use only the hospitals which contract with
the
plan.
Under an
exclusive provider plan, which includes most health
maintenance
organizations
("HMOs"), private payors
16
<PAGE>
limit coverage to those services provided by selected
hospitals.
Discounts
offered to HMOs and PPOs may result in payment to the
contracting
hospital of
less than actual cost and the volume of patients directed to
a
hospital
under an
HMO or PPO contract may vary significantly from projections.
Often, HMO
or PPO
contracts are enforceable for a stated term, regardless of
provider
losses or of
bankruptcy of the respective HMO or PPO. It is expected that
failure to
execute
and maintain such PPO and HMO contracts would reduce a
hospital's
patient base
or gross revenues. Conversely, participation may maintain or
increase
the
patient base, but may result in reduced payment and lower
net
income to
the
contracting hospitals.
Such California Exempt Obligations may also be insured
by
the State
of
California pursuant to an insurance program implemented by
the
Office of
Statewide Health Planning and Development for health
facility
construction
loans. If a default occurs on insured California Exempt
Obligations, the
State
Treasurer will issue debentures payable out of a reserve
fund
established under
the insurance program or will pay principal and interest, on
an
unaccelerated
basis from unappropriated State funds. At the request of the
Office of
Statewide
Health Planning and Development, Arthur D. Little, Inc.
prepared a study
in
December 1983 to evaluate the adequacy of the reserve fund
established
under the
insurance program and, based on certain formulations and
assumptions
found the
reserve fund substantially underfunded. In September of
1986,
Arthur D.
Little,
Inc. prepared an update of the study and concluded that an
additional
10%
reserve be established for "multi-level" facilities. For the
balance of
the
reserve fund, the update recommended maintaining the current
reserve
calculation
method. In March 1990, Arthur D. Little, Inc. prepared a
further review
of the
study and recommended that separate reserves continue to be
established
for
"multi-level" facilities at a reserve level consistent with
those that
would be
required by an insurance company.
Certain California Exempt Obligations in the Fund may be
obligations
which
are secured in whole or in part by a mortgage or deed of
trust
on real
property.
California has five principal statutory provisions which
limit
the
remedies of a
creditor secured by a mortgage or deed of trust. Two limit
the
creditor's right
to obtain a deficiency judgment, one limitation being based
on
the
method of
foreclosure and the other on the type of debt secured. Under
the former,
a
deficiency judgment is barred when the foreclosure is
accomplished by
means of a
nonjudicial trustee's sale. Under the latter, a deficiency
judgment is
barred
when the foreclosed mortgage or deed of trust secures
certain
purchase
money
obligations. Another California statute, commonly known as
the
"one form
of
action" rule, requires creditors secured by real property to
exhaust
their real
property security by foreclosure before bringing a personal
action
against the
debtor. The fourth statutory provision limits any deficiency
judgment
obtained
by a creditor secured by real property following a judicial
sale of such
property to the excess of the outstanding debt over the fair
value of
the
property at the time of the sale, thus preventing the
creditor
from
obtaining a
large deficiency judgment against the debtor as the result
of
low bids
at a
judicial sale. The fifth statutory provision gives the
debtor
the right
to
redeem the real property from any judicial foreclosure sale
as
to which
a
deficiency judgment may be ordered against the debtor.
Upon the default of a mortgage or deed of trust with
respect to
California
real property, the creditor's nonjudicial foreclosure rights
under the
power of
sale contained in the mortgage or deed of trust are subject
to
the
constraints
imposed by California law upon transfers of title to real
property by
private
power of sale. During the three-month period beginning with
the
filing
of a
formal notice of default, the debtor is entitled to
reinstate
the
mortgage by
making any overdue payments. Under standard loan servicing
procedures,
the
filing of the formal notice of default does not occur unless
at
least
three full
monthly payments have become due and remain unpaid. The
power
of sale is
exercised by posting
17
<PAGE>
and publishing a notice of sale for at least 20 days after
expiration of
the
three-month reinstatement period. Therefore, the effective
minimum
period for
foreclosing on a mortgage could be in excess of seven months
after the
initial
default. Such time delays in collections could disrupt the
flow
of
revenues
available to an issuer for the payment of debt service on
the
outstanding
obligations if such defaults occur with respect to a
substantial number
of
mortgages or deeds of trust securing an issuer's
obligations.
In addition, a court could find that there is sufficient
involvement
of the
issuer in the nonjudicial sale of property securing a
mortgage
for such
private
sale to constitute "state action," and could hold that the
private-
right-of-sale
proceedings violate the due process requirements of the
Federal
or State
Constitutions, consequently preventing an issuer from using
the
nonjudicial
foreclosure remedy described above.
Certain California Exempt Obligations in the Fund may be
obligations
which
finance the acquisition of single family home mortgages for
low
and
moderate
income mortgagors. These obligations may be payable solely
from
revenues
derived
from the home mortgages, and are subject to California's
statutory
limitations
described above applicable to obligations secured by real
property.
Under
California antideficiency legislation, there is no personal
recourse
against a
mortgagor of a single family residence purchased with the
loan
secured
by the
mortgage, regardless of whether the creditor chooses
judicial
or
nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-
family owner-
occupied
dwellings may be prepaid at any time. Prepayment charges on
such
mortgage loans
may be imposed only with respect to voluntary prepayments
made
during
the first
five years during the term of the mortgage loan, and cannot
in
any event
exceed
six months' advance interest on the amount prepaid in excess
of
20% of
the
original principal amount of the mortgage loan. This
limitation
could
affect the
flow of revenues available to an issuer for debt service on
the
outstanding debt
obligations which financed such home mortgages.
ADDITIONAL CONSIDERATIONS. With respect to Municipal
Obligations issued
by the
State of California and its political sub-divisions, (I.E.,
California
Exempt
Obligations) the Fund cannot predict what legislation, if
any,
may be
proposed
in the California State Legislature as regards the
California
State
personal
income tax status of interest on such obligations, or which
proposals,
if any,
might be enacted. Such proposals, if enacted, might
materially
adversely
affect
the availability of California Exempt Obligations for
investment by the
Fund and
the value of the Fund's portfolio. In such an event, the
Trustees would
reevaluate the Fund's investment objective and policies and
consider
changes in
its structure or possible dissolution.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK
EXEMPT OBLIGATIONS
As indicated in the New York Fund's Prospectus, the Fund
seeks
its
objective by
investing principally in a portfolio of Municipal
Obligations,
the
interest from
which is exempt from New York State and New York City
personal
income
taxes
("New York Exempt Obligations").
Some of the significant financial considerations
relating
to the
Fund's
investment in New York Exempt Obligations are summarized
below.
This
summary
information is not intended to be a complete description and
is
principally
derived from official statements relating to issues of New
York
Exempt
Obligations that were available prior to the date of this
Statement of
Additional Information. The accuracy and completeness of the
information
contained in those official statements have not been
independently
verified.
STATE ECONOMY. New York State (the "State") is the third
most
populous
state in
the nation and has a relatively high level of personal
wealth.
The
State's
economy is diverse with a comparatively large share of the
nation's
finance,
insurance, transportation, communications and
18
<PAGE>
services employment, and a very small share of the nation's
farming and
mining
activity. The State has a declining proportion of its
workforce
engaged
in
manufacturing, and an increasing proportion engaged in
service
industries. New
York City (the "City"), which is the most populous city in
the
State and
nation
and is the center of the nation's largest metropolitan area,
accounts
for a
large portion of the State's population and personal income.
The State has historically 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 position. The
recession
has been
more severe in the State, owing to a significant
retrenchment
in the
financial
services industry, cutbacks in defense spending, and an
overbuilt real
estate
market. There can be no assurance that the State economy
will
not
experience
worse-than-predicted results in the 1994-95 fiscal year,
with
corresponding
material and adverse effects on the State's projections of
receipts and
disbursements.
The unemployment rate in the State dipped below the
national rate in
the
second half of 1981 and remained lower until 1991. It stood
at
7.7% in
1993. The
total employment growth rate in the State has been below the
national
average
since 1984. State per capita personal income remains above
the
national
average.
State per capita income for 1993 was $24,623, which is 18.3%
above the
1993
national average of $20,817. During the past ten years,
total
personal
income in
the State rose slightly faster than the national average
only
in 1986
through
1989.
STATE BUDGET. The State Constitution requires the Governor
to
submit to
the
Legislature a balanced Executive Budget which contains a
complete plan
of
expenditures for the ensuing fiscal year and all moneys and
revenues
estimated
to be available therefor, accompanied by bills containing
all
proposed
appropriations or reappropriations and any new or modified
revenue
measures to
be enacted in connection with the Executive Budget. The
entire
plan
constitutes
the proposed State financial plan for that fiscal year. The
Governor is
required
to submit to the Legislature quarterly budget updates which
include a
revised
cash-basis State financial plan and an explanation of any
changes from
the
previous State financial plan.
The State's budget for the 1994-95 fiscal year was
enacted
by the
Legislature on June 7, 1994, more than two months after the
start of the
fiscal
year. Prior to adoption of the budget, the Legislature
enacted
appropriations
for disbursements considered to be necessary for State
operations and
other
purposes, including all necessary appropriations for debt
service. The
State
financial plan for the 1994-95 fiscal year was formulated on
June 16,
1994 and
is based upon the State's budget as enacted by the
Legislature
and
signed into
law by the Governor (the "1994-95 State Financial Plan").
This
delay in
the
enactment of the State's 1994-95 fiscal year budget may
reduce
the
effectiveness
of several of the actions proposed.
The State issued its second quarterly update to the cash
basis 1994-
95 State
Financial Plan on October 28, 1994. The update projects a
year-
end
surplus of
$14 million in the General Fund, with estimated receipts
reduced by $267
million
and estimated disbursements reduced by $281 million,
compared
to the
1994-95
State Financial Plan as initially formulated.
The 1994-95 State Financial Plan is based on a number of
assumptions
and
projections. Because it is not possible to predict
accurately
the
occurrence of
all factors that may affect the 1994-95 State Financial
Plan,
actual
results may
differ and have differed materially in recent years, from
projections
made at
the outset of a fiscal year. 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.
19
<PAGE>
RECENT FINANCIAL RESULTS. The General Fund is the general
operating fund
of the
State and is used to account for all financial transactions,
except
those
required to be accounted for in another fund. It is the
State's
largest
fund and
receives almost all State taxes and other resources not
dedicated to
particular
purposes. In the State's 1994-95 fiscal year, the General
Fund
is
expected to
account for approximately 52% of total governmental-fund
receipts and
51% of
total governmental-fund disbursements.
The General Fund is projected to be balanced on a cash
basis for the
1994-95
fiscal year. Total receipts are projected to be $34.321
billion, an
increase of
$2.092 billion over total receipts in the prior fiscal year.
Total
General Fund
disbursements are projected to be $34.248 billion, an
increase
of $2.351
billion
over the total amount disbursed and transferred in the prior
fiscal
year.
The State's financial position on a GAAP (generally
accepted
accounting
principles) basis as of March 31, 1993 included an 1991-92
accumulated
deficit
in its combined governmental funds of $681 million.
Liabilities
totalled
$12.864
billion and assets of $12.183 billion were available to
liquidate these
liabilities.
The State's financial operations have improved during
recent fiscal
years.
During the period 1989-90 through 1991-92, the State
incurred
General
Fund
operating deficits that were closed with receipts from the
issuance of
tax and
revenue anticipation notes. The national recession and then
the
lingering
economic slowdown in the New York and regional economy,
resulted in
repeated
shortfall in receipts and three budget deficits. For its
1992-
93 and
1993-94
fiscal years, however, the State recorded balanced budgets
on a
cash
basis, with
substantial fund balances in each year.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of
methods
by which
the
State of New York may incur debt. Under the State
Constitution,
the
State may
not, with limited exceptions for emergencies, undertake long-
term
general
obligation borrowing (I.E., borrowing for more than one
year)
unless the
borrowing is authorized in a specific amount for a single
work
or
purpose by the
Legislature and approved by the voters. There is no
limitation
on the
amount of
long-term general obligation debt that may be so authorized
and
subsequently
incurred by the State. The total amount of long-term State
general
obligation
debt authorized but not issued as of December 31, 1993 was
approximately
$2.273
billion.
The State may undertake short-term borrowings without
voter
approval
(a) in
anticipation of the receipt of taxes and revenues, by
issuing
tax and
revenue
anticipation notes, and (b) in anticipation of the receipt
of
proceeds
from the
sale of duly authorized but unissued bonds, by issuing
general
obligation bond
anticipation notes. The State may also, pursuant to specific
constitutional
authorization, directly guarantee certain obligations of the
State's
authorities
and public benefit corporations ("Authorities"). Payments of
debt
service on New
York State general obligation and New York State-guaranteed
bonds and
notes are
legally enforceable obligations of the State.
The State employs additional long-term financing
mechanisms, lease-
purchase
and contractual-obligation financings, which involve
obligations of
public
authorities or municipalities that are State-supported but
are
not
general
obligations of the State. Under these financing
arrangements,
certain
public
authorities and municipalities have issued obligations to
finance the
construction and rehabilitation of facilities or the
acquisition of
equipment,
and expect to meet their debt service requirements through
the
receipt
of rental
or other contractual payments made by the State. Although
these
financing
arrangements involve a contractual agreement by the State to
make
payments to a
public authority, municipality or other entity, the State's
obligation
to make
such payments is generally expressly made subject to
appropriation by
the
Legislature and the actual availability of money to the
State
for making
the
payments. The State has also entered into a contractual-
20
<PAGE>
obligation financing arrangement with the Local Government
Assistance
Corporation ("LGAC") in an effort to restructure the way the
State makes
certain
local aid payments.
In 1990, as part of a State fiscal reform program,
legislation was
enacted
creating the New York Local Government Assistance
Corporation
("LGAC"),
a public
benefit corporation empowered to issue long-term obligations
to
fund
certain
payments to local governments traditionally funded through
New
York
State's
annual seasonal borrowing. The legislation empowered LGAC to
issue its
bonds and
notes in an amount not in excess of $4.7 billion (exclusive
of
certain
refunding
bonds) plus certain other amounts. Over a period of years,
the
issuance
of these
long-term obligations, which are to be amortized over no
more
than 30
years, was
expected to eliminate the need for continued short-term
seasonal
borrowing. The
legislation also imposed a cap on the annual seasonal
borrowing
of the
State at
$4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued
to
provide for capitalized interest, except in cases where the
Governor and
the
legislative leaders have certified the need for additional
borrowing and
provided a schedule for reducing it to the cap. If borrowing
above the
cap is
thus permitted in any fiscal year, it is required by law to
be
reduced
to the
cap by the fourth fiscal year after the limit was first
exceeded. As of
December
1994, LGAC had issued bonds to provide net proceeds of
$3.856
billion
and has
been authorized to issue its bonds to provide net proceeds
of
up to an
additional $315 million during the State's 1994-95 fiscal
year.
The
impact of
this borrowing, together with the availability of certain
cash
reserves,
is
that, for the first time in nearly 35 years, the 1994-95
State
Financial
Plan
includes no short-term seasonal borrowing.
In April 1993, legislation was enacted proposing
significant
constitutional
changes to the long-term financing practices of the State
and
the
Authorities.
The Legislature passed a proposed constitutional
amendment
that
would permit
the State, within a formula-based cap, to issue revenue
bonds,
which
would be
debt of the State secured solely by a pledge of certain
State
tax
receipts
(including those allocated to State funds dedicated for
transportation
purposes), and not by the full faith and credit of the
State.
In
addition, the
proposed amendment would require that State debt be incurred
only for
capital
projects included in a multi-year capital financing plan and
would
prohibit,
after its effective date, lease-purchase and contractual-
obligation
financing
mechanisms for State facilities. Public hearings were held
on
the
proposed
constitutional amendment during 1993. Following these
hearings,
in
February
1994, the Governor and the State Comptroller recommended a
revised
constitutional amendment which would further tighten the ban
on
lease-
purchase
and contractual-obligation financing, incorporate existing
lease-
purchase and
contractual-obligation debt under the proposed revenue bond
cap
while
simultaneously reducing the size of the cap. After
considering
these
recommendations, the Legislature passed a revised
constitutional
amendment which
tightens the ban, and provides for a phase-in to a lower
cap.
Before the
approved constitutional amendment or any revised amendment
enacted in
1994 can
be presented to the voters for their consideration, it must
be
passed by
a
separately elected legislature. The amendment must therefore
be
passed
by the
newly elected Legislature in 1995 prior to presentation to
the
voters at
the
earliest in November 1995. The amendment could not become
effective
before
January 1, 1996.
____On January 13, 1992, S&Preduced its ratings on the
State's
general
obligation bonds from A to A- and, in addition, reduced its
ratings on
the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative
rating
outlook assessment on State general obligation debt. On
April
26, 1993, S&P revised the rating outlook assessment to
stable.
On
February 14, 1994, S&P raised its outlook to positive and,
on
February 28, 1994, confirmed its A- rating. On January 6,
1992,
Moody's
reduced its ratings on outstanding limited-
21
<PAGE>
liability State lease purchase and contractual obligations
from
A to
Baa1. On
February 28, 1994, Moody's reconfirmed its A rating on the
State's
general
obligation long-term indebtedness.
____The State anticipates that its capital programs will be
financed, in
part,
by State and public authorities borrowings in 1994-95. The
State expects
to
issue $374 million in general obligation bonds (including
$140
million
for
purposes of redeeming outstanding bond anticipation notes)
and
$140
million in
general obligation commercial paper. The Legislature has
also
authorized
the
issuance of up to $69 million in certificates of
participation
during
the
State's 1994-95 fiscal year for equipment purchases. The
projection of
the State
regarding its borrowings for the 1994-95 fiscal year may
change
if
circumstances
require.
____Principal and interest payments on general obligation
bonds
and
interest
payments on bond anticipation notes and on tax and revenue
anticipation
notes
were $782.5 million for the 1993-94 fiscal year, and are
estimated to be
$786.3
million for the 1994-95 fiscal year. These figures do not
include
interest
payable on State General Obligation Refunding Bonds issued
in
July 1992
("Refunding Bonds") to the extent that such interest was
paid
from an
escrow
fund established with the proceeds of such Refunding Bonds.
Principal
and
interest payments on fixed rate and variable rate bonds
issued
by LGAC
were
$239.4 million for the 1993-94 fiscal year, and are
estimated
to be
$289.9
million for 1994-95. State lease-purchase rental and
contractual
obligation
payments for 1993-94, including State installment payments
relating to
certificates of participation, were $1.258 billion and are
estimated to
be
$1.495 billion in 1994-95.
____New York State has never defaulted on any of its general
obligation
indebtedness or its obligations under lease-purchase or
contractual-
obligation
financing arrangements and has never been called upon to
make
any direct
payments pursuant to its guarantees.
LITIGATION. Certain litigation pending against the State or
its
officers
or
employees could have a substantial or long-term adverse
effect
on State
finances. Among the more significant of these cases are
those
that
involve: (a)
the validity of agreements and treaties by which various
Indian
tribes
transferred title to the State of certain land in central
and
upstate
New York;
(b) certain aspects of the State's Medicaid policies,
including
its
rates,
regulations and procedures; (c) contamination in the Love
Canal
area of
Niagara
Falls; (d) action against the State and City officials
alleging
inadequate
shelter allowances to maintain proper housing; (e)
challenges
to the
practice of
reimbursing certain Office of Mental Health patient care
expenses from
the
client's Social Security benefits; (f) alleged
responsibility
of the
State's
officials to assist in remedying racial segregation in the
City
of
Yonkers; (g)
action in which the State is a third party defendant, for
injunctive or
other
appropriate relief, concerning liability for the maintenance
of
stone
groins
constructed along certain areas of Long Island's shoreline;
(8)
challenges by
commercial insurers, employee welfare benefit plans, and
health
maintenance
organizations to Section 2807-c of the Public Health Law,
which
imposes
13%, 11%
and 9% surcharges on inpatient hospital bills and a bad debt
and charity
care
allowance on all hospital bills and hospital bills paid by
such
entities; (9)
challenge by a long distance carrier to the
constitutionality
of Tax Law
Section186-a(2-a) which restricted certain deduction of
local
access
service
fees and (10) challenges to certain aspects of petroleum
business taxes.
A number of cases have also been instituted against the
State
challenging
the constitutionality of various public authority financing
programs.
In a proceeding commenced on August 6, 1991 (SCHULZ, ET
AL.
V. STATE
OF NEW
YORK, ET AL., Supreme Court, Albany County), petitioners
challenge the
constitutionality of two bonding programs of the New York
State
Thruway
Authority authorized by Chapters 166 and 410 of the Laws of
1991. In
addition,
petitioners challenge the fiscal year 1991-92 judiciary
budget
as having
been
enacted in violation of Sections 1 and 2 of Article VII of
the
State
Constitution. The defendants' motion to dismiss the action
on
procedural
grounds
was
22
<PAGE>
denied by order of the Supreme Court dated January 2, 1992.
By
order
dated
November 5, 1992, the Appellate Division, Third Department,
reversed the
order
of the Supreme Court and granted defendants' motion to
dismiss
on
grounds of
standing and mootness. By order dated September 16, 1993, on
motion to
reconsider, the Appellate Division, Third Department, ruled
that
plaintiffs have
standing to challenge the bonding program authorized by
Chapter
166 of
the laws
of 1991. The proceeding is presently pending in Supreme
Court,
Albany
County.
In SCHULZ, ET AL. V. STATE OF NEW YORK, ET AL.,
commenced
May 24,
1993,
Supreme Court, Albany County, petitioners challenge, among
other things,
the
constitutionality of, and seek to enjoin certain highway,
bridge and
mass
transportation bonding programs of the New York State
Thruway
Authority
and the
Metropolitan Transportation Authority authorized by Chapter
56
of the
Laws of
1993. Petitioners contend that the application of State tax
receipts
held in
dedicated transportation funds to pay debt service on bonds
of
the
Thruway
Authority and of the Metropolitan Transportation Authority
violates
Sections 8
and 11 of Article VII and Section 5 of Article X of the
State
Constitution and
due process provisions of the State and Federal
Constitutions.
By order
dated
July 27, 1993, the Supreme Court granted defendants' motions
for summary
judgment, dismissed the complaint and vacated the temporary
restraining
order
previously issued. By decision dated October 21, 1993, the
Appellate
Division,
Third Department, affirmed the judgment of the Supreme
Court.
On June
30, 1994,
the Court of Appeals unanimously affirmed the rulings of the
trial court
and the
Appellate Division in favor of the State.
Several actions challenging the constitutionality of
legislation
enacted
during the 1990 legislative session which changed actuarial
funding
methods for
determining state and local contributions to state employee
retirement
systems
have been decided against the State. As a result, the
State's
Comptroller has
developed a plan to restore the State's retirement systems
to
prior
funding
levels. Such funding is expected to exceed prior levels by
$30
million
in fiscal
1994-95, $63 million in fiscal 1995-96, $116 million in
fiscal
1996-97,
$193
million in fiscal 1997-98, peaking at $241 million in fiscal
1998-99.
Beginning
in fiscal 2001-02, State contributions required under the
Comptroller's
plan are
projected to be less than that required under the prior
funding
method.
As a
result of the United States Supreme Court decision in the
case
of STATE
OF
DELAWARE v. STATE OF NEW YORK, on January 21, 1994, the
State
entered
into a
settlement agreement with Delaware. The State made an
immediate
$35
million
payment to Delaware and agreed to make annual payments of
$33
million in
each of
the next five fiscal years. In return, Delaware has agreed
to
withdraw
its
claims and its request for summary judgment. The State and
Massachusetts
have
also executed a settlement agreement which provides for
aggregate
payments by
New York State of $23 million, payable over five consecutive
years.
Litigation
continues with respect to other parties and the State may be
required to
make
additional payments during the State's 1994-95 fiscal year.
The legal proceedings noted above involve State
finances,
State
programs and
miscellaneous tort, real property and contract claims in
which
the State
is a
defendant and the monetary damages sought are substantial.
These
proceedings
could affect adversely the financial condition of the State
in
the 1994-
95
fiscal year or thereafter. Adverse developments in these
proceedings or
the
initiation of new proceedings could affect the ability of
the
State to
maintain
a balanced Revised 1994-95 State Financial Plan. An adverse
decision in
any of
these proceedings could exceed the amount of the Revised
1994-
95 State
Financial
Plan reserve for the payment of judgments and, therefore,
could
affect
the
ability of the State to maintain a balanced Revised 1994-95
State
Financial
Plan. In its audited financial statements for the fiscal
year
ended
March 31,
1994, the State reported its estimated liability for awarded
and
anticipated
unfavorable judgments to be $675 million.
23
<PAGE>
Although other litigation is pending against the State,
except as
described
above, no current litigation involves the State's authority,
as
a matter
of law,
to contract indebtedness, issue its obligations, or pay such
indebtedness when
it matures, or affects the State's power or ability, as a
matter of law,
to
impose or collect significant amounts of taxes and revenues.
AUTHORITIES. The fiscal stability of the State is related,
in
part, to
the
fiscal stability of its Authorities, which generally have
responsibility
for
financing, constructing and operating revenue-producing
public
benefit
facilities. Authorities are not subject to the
constitutional
restrictions on
the incurrence of debt which apply to the State itself, and
may
issue
bonds and
notes within the amounts of, and as otherwise restricted by,
their
legislative
authorization. The State's access to the public credit
markets
could be
impaired, and the market price of its outstanding debt may
be
materially
and
adversely affected, if any of the Authorities were to
default
on their
respective obligations, particularly with respect to debt
that
are
State-supported or State-related. As of September 30, 1993,
date of the
latest
data available, there were 18 Authorities that had
outstanding
debt of
$100
million or more. The aggregate outstanding debt, including
refunding
bonds, of
these 18 Authorities was $63.5 billion. As of March 31,
1994,
aggregate
public
authority debt outstanding as State-supported debt was $21.1
billion and
as
State-related debt was $29.4 billion.
Authorities are generally supported by revenues
generated
by the
projects
financed or operated, such as fares, user fees on bridges,
highway tolls
and
rentals for dormitory rooms and housing. In recent years,
however, the
State has
provided financial assistance through appropriations, in
some
cases of a
recurring nature, to certain of the 18 Authorities for
operating and
other
expenses and, in fulfillment of its commitments on moral
obligation
indebtedness
or otherwise, for debt service. This operating assistance is
expected to
continue to be required in future years. In addition,
certain
statutory
arrangements provide for State local assistance payments
otherwise
payable to
localities to be made under certain circumstances to certain
Authorities. The
State has no obligation to provide additional assistance to
localities
whose
local assistance payments have been paid to Authorities
under
these
arrangements. However, in the event that such local
assistance
payments
are so
diverted, the affected localities could seek additional
State
funds.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the
State is
closely
related to the fiscal health of its localities, particularly
the City,
which has
required and continues to require significant financial
assistance from
the
State. The City's independently audited operating results
for
each of
its 1981
through 1993 fiscal years, which end on June 30, show a
General
Fund
surplus
reported in accordance with GAAP. In addition, the City's
financial
statements
for the 1993 fiscal year received an unqualified opinion
from
the City's
independent auditors, the eleventh consecutive year the City
has
received such
an opinion.
In 1975, the City suffered a fiscal crisis that impaired
the
borrowing
ability of both the City and the State. In that year the
City
lost
access to
public credit markets. The City was not able to sell short-
term
notes to
the
public again until 1979.
In 1975, S&P 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 S&P. On July 2, 1985,
S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 2, 1993, S&P reconfirmed
its
A-
rating of City bonds, continued its negative rating outlook
assessment
and
stated that maintenance of such rating depended upon the
City's
making
further
progress towards reducing budget gaps in the outlying years.
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 January 17, 1995, S&P placed
24
<PAGE>
the City's general obligation bonds on its CreditWatch list
which may
portend a
rating downgrade from the agency in the upcoming months.
The City is heavily dependent on State and Federal
assistance to
cover
insufficiencies in its revenues. There can be no assurance
that
in the
future
Federal and State assistance will enable the City to make up
its budget
deficits. To help alleviate the City's financial
difficulties,
the
Legislature
created the Municipal Assistance Corporation ("MAC") in
1975.
MAC is
authorized
to issue bonds and notes payable from certain stock transfer
tax
revenues, from
the City's portion of the State sales tax derived in the
City
and from
State per
capita aid otherwise payable by the State to the City.
Failure
by the
State to
continue the imposition of such taxes, the reduction of the
rate of such
taxes
to rates less than those in effect on July 2, 1975, failure
by
the State
to pay
such aid revenues and the reduction of such aid revenues
below
a
specified level
are included among the events of default in the resolutions
authorizing
MAC's
long-term debt. The occurrence of an event of default may
result in the
acceleration of the maturity of all or a portion of MAC's
debt.
As of
December
31, 1993, MAC had outstanding an aggregate of approximately
$5.204
billion of
its bonds. MAC bonds and notes constitute general
obligations
of MAC and
do not
constitute an enforceable obligation or debt of either the
State or the
City.
Under its enabling legislation, MAC's authority to issue
bonds
and notes
(other
than refunding bonds and notes) expired on December 31,
1984.
Legislation has
been passed by the legislature which would, under certain
conditions,
permit MAC
to issue up to $1.465 billion of additional bonds, which are
not subject
to a
moral obligation provision.
Since 1975, the City's financial condition has been
subject
to
oversight and
review by the New York State Financial Control Board (the
"Control
Board") and
since 1978 the City's financial statements have been audited
by
independent
accounting firms. To be eligible for guarantees and
assistance,
the City
is
required during a "control period" to submit annually for
Control Board
approval, and when a control period is not in effect for
Control Board
review, a
financial plan for the next four fiscal years covering the
City
and
certain
agencies showing balanced budgets determined in accordance
with
GAAP.
The State
also established the Office of the State Deputy Comptroller
for
New York
City
("OSDC") to assist the Control Board in exercising its
powers
and
responsibilities. On June 30, 1986, the City satisfied the
statutory
requirements for termination of the control period. This
means
that the
Control
Board's powers of approval are suspended, but the Board
continues to
have
oversight responsibilities.
The staffs of OSDC and the Control Board issued periodic
reports on
the
City's financial plans, as modified, analyzing forecasts of
revenues and
expenditures, cash flow, and debt service requirements, as
well
as
compliance
with the financial plan, as modified, by the City and its
Covered
Organizations
(I.E., those which receive or may receive monies from the
City
directly,
indirectly or contingently). OSDC staff reports issued
during
the mid-
1980's
noted that the City's budgets benefited from a rapid rise in
the City's
economy,
which boosted the City's collection of property, business
and
income
taxes.
These resources were used to increase the City's workforce
and
the scope
of
discretionary and mandated City services. Subsequent OSDC
staff
reports
examined
the 1987 stock market crash and the 1989-92 recession, which
affected
the City's
region more severely than the nation, and attributed an
erosion
of City
revenues
and increasing strain on City expenditures to that
recession.
According
to a
recent OSDC staff report, the City's economy is now slowly
recovering,
but the
scope of that recovery is uncertain and unlikely, in the
foreseeable
future, to
match the expansion of the mid-1980's. Also, staff reports
of
OSDC and
the
Control Board have indicated that the City's recent balanced
budgets
have been
accomplished, in part, through the use of non-recurring
resources, tax
increases
and additional State assistance; that the City has not yet
brought its
long-term
expenditures in line with recurring revenues; and that the
City
is
therefore
likely to continue to face
25
<PAGE>
future projected budget gaps requiring the City to increase
revenues
and/or
reduce expenditures. According to the most recent staff
reports
of OSDC
and the
Control Board, during the four-year period covered by the
current
financial
plan, the City is relying on obtaining substantial resources
from
initiatives
needing approval and cooperation of its municipal labor
unions,
Covered
Organizations and City Council, as well as the state and
Federal
governments,
among others.
Although the City has balanced its budget since 1981,
estimates of
the
City's revenues and expenditures, which are based on
numerous
assumptions, are
subject to various uncertainties. If expected Federal or
State
aid is
not
forthcoming, if unforeseen developments in the economy
significantly
reduce
revenues derived from economically sensitive taxes or
necessitate
increased
expenditures for public assistance, if the City should
negotiate wage
increases
for its employees greater than the amounts provided for in
the
City's
financial
plan or if other uncertainties materialize that reduce
expected
revenues
or
increase projected expenditures, then, to avoid operating
deficits, the
City may
be required to implement additional actions, including
increases in
taxes and
reductions in essential City services. The City might also
seek
additional
assistance from New York State.
The City requires certain amounts of financing for
seasonal
and
capital
spending purposes. The City has issued $1.75 billion of
notes
for
seasonal
financing purposes during fiscal year 1994. The City's
capital
financing
program
projects long-term financing requirements of approximately
$17
billion
for the
City's fiscal years 1995 through 1998. The major capital
requirements
include
expenditures for the City's water supply and sewage disposal
systems,
roads,
bridges, mass transit, schools, hospitals and housing. In
addition to
financing
for new purposes, the City and the New York City Municipal
Water Finance
Authority have issued refunding bonds totalling $1.8 billion
in
fiscal
year
1994.
Certain localities, in addition to the City, could have
financial
problems
leading to requests for additional New York State assistance
during the
State's
1994-95 fiscal year and thereafter. The potential impact on
the
State of
such
requests by localities is not included in the projections of
the State's
receipts and disbursements in the State's 1994-95 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers")
resulted
in the creation of the Financial Control Board for the City
of
Yonkers
(the
"Yonkers Board") by New York State in 1984. The Yonkers
Board
is charged
with
oversight of the fiscal affairs of Yonkers. Future actions
taken by the
Governor
or the Legislature to assist Yonkers could result in
allocation
of New
York
State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in
substantial
short-term
and long-term borrowings. In 1992, the total indebtedness of
all
localities in
New York State was approximately $35.2 billion, of which
$19.5
billion
was debt
of New York City (excluding $5.9 billion in MAC debt); a
small
portion
(approximately $71.6 million) of the $35.2 billion of
indebtedness
represented
borrowing to finance budgetary deficits and was issued
pursuant
to
enabling New
York State legislation. State law requires the Comptroller
to
review and
make
recommendations concerning the budgets of those local
government units
other
than New York City authorized by State law to issue debt to
finance
deficits
during the period that such deficit financing is
outstanding.
Seventeen
localities had outstanding indebtedness for deficit
financing
at the
close of
their fiscal year ending in 1992.
From time to time, Federal expenditure reductions could
reduce, or
in some
cases eliminate, Federal funding of some local programs and
accordingly
might
impose substantial increased expenditure requirements on
affected
localities. If
New York State, New York City or any of the Authorities were
to
suffer
serious
financial difficulties jeopardizing their respective access
to
the
public credit
markets, the marketability of notes and bonds issued by
localities
within New
York State could be adversely affected. Localities also face
anticipated
and
26
<PAGE>
potential problems resulting from certain pending
litigation,
judicial
decisions
and long-range economic trends. The longer-range problems of
declining
urban
population, increasing expenditures and other economic
trends
could
adversely
affect localities and require increasing New York State
assistance in
the
future.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's, S&P and Fitch Investors
Service,
Inc.
("Fitch") represent the opinions of those agencies as to the
quality of
debt
obligations that they rate. These ratings, however, are
relative and
subjective,
are not absolute standards of quality and do not evaluate
the
market
risk of
securities. Ratings will be used with respect to the Funds
as
initial
criteria
for the selection of portfolio securities; the Funds will
also
rely upon
the
independent advice of SBMFM to evaluate potential
investments.
Among the
factors
that will be considered by SBMFM are the long-term ability
of
the issuer
to pay
principal and interest and general economic trends. The
Appendix to this
Statement of Additional Information contains further
information
concerning the
ratings of Moody's, S&P and Fitch, together with a brief
discussion of
the
significance of those ratings.
An issue of debt obligations may, subsequent to its
purchase by a
Fund,
cease to be rated or its ratings may be reduced below the
minimum
required for
purchase by the Fund. Neither event will require the sale of
the debt
obligation
by a Fund, but SBMFM will consider the event in its
determination of
whether the
Fund should continue to hold the obligation. In addition, to
the extent
that
ratings change as a result of changes in rating
organizations
or their
rating
systems or as a result of a corporate restructuring of
Moody's,
S&P or
Fitch,
SBMFM will attempt to use comparable ratings as standards
for
each
Fund's
investments.
MISCELLANEOUS INVESTMENT POLICIES
Each Fund may invest up to an aggregate amount equal to 10%
of
its net
assets in
illiquid securities, which term includes securities subject
to
contractual or
other restrictions on resale and other instruments that lack
readily
available
markets. None of the Funds will lend its portfolio
securities.
REPURCHASE AGREEMENTS
Each Fund may engage in repurchase agreement transactions
with
banks
which are
the issuers of instruments acceptable for purchase by the
Fund
and
certain
dealers on the Federal Reserve Bank of New York's list of
reporting
dealers. A
repurchase agreement is a contract under which the buyer of
a
security
simultaneously commits to resell the security to the seller
at
an
agreed-upon
price on an agreed-upon date. Under the terms of a typical
repurchase
agreement,
a Fund would acquire an underlying debt obligation for a
relatively
short period
subject to an obligation of the seller to repurchase, and
the
Fund to
resell,
the obligation at an agreed-upon price and time, thereby
determining the
yield
during the Fund's holding period. This arrangement results
in a
fixed
rate of
return that is not subject to market fluctuations during the
Fund's
holding
period. Under each repurchase agreement, the selling
institution will be
required to maintain the value of the securities subject to
the
repurchase
agreement at not less than their repurchase price. Although
the
amount
of a
Fund's assets that may be invested in purchase agreements
terminable in
less
than seven days is not limited, repurchase agreements
maturing
in more
than
seven days, together with other securities lacking readily
available
markets
held by the Fund, will not exceed 10% of the Fund's net
assets.
The value of the securities underlying a repurchase
agreement of a
Fund will
be monitored on an ongoing basis by SBMFM or Boston Advisors
to
ensure
that the
value is at least equal at all times to the total amount of
the
repurchase
obligation, including interest. SBMFM or Boston Advisors
will
also
monitor, on
an ongoing basis to evaluate potential risks, the
creditworthiness of
the banks
and dealers with which a Fund enters into repurchase
agreements.
27
<PAGE>
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
When a Fund engages in when-issued or delayed-delivery
securities
transactions,
it will rely on the other party to consummate the trade.
Failure of the
seller
to do so may result in a Fund's incurring a loss or missing
an
opportunity to
obtain a price considered to be advantageous.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 14 below have
been
adopted by the
Trust as fundamental policies of the Funds. Under the 1940
Act,
a
fundamental
policy may not be changed with respect to a Fund without the
vote of a
majority
of the outstanding voting securities of the Fund. Majority
is
defined in
the
1940 Act as the lesser of (a) 67% or more of the shares
present
at a
Fund
meeting, if the holders of more than 50% of the outstanding
shares of
the Fund
are present or represented by proxy, or (b) more than 50% of
outstanding
shares.
Investment restrictions 15 through 19 may be changed by a
vote
of a
majority of
the Trust's Board of Trustees at any time.
Under the investment restrictions adopted by the Trust
with
respect
to the
Funds:
1. No Fund will purchase securities other than
Municipal
Obligations and
Taxable Investments as those terms are defined in the
Prospectuses
or this
Statement of Additional Information.
2. The Municipal Fund will not purchase securities
(other
than U.S.
government securities) of any issuer if, as a result of
the
purchase, more
than 5% of the value of the Fund's total assets would be
invested in
the
securities of the issuer, except that up to 25% of the
value of the
Fund's
total assets may be invested without regard to this 5%
limitation.
3. The Municipal Fund will not purchase more than 10%
of
the voting
securities of any one issuer, except that this
limitation
is not
applicable
to a Fund's investments in U.S. government securities,
and
up to 25%
of the
Fund's assets may be invested without regard to this 10%
limitation.
4. No Fund will invest more than 25% of the value of
its
total
assets in
securities of issuers in any one industry, except that
this
limitation is
not applicable to a Fund's investments in U.S.
government
securities.
5. No Fund will borrow money, except that a Fund may
borrow from
banks for
temporary or emergency (not leveraging) purposes,
including
the
meeting of
redemption requests that might otherwise require the
untimely
disposition of
securities, in an amount not to exceed 10% of the value
of
the
Fund's total
assets (including the amount borrowed) valued at market
less
liabilities
(not including the amount borrowed) at the time the
borrowing is
made.
Whenever a Fund's borrowings exceed 5% of the value of
its
total
assets, the
Fund will not make any additional investments.
6. No Fund will pledge, hypothecate, mortgage or
otherwise
encumber
its
assets, except to secure permitted borrowings.
7. No Fund will lend money to other persons except
through
purchasing
Municipal Obligations or Taxable Investments and
entering
into
repurchase
agreements, each in a manner consistent with the Fund's
investment
objective
and policies.
8. No Fund will purchase securities on margin, except
that
a Fund
may
obtain any short-term credits necessary for the
clearance
of
purchases and
sales of securities.
9. No Fund will make short sales of securities or
maintain
a short
position.
10. No Fund will purchase or sell real estate or real
estate limited
partnership interests.
11. No Fund will purchase or sell commodities or
commodity
contracts.
12. No Fund will act as an underwriter of securities,
except that a
Fund may
acquire securities under circumstances in which, if the
securities
were
sold, the Fund could be deemed to be an underwriter for
purposes of
the
Securities Act of 1933, as amended.
28
<PAGE>
13. No Fund will invest in oil, gas or other mineral
leases
or
exploration
or development programs.
14. No Fund may write or sell puts, calls, straddles,
spreads or
combinations of those transactions, except as permitted
under the
Fund's
investment objective and policies.
15. No Fund will purchase any security if, as a result
(unless the
security
is acquired pursuant to a plan of reorganization or an
offer of
exchange),
the Fund would own any securities of an open-end
investment
company
or more
than 3% of the total outstanding voting stock of any
closed-
end
investment
company, or more than 5% of the value of the Fund's
total
assets
would be
invested in securities of any one or more closed-end
investment
companies.
16. No Fund will purchase a security if, as a result,
the
Fund would
then
have more than 5% of its total assets invested in
securities of
issuers
(including predecessors) that have been in continuous
operation for
fewer
than three years, except that this limitation will be
deemed to
apply to the
entity supplying the revenues from which the issue is to
be
paid, in
the
case of private activity bonds purchased.
17. No Fund may make investments for the purpose of
exercising
control of
management.
18. No Fund will purchase or retain securities of any
issuer if, to
the
knowledge of the Trust, any of the Trust's officers or
Trustees or
any
officer or director of SBMFM individually owns more than
1/2 of 1%
of the
outstanding securities of the issuer and together they
own
beneficially more
than 5% of the securities.
19. No Fund will lend its portfolio securities.
The Trust may make commitments more restrictive than the
restrictions listed
above to enable the sale of shares of any Fund in certain
states. Should
the
Trust determine that a commitment is no longer in the best
interests of
a Fund
and its shareholders, the Trust will revoke the commitment
by
terminating the
sale of shares of the Fund in the state involved. The
percentage
limitations
contained in the restrictions listed above apply at the time
of
purchases of
securities.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for each Fund are made
by
SBMFM,
subject to
the overall review of the Trust's Board of Trustees.
Although
investment
decisions for each Fund are made independently from those of
the other
accounts
managed by SBMFM, investments of the type that a Fund may
make
also may
be made
by those other accounts. When a Fund and one or more other
accounts
managed by
SBMFM are prepared to invest in, or desire to dispose of,
the
same
security,
available investments or opportunities for sales will be
allocated in a
manner
believed by SBMFM to be equitable to each. In some cases,
this
procedure
may
adversely affect the price paid or received by a Fund or the
size of the
position obtained or disposed of by a Fund. The Trust has
paid
no
brokerage
commissions since its commencement of operations.
Allocation of transactions on behalf of the Funds,
including their
frequency, to various dealers is determined by SBMFM in its
best
judgment and in
a manner deemed fair and reasonable to the Funds'
shareholders.
The
primary
considerations of SBMFM in allocating transactions are
availability of
the
desired security and the prompt execution of orders in an
effective
manner at
the most favorable prices. Subject to these considerations,
dealers that
provide
supplemental investment research and statistical or other
services to
SBMFM may
receive orders for portfolio transactions by a Fund.
Information so
received is
in addition to, and not in lieu of, services required to be
performed by
SBMFM,
and the fees of SBMFM are not reduced as a consequence of
their
receipt
of the
supplemental information. The information may be useful to
SBMFM in
serving both
a Fund and other clients, and conversely, supplemental
information
obtained by
the placement of business of other clients may be useful to
SBMFM in
carrying
out their obligations to a Fund.
29
<PAGE>
No Fund will purchase U.S. government securities or
Municipal
Obligations
during the existence of any underwriting or selling group
relating to
the
securities, of which SBMFM is a member, except to the extent
permitted
by the
SEC. Under certain circumstances, a Fund may be at a
disadvantage
because of
this limitation in comparison with other funds that have
similar
investment
objectives but that are not subject to a similar limitation.
PORTFOLIO TURNOVER
While a Fund's portfolio turnover rate (the lesser of
purchases
or sales
of
portfolio securities during the year, excluding purchases or
sales of
short-term
securities, divided by the monthly average value of
portfolio
securities) is
generally not expected to exceed 100%, it has in the past
exceeded 100%
with
respect to certain funds. The rate of turnover will not be a
limiting
factor,
however, when a Fund deems it desirable to sell or purchase
securities.
This
policy should not result in higher brokerage commissions to
a
Fund, as
purchases
and sales of portfolio securities are usually effected as
principal
transactions. Securities may be sold in anticipation of a
rise
in
interest rates
(market decline) or purchased in anticipation of a decline
in
interest
rates
(market rise) and later sold. In addition, a security may be
sold and
another
security of comparable quality purchased at approximately
the
same time
to take
advantage of what the Fund believes to be a temporary
disparity
in the
normal
yield relationship between the two securities. These yield
disparities
may occur
for reasons not directly related to the investment quality
of
particular
issues
or the general movement of interest rates, such as changes
in
the
overall demand
for, or supply of, various types of tax-exempt securities.
The portfolio turnover rates are as follows:
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
FUND 11/30/94
11/30/93
- ----------------------------------------- ---------- -----
- ---
- --
<S> <C> <C>
Municipal Fund........................... 28%
4%
California Fund.......................... 39%
16%
New York Fund............................ 68%
22%
</TABLE>
This higher level of turnover for the Funds was due to
significant
changes
in the portfolio in response to the unusual volatility
experienced in
municipal
bond markets during this period.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedules of sales charges described in the Prospectuses
applies to
purchases of shares of each Fund made by any "purchaser,"
which
term is
defined
to include the following: (a) an individual; (b) an
individual's spouse
and his
or her children purchasing shares for his or her own
account;
(c) a
trustee or
other fiduciary purchasing shares for a single trust estate
or
single
fiduciary
account; (d) a pension, profit-sharing or other employee
benefit plan
qualified
under Section 401(a) of the Code and qualified employee
benefit
plans of
employers who are "affiliated persons" of each other within
the
meaning
of the
1940 Act; (e) tax-exempt organizations enumerated in Section
501(c)(3)
or (13)
of the Code; or (f) any other organized group of persons,
provided that
the
organization has been in existence for at least six months
and
was
organized for
a purpose other than the purchase of investment company
securities at a
discount. Purchasers who wish to combine purchase orders to
take
advantage of
volume discounts should contact a Smith Barney Financial
Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in
the
Prospectuses,
apply to any purchase of shares of a Fund by any "purchaser"
(as defined
above).
The reduced sales charge is subject to confirmation of the
shareholder's
holdings through a check of appropriate records. The Trust
reserves the
right to
terminate or amend the combined right of accumulation at any
time after
written
notice to shareholders. For further information regarding
the
right of
accumulation, shareholders should contact a Smith Barney
Financial
Consultant.
30
<PAGE>
DETERMINATION OF PUBLIC OFFERING PRICE
The Funds offer their shares to the public on a continuous
basis. The
public
offering price for a Class A and Class Y share of a Fund is
equal to the
net
asset value per share at the time of purchase, plus for
Class A
shares
an
initial sales charge based on the aggregate amount of the
investment.
The public
offering price for a Class C share (and Class A share
purchases,
including
applicable rights of accumulation, equalling or exceeding
$500,000) is
equal to
the net asset value per share at the time of purchase and no
sales
charge is
imposed at the time of purchase. A contingent deferred sales
charge
("CDSC"),
however, is imposed on certain redemptions of Class C
shares,
and Class
A shares
when purchased in amounts exceeding $500,000. The method of
computation
of the
public offering price is shown in each Fund's financial
statements,
incorporated
by reference in their entirety into this Statement of
Additional
Information.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Funds is
included in
the
Prospectuses. The right of redemption of shares of each Fund
may be
suspended or
the date of payment postponed (a) for any periods during
which
the New
York
Stock Exchange, Inc. (the "NYSE") is closed (other than for
customary
weekend
and holiday closings), (b) when trading in the markets the
Fund
normally
utilizes is restricted, or an emergency exists, as
determined
by the
SEC, so
that disposal of the Fund's investments or determination of
its
net
asset value
is not reasonably practicable or (c) for any other periods
as
the SEC by
order
may permit for the protection of the Fund's shareholders.
DISTRIBUTION IN KIND
If the Board of Trustees of the Trust determines that it
would
be
detrimental to
the best interests of the remaining shareholders to make a
redemption
payment
wholly in cash, a Fund may pay, in accordance with SEC
rules,
any
portion of a
redemption in excess of the lesser of $250,000 or 1.00% of
the
Fund's
net assets
by a distribution in kind of portfolio securities in lieu of
cash.
Securities
issued as a distribution in kind may incur brokerage
commissions when
shareholders subsequently sell those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is
available
to
shareholders of any Fund who own shares of the Fund with a
value of at
least
$10,000 and who wish to receive specific amounts of cash
monthly or
quarterly.
Withdrawals of at least $100 may be made under the
Withdrawal
Plan by
redeeming
as many shares of the Fund as may be necessary to cover the
stipulated
withdrawal payment. Any applicable CDSC will not be waived
on
amounts
withdrawn
by shareholders that exceed 1.00% per month of the value of
a
shareholder's
shares at the time the Withdrawal Plan commences. (With
respect
to
Withdrawal
Plans in effect prior to November 7, 1994, any applicable
CDSC
will be
waived on
amounts withdrawn that do not exceed 2.00% per month of the
value of a
shareholder's shares at the time the Withdrawal Plan
commences.) To the
extent
that withdrawals exceed dividends, distributions and
appreciation of a
shareholder's investment in a Fund, continued withdrawal
payments will
reduce
the shareholder's investment, and may ultimately exhaust it.
Withdrawal
payments
should not be considered as income from investment in a
Fund.
Furthermore, as it
generally would not be advantageous to a shareholder to make
additional
investments in the Fund at the same time he or she is
participating in
the
Withdrawal Plan, purchases by such shareholders in amounts
of
less than
$5,000
ordinarily will not be permitted.
Shareholders of a Fund who wish to participate in the
Withdrawal
Plan and
who hold their shares of the Fund in certificate form must
deposit their
share
certificates with TSSG as agent for Withdrawal Plan members.
All
dividends and
distributions on shares in the Withdrawal Plan are
reinvested
automatically at
net asset value in additional shares of the Fund involved.
Effective
November 7,
1994, Withdrawal Plans should be set up with a Smith Barney
Financial
Consultant. A shareholder
31
<PAGE>
who purchases shares directly through TSSG may continue to
do
so and
applications for participation in the Withdrawal Plan must
be
received
by TSSG
no later than the eighth day of the month to be eligibile
for
participation
beginning with that month's withdrawal. For additional
information,
shareholders
should contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trust's distributor on a best
efforts basis
pursuant
to a written agreement dated July 30, 1993 (the
"Distribution
Agreement"), which
was most recently approved by the Trust's Board of Trustees
on
July 20,
1994.
For the fiscal period ending November 30, 1992 and the
1993
and 1994
fiscal
years, Smith Barney or its predecessor Shearson Lehman
Brothers
received
the
following in sales charges for the sale of each Fund's Class
A
shares,
and did
not reallow any portion thereof to dealers:
<TABLE>
<CAPTION>
YEAR YEAR
YEAR
ENDED ENDED
ENDED
FUND 11/30/94 11/30/93
11/30/92
- ---------------------------- ----------- ----------- ----
- ---
- ----
<S> <C> <C> <C>
Municipal Fund.............. $ 576,872 $ 576,872 $
343,579
California Fund............. $ 179,329 $ 179,329 $
242,773
New York Fund............... $ 412,346 $ 412,346 $
98,334
</TABLE>
For the fiscal period ending November 30, 1992 and the
1993
and 1994
fiscal
years, Smith Barney or Shearson Lehman Brothers received the
following
representing CDSC on redemption of each Fund's Class A
shares:
<TABLE>
<CAPTION>
YEAR YEAR
YEAR
ENDED ENDED
ENDED
FUND 11/30/94 11/30/93
11/30/92
- ---------------------------- ----------- ----------- ----
- ---
- ----
<S> <C> <C> <C>
Municipal Fund.............. $ 81,916 $ 41,260 $
4,082
California Fund............. $ 18,705 $ 5,932 $
3,863
New York Fund............... $ 22,791 $ 26,433 $
783
</TABLE>
When payment is made by the investor before the
settlement
date,
unless
otherwise noted by the investor, the funds will be held as a
free credit
balance
in the investor's brokerage account and Smith Barney may
benefit from
the
temporary use of the funds. The investor may designate
another
use for
the funds
prior to settlement date, such as an investment in a money
market fund
(other
than Smith Barney Exchange Reserve Fund) of the Smith Barney
Mutual
Funds. If
the investor instructs Smith Barney to invest the funds in a
Smith
Barney money
market fund, the amount of the investment will be included
as
part of
the
average daily net assets of both the Fund and the money
market
fund, and
affiliates of Smith Barney that serve the funds in an
investment
advisory or
administrative capacity will benefit from the fact that they
are
receiving fees
from both such investment companies for managing these
assets,
computed
on the
basis of their average daily net assets. The Trust's Board
of
Trustees
has been
advised of the benefits to Smith Barney resulting from these
settlement
procedures and will take such benefits into consideration
when
reviewing
the
Advisory, Administration and Distribution Agreements for
continuance.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and
for
the
expense it
bears under the Distribution Agreement, the Trust has
adopted a
services
and
distribution plan (the "Plan") pursuant to Rule 12b-1 under
the
1940
Act. Under
the Plan, each Fund pays Smith Barney a service fee, accrued
daily and
paid
monthly, calculated at the annual rate of 0.15% of the value
of
the
Fund's
32
<PAGE>
average daily net assets attributable to the Fund's shares.
In
addition,
each
Fund pays Smith Barney a distribution fee with respect to
the
Class C
shares
primarily intended to compensate Smith Barney for its
initial
expense of
paying
its Financial Consultants a commission upon sales of those
shares. The
Class C
distribution fee is calculated at the annual rate of 0.20%
of
the value
of the
Funds' average net assets attributable to the shares of the
Class.
For the period from December 31, 1991 through November
30,
1992,
Shearson
Lehman Brothers, the Trust's distributor prior to Smith
Barney,
received
$90,238
in the aggregate from the Trust under the Plan. For the
fiscal
years
ended
November 30, 1993 and 1994, Smith Barney and/or its
predecessor,
Shearson Lehman
Brothers, received $269,091 and $291,639, respectively, in
the
aggregate
from the
Plan.
Under its terms, the Plan continues from year to year,
provided such
continuance is approved annually by vote of the Board of
Trustees,
including a
majority of the Trustees who are not interested persons of
the
Trust and
who
have no direct or indirect financial interest in the
operation
of the
Plan or in
the Distribution Agreement (the "Independent Trustees"). The
Plan may
not be
amended to increase the amount of the service and
distribution
fees
without
shareholder approval, and all amendments of the Plan also
must
be
approved by
the Trustees including all of the Independent Trustees in
the
manner
described
above. The Plan may be terminated with respect to a Class at
any time,
without
penalty, by vote of a majority of the Independent Trustees
or,
with
respect to
any Fund, by vote of a majority of the outstanding voting
securities of
a Fund
(as defined in the 1940 Act). Pursuant to the Plan, Smith
Barney will
provide
the Board of Trustees with periodic reports of amounts
expended
under
the Plan
and the purpose for which such expenditures were made.
VALUATION OF SHARES
The net asset value per share of each Fund's Classes is
calculated on
each day,
Monday through Friday, except days on which the NYSE is
closed.
The NYSE
currently is scheduled to be closed on New Year's Day,
Presidents' Day,
Good
Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving
and
Christmas,
and on the preceding Friday or subsequent Monday when one of
these
holidays
falls on a Saturday or Sunday, respectively. Because of the
differences
in
distribution fees and Class-specific expenses, the per share
net asset
value of
each Class may differ. The following is a description of the
procedures
used by
the Trust in valuing its assets.
In carrying out valuation policies adopted by the
Trust's
Board of
Trustees,
Boston Advisors, as sub-administrator, may consult with an
independent
pricing
service (the "Pricing Service") retained by the Trust. Debt
securities
of
domestic issuers (other than U.S. government securities and
short-term
investments), including Municipal Obligations, are valued by
Boston
Advisors
after consultation with the Pricing Service. 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 prices and asked prices.
Investments for
which
no readily obtainable market quotations are available, in
the
judgment
of the
Pricing Service, are carried at fair value as determined by
the
Pricing
Service.
The procedures of the Pricing Service are reviewed
periodically
by the
officers
of the Trust under the general supervision and
responsibility
of the
Board of
Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the
Smith Barney
Mutual
Funds may exchange all or part of their shares for shares of
the same
Class of
other funds in the Smith Barney Mutual Funds, on the basis
of
relative
net asset
value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with
a sales charge may be exchanged for Class A shares of
any
of the
other
funds, and the sales charge differential, if any, will
be
applied.
Class A
shares of any fund may be exchanged without a sales
charge
33
<PAGE>
for shares of the funds that are offered without a sales
charge.
Class A
shares of any fund purchased without a sales charge may
be
exchanged
for
shares sold with a sales charge, and the appropriate
sales
charge
differential will be applied.
B. Class A shares of any fund acquired by a
previous exchange of shares purchased with a sales
charge
may be
exchanged
for Class A shares of any of the other funds, and the
sales
charge
differential, if any, will be applied.
Dealers other than Smith Barney must notify TSSG of the
investor's
prior
ownership of Class A shares of Smith Barney High Income Fund
and the
account
number in order to accomplish an exchange of shares of Smith
Barney High
Income
Fund under paragraph B above.
The exchange privilege enables shareholders in any fund
of
the Smith
Barney
Mutual Funds to acquire shares of the same Class in a fund
with
different
investment objectives when they believe a shift between
funds
is an
appropriate
investment decision. This privilege is available to
shareholders
residing in any
state in which the fund shares being acquired may legally be
sold. Prior
to any
exchange, the shareholder should obtain and review a copy of
the current
prospectus of each fund into which an exchange is being
considered.
Prospectuses
may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting
documents,
shares submitted for exchange are redeemed at the then-
current
net asset
value
and, subject to any applicable CDSC, the proceeds are
immediately
invested, at a
price as described above, in shares of the fund being
acquired.
Smith
Barney
reserves the right to reject any exchange request. The
exchange
privilege may be
modified or terminated at any time after written notice to
shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote a Fund's yield or
total
return in
advertisements or in reports and other communications to
shareholders.
The Trust
may include comparative performance information in
advertising
or
marketing each
Fund's shares. Such performance information may include the
following
industry
and financial publications: BARRON'S, BUSINESS WEEK, CDA
INVESTMENT
TECHNOLOGIES, INC., CHANGING TIMES, FORBES, FORTUNE,
INSTITUTIONAL
INVESTOR,
INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL FUND VALUES, THE
NEW
YORK
TIMES, USA
TODAY and THE WALL STREET JOURNAL. To the extent any
advertisement or
sales
literature of a Fund describes the expenses or performance
of
any Class
it will
also disclose such information for the other Classes.
YIELD AND EQUIVALENT TAXABLE YIELD
A Fund's 30-day yield figure described in the Prospectuses
is
calculated
according to a formula prescribed by the SEC, expressed as
follows:
<TABLE>
<S> <C> <C>
YIELD = 2 [(a-b + 1)6 - 1]
cd
</TABLE>
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned
during the period.
b = expenses accrued for the period
(net of reimbursement).
c = the average daily number of
shares outstanding during the
period that were entitled to
receive dividends.
d = the maximum offering price per
share on the last day of the
period.
</TABLE>
For the purpose of determining the interest earned
(variable "a" in
the
formula) on debt obligations that were purchased by a Fund
at a
discount
or
premium, the formula generally calls for amortization of the
discount or
premium; the amortization schedule will be adjusted monthly
to
reflect
changes
in the market values of the debt obligations.
A Fund's "equivalent taxable 30-day yield" for a Class
is
computed
by
dividing that portion of the Class' 30-day yield which is
tax-
exempt by
one
minus a stated income tax rate and adding the product to
that
portion,
if any of
the Class' yield that is not tax-exempt.
34
<PAGE>
The yield on municipal securities is dependent upon a
variety of
factors,
including general economic and monetary conditions,
conditions
of the
municipal
securities market, size of a particular offering, maturity
of
the
obligation
offered and rating of the issue. Investors should recognize
that, in
periods of
declining interest rates, a Fund's yield for each Class of
shares will
tend to
be somewhat higher than prevailing market rates, and in
periods
of
rising
interest rates a Fund's yield for each Class of shares will
tend to be
somewhat
lower. In addition, when interest rates are falling, the
inflow
of net
new money
to a Fund from the continuous sale of its shares will likely
be
invested
in
portfolio instruments producing lower yields than the
balance
of the
Fund's
portfolio, thereby reducing the current yield of the Fund.
In
periods of
rising
interest rates, the opposite can be expected to occur.
The yields for the 30-day period ended November 30, 1994
were as
follows:
Municipal Fund -- (0.39)%, California Fund -- (1.33)%, and
New
York Fund
- --
(1.60)%.
The equivalent taxable yields for the 30-day period
ended
November
30, 1994
assuming payment of Federal income taxes at the rate of
31.0%;
California income
taxes at the rate of 9.3% for the California Fund; and New
York
State
and City
income taxes at a rate of 12.0% for the New York Fund would
have been as
follows: Municipal Fund -- (0.57)%; California Fund --
(2.13)%,
and New
York
Fund -- (2.64)%.
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures, as described
below, are
computed
according to a formula prescribed by the SEC. The formula
can
be
expressed as
follows:
P(1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial
payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical $1,000
investment made at the
beginning of a 1-, 5- or
10-year period at the end of
a 1-, 5- or 10-year period
(or fractional portion
thereof), assuming
reinvestment of all dividends
and distributions.
</TABLE>
The ERV assumes complete redemption of the hypothetical
investment
at the
end of the measuring period. A Fund's net investment income
changes in
response
to fluctuations in interest rates and the expenses of the
Fund.
The following total return figures assume that the
maximum
Class A
2.00%
sales charge has been deducted from the investment at the
time
of
purchase and
have been restated to show the change in the maximum sales
charge. The
Funds'
average annual total return figures for Class A shares were
as
follows:
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1994
-----------------------------
- --
TOTAL RETURN TOTAL
RETURN
(WITH FEE (WITHOUT
FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- -------------- ------------
- --
<S> <C> <C>
Municipal Fund.............. (1.78)% (1.92)%
California Fund............. (5.57)% (6.06)%
New York Fund............... (5.89)% (6.22)%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31,
1991)
THROUGH NOVEMBER 30, 1994
-----------------------------
- --
TOTAL RETURN TOTAL
RETURN
(WITH FEE (WITHOUT
FEE
WAIVERS) WAIVERS)
-------------- ------------
- --
<S> <C> <C>
Municipal Fund.............. 4.06% 3.65%
California Fund............. 3.69% 2.68%
New York Fund............... 4.02% 3.43%
</TABLE>
35
<PAGE>
AGGREGATE TOTAL RETURN
A Fund's "aggregate total return" figures, as described
below,
represent
the
cumulative change in the value of an investment in the Fund
for
the
specified
period and are computed by the following formula:
ERV - P
------------
P
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial
payment of $10,000.
ERV = Ending Redeemable Value of a
hypothetical $10,000
investment made at the
beginning of the 1-, 5- or
10-year period at the end of
the 1-, 5- or 10-year period
(or fractional portion
thereof), assuming
reinvestment of all dividends
and distributions.
</TABLE>
The ERV assumes complete redemption of the hypothetical
investment
at the
end of the measuring period.
The Funds' aggregate total return figures for Class A
shares were as
follows:
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1994
-----------------------------
- --
TOTAL RETURN TOTAL
RETURN
(WITH FEE (WITHOUT
FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- -------------- ------------
- --
<S> <C> <C>
Municipal Fund.............. 0.23% (0.09)%
California Fund............. (3.65)% (4.15)%
New York Fund............... (3.97)% (4.31)%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31,
1991)
THROUGH NOVEMBER 30, 1994
----------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
------------ -------------
<S> <C> <C>
Municipal Fund.............. 14.59% 13.27%
California Fund............. 13.42% 10.21%
New York Fund............... 14.46% 12.59%
</TABLE>
These aggregate total return figures for Class A do not
assume that
the
maximum 2.00% sales charge has been deducted from the
investment at the
time of
purchase. If the sales charge had been deducted at the time
of
purchase,
the
aggregate total return for Class A shares for those same
periods would
have been
as follows in the tables set forth below. The total return
figures have
been
restated to show the change in the maximum sales charge.
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1994
-----------------------------
- --
TOTAL RETURN TOTAL
RETURN
(WITH FEE (WITHOUT
FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- -------------- ------------
- --
<S> <C> <C>
Municipal Fund.............. (1.78)% (1.92)%
California Fund............. (5.57)% (6.06)%
New York Fund............... (5.89)% (6.22)%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31,
1991)
THROUGH NOVEMBER 30, 1994
-----------------------------
- -
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
------------- -------------
- -
<S> <C> <C>
Municipal Fund.............. 12.30% 11.01%
California Fund............. 11.15% 8.00%
New York Fund............... 12.17% 10.34%
</TABLE>
It is important to note that the total return figures
set
forth
above are
based on historical earnings and are not intended to
indicate
future
performance. Each Class' net investment income changes in
response to
fluctuation in interest rates and the expenses of the Fund.
Performance
will
vary from time to time depending upon market conditions, the
composition
of the
Fund's portfolio and operating expenses and the expenses
exclusively
attributable to the Class. Consequently, any given
performance
quotation
should
not be considered representative of the Class' performance
for
any
specified
period in the future. Because performance will vary, it may
not
provide
a basis
for comparing an investment in the Class with certain bank
deposits or
other
investments that pay a fixed yield for a stated period of
time.
Investors
comparing a Class' performance with that of other mutual
funds
should
give
consideration to the quality and maturity of the respective
investment
companies' portfolio securities.
TAXES
The following is a summary of selected Federal income tax
considerations
that
may affect the Trust and its
36
<PAGE>
shareholders. The summary is not intended as a substitute
for
individual
tax
advice and investors are urged to consult their own tax
advisors as to
the tax
consequences of an investment in the Trust.
As described above and in the Prospectuses, each Fund is
designed to
provide
investors with current income which is excluded from gross
income for
Federal
income tax purposes, and the California Fund and the New
York
Fund are
designed
to provide investors with current income exempt from
otherwise
applicable state
and/or local personal income taxes. The Trust is not
intended
to be a
balanced
investment program and is not designed for investors seeking
capital
gains or
maximum tax-exempt income irrespective of fluctuations in
principal.
Investment
in the Trust would not be suitable for tax-exempt
institutions,
qualified
retirement plans, H.R. 10 plans and individual retirement
accounts
because those
investors would not gain any additional tax benefit from the
receipt of
tax-exempt income.
The Trust has qualified and intends that each Fund
continue
to
qualify each
year as a "regulated investment company" under the Code.
Provided that a
Fund
(a) is a regulated investment company and (b) distributes to
its
shareholders at
least 90% of its taxable net investment income (including,
for
this
purpose, its
net realized short-term capital gains) and 90% of its tax-
exempt
interest income
(reduced by certain expenses), the Fund will not be liable
for
Federal
income
taxes to the extent its taxable net investment income and
its
net
realized
long-term and short-term capital gains, if any, are
distributed
to its
shareholders. Any such taxes paid by a Fund would reduce the
amount of
income
and gains available for distribution to shareholders.
Because the Fund may distribute exempt-interest
dividends,
interest
on
indebtedness incurred by a shareholder to purchase or carry
shares of a
Fund is
not deductible for Federal income tax purposes. In addition,
the
indebtedness is
not deductible by a shareholder of the California Fund for
California
State
personal income tax purposes, nor by a New York Fund
shareholder for New
York
State and New York City personal income tax purposes. If a
shareholder
receives
exempt-interest dividends with respect to any share of a
Fund
and if the
share
is held by the shareholder for six months or less, then any
loss on the
sale or
exchange of the share may, to the extent of the exempt-
interest
dividends, be
disallowed. In addition, the Code may require a shareholder
that
receives
exempt-interest dividends to treat as taxable income a
portion
of
certain
otherwise non-taxable social security and railroad
retirement
benefit
payments.
Furthermore, the portion of any exempt-interest dividend
paid
by a Fund
that
represents income derived from private activity bonds held
by
the Fund
may not
retain its tax-exempt status in the hands of a shareholder
who
is a
"substantial
user" of a facility financed by the bonds, or a "related
person" of the
substantial user. Moreover, as noted in the Prospectuses (a)
some or all
of a
Fund's exempt-interest dividends may be a specific
preference
item, or a
component of an adjustment item, for purposes of the Federal
individual
and
corporate alternative minimum taxes and (b) the receipt of a
Fund's
dividends
and distributions may affect a corporate shareholder's
Federal
"environmental"
tax liability. In addition, the receipt of a Fund's
dividends
and
distributions
may affect a foreign corporate shareholder's Federal "branch
profits"
tax
liability and the Federal and California "excess net passive
income" tax
liability of a Subchapter S corporation. Shareholders should
consult
their own
tax advisors to determine whether they are (a) "substantial
users" with
respect
to a facility or "related" to those users within the meaning
of
the Code
or (b)
subject to a Federal alternative minimum tax, the Federal
"environmental" tax,
the Federal "branch profits" tax, or the Federal or
California
"excess
net
passive income" tax. As a general rule, a Fund's gain or
loss
on a sale
or
exchange of an investment will be a long-term capital gain
or
loss if
the Fund
has held the investment for more than one year and will be a
short-term
capital
gain or loss if it has held the investment for one year or
less.
Furthermore, as
a general rule, a shareholder's gain or loss on a sale or
redemption of
shares
of a Fund will be a long-term capital gain or loss
37
<PAGE>
if the shareholder has held his or her Fund shares for more
than one
year and
will be a short-term capital gain or loss if he or she has
held
his or
her Fund
shares for one year or less.
Shareholders of each Fund will receive, as more fully
described in
the
Prospectuses, an annual statement as to the income tax
status
of his or
her
dividends and distributions for the prior calendar year.
Each
shareholder will
also receive, if appropriate, various written notices after
the
close of
a
Fund's prior taxable year as to the Federal income tax
status
of certain
dividends or distributions which were received from the Fund
during the
Fund's
prior taxable year.
The dollar amount of dividends paid by a Fund that is
excluded from
Federal
income taxation and the dollar amount of dividends paid by a
Fund that
is
subject to federal income taxation, if any, will vary for
each
shareholder
depending upon the size and duration of each shareholder's
investment in
a Fund.
Investors considering buying shares of a Fund on or just
prior to
the record
date for a capital gain distribution should be aware that
the
amount of
the
forthcoming distribution payment will be a taxable
distribution
payment.
If a shareholder fails to furnish a correct taxpayer
identification
number,
fails to report fully dividend or interest income or fails
to
certify
that he or
she has provided a correct taxpayer identification number
and
that he or
she is
not subject to "backup withholding," then the shareholder
may
be subject
to a
31% "backup withholding" tax with respect to (a) taxable
dividends and
distributions and (b) the proceeds of any redemptions of
shares
of a
Fund. An
individual's taxpayer identification number is his or her
social
security
number. The backup withholding tax is not an additional tax
and
may be
credited
against a taxpayer's regular Federal income tax liability.
The discussion above is only a summary of certain tax
considerations
generally affecting a Fund and its shareholders, and is not
intended as
a
substitute for careful tax planning. Shareholders are urged
to
consult
their tax
advisors with specific reference to their own tax
situations,
including
their
state and local tax liabilities.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust
on
October
17, 1991
under the name Shearson Lehman Brothers Intermediate-Term
Trust. On
November 20,
1991, July 30, 1993, and October 14, 1994, the Fund's name
was
changed
to
Shearson Lehman Brothers Income Trust, Smith Barney Shearson
Income
Trust and
Smith Barney Income Trust, respectively.
Boston Safe, an indirect wholly owned subsidiary of
Mellon,
is
located at
One Boston Place, Boston, Massachusetts 02108, and serves as
the
custodian for
the Trust. Under the custody agreement, Boston Safe holds
the
Trust's
portfolio
securities and keeps all necessary accounts and records. For
its
services,
Boston Safe receives a monthly fee based upon the month-end
market value
of
securities held in custody and also receives securities
transaction
charges. The
assets of the Trust are held under bank custodianship in
compliance with
the
1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts
02109, and
serves
as the Trust's transfer agent. Under its transfer agency
agreement, TSSG
maintains the shareholder account records for the Trust,
handles certain
communications between shareholders and the Trust and
distributes
dividends and
distributions payable by the Trust. For these services, TSSG
receives a
monthly
fee computed on the basis of the number of shareholder
accounts
it
maintains for
the Trust during the month, and is reimbursed for out-of-
pocket
expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended November
30, 1994,
accompany
this Statement of Additional Information and are
incorporated
herein by
reference in their entirety.
38
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa -- Bonds 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 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 that
make
the long term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable
investment
attributes
and are to be considered as upper medium-grade obligations.
Factors
giving
security to principal and interest are considered adequate,
but
elements
may be
present which suggest a susceptibility to impairment
sometime
in the
future.
Baa -- Bonds rated Baa are considered as medium-grade
obligations,
I.E.,
that is 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.
Moody's applies the numerical modifiers 1, 2 and 3 in
each
generic
rating
classification below Aaa. The modifier 1 indicates that the
security
ranks in
the higher end of its generic rating category; the modifier
2
indicates
a
mid-range ranking; and the modifier 3 indicates that the
issue
ranks in
the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other
short-
term loans
are
designated Moody's Investment Grade ("MIG")and for variable
demand
obligations
are designated Variable Moody's Investment Grade "(VMIG)".
This
distinction is
in recognition of the differences between short-term credit
risk and
long-term
risk. Loans bearing the designation MIG 1 or VMIG 1 are of
the
best
quality,
enjoying strong protection by established cash flows of
funds
for their
servicing, superior liquidity support or from established
and
broad-
based access
to the market for refinancing or both. Loans bearing the
designation MIG
2 or
VMIG 2 are of high quality, with ample margins of
protection,
although
not as
large as the preceding group. Loans bearing the designation
MIG
3 or
VMIG 3 are
of favorable quality, with all security elements accounted
for,
but
lacking the
undeniable strength of the preceding grades. Liquidity and
cash
flow may
be
narrow and market access for refinancing, is likely to be
less
well
established.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating
assigned by
Moody's.
Issuers rated Prime-1 (or related supporting institutions)
are
considered to
have a superior capacity for repayment of short term
promissory
obligations.
Issuers rated Prime-2 (or related supporting institutions)
are
considered to
have a strong capacity for repayment of short term
promissory
obligations. This
will normally be evidenced by many of the characteristics of
issuers
rated
Prime-1 but to a lesser degree. Earnings trends and coverage
ratios,
while
sound, will be more subject to variation. Capitalization
characteristics, while
still appropriate, may be more affected by external
conditions.
Ample
alternative liquidity is maintained.
A-1
<PAGE>
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:
AAA -- These are the obligations of the highest quality.
They
have the
strongest
capacity for timely payment of debt service.
General Obligation Bonds rated AAA -- In a period of
economic
stress, the
issuers will suffer the smallest declines in income and
will be
least
susceptible to autonomous decline. Debt burden is
moderate.
A strong
revenue
structure appears more than adequate to meet future
expenditure
requirements. Quality of management appears superior.
Revenue Bonds rated AAA -- Debt service coverage has
been,
and is
expected
to remain, substantial. Stability of the pledged
revenues
is also
exceptionally strong due to the competitive position of
the
municipal
enterprise or to the nature of the revenues. Basic
security
provisions
(including rate covenant, earnings test for issuance of
additional
bonds and
debt service reserve requirements) are rigorous. There
is
evidence
of
superior management.
AA -- The investment characteristics of bonds in this
group
are only
slightly less marked than those of the prime quality issues.
Bonds rated
AA have
the second strongest capacity for payment of debt service.
A -- Principal and interest payments on bonds in this
category are
regarded
as safe, although the bonds are somewhat more susceptible to
the adverse
effects
of changes in circumstances and economic conditions than
bonds
in higher
rated
categories. This rating describes the third strongest
capacity
for
payment of
debt service.
General Obligation Bonds rated A -- There is some
weakness,
either
in the
local economic base, in debt burden, in the balance
between
revenues
and
expenditures or in quality of management. Under certain
adverse
circumstances, any one such weakness might impair the
ability of the
issuer
to meet debt obligations at some future date.
Revenue Bonds rated A -- Debt service coverage is good,
but
not
exceptional.
Stability of the pledged revenues could show some
variations because
of
increased competition or economic influences on
revenues.
Basic
security
provisions, while satisfactory, are less stringent.
Management
performance
appears adequate.
BBB -- The bonds in this group are regarded as having an
adequate
capacity
to pay interest and repay principal. Whereas bonds in this
group
normally
exhibit 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. Bonds
rated BBB have the fourth strongest capacity for payment of
debt
service.
S&P's letter ratings may be modified by the addition of
a
plus or a
minus
sign, which is used to show relative standing within the
major
rating
categories, except in the AAA category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are
usually given
note
ratings (designated SP-1, -2 or -3) to distinguish more
clearly
the
credit
quality of notes as compared to bonds. Notes rated SP-1 have
a
very
strong or
strong capacity to pay principal and interest. Those issues
determined
to
possess overwhelming safety characteristics are given the
designation of
SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay
principal
and
interest.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P 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 A-
1+.
Capacity
for
timely payment on commercial paper rated A-2 is strong, but
the
relative
degree
of safety is not as high as for issues designated A-1.
DESCRIPTION OF FITCH MUNICIPAL BOND RATINGS:
AAA -- Bonds rated AAA are considered to be investment grade
and of the
highest
credit quality. The obligor
A-2
<PAGE>
has an exceptionally strong ability to pay interest and
repay
principal,
which
is unlikely to be affected by reasonably foreseeable events.
AA -- Bonds rated AA are considered to be investment
grade
and of
very high
credit quality. The obligor's ability to pay interest and
repay
principal is
very strong, although not quite as strong as bonds rated
AAA.
Because
bonds
rated in the AAA and AA categories are not significantly
vulnerable to
foreseeable future developments, short term debt of these
issues is
generally
rated F-1+ by Fitch.
A -- Bonds rated A are considered to be investment grade
and of high
credit
quality. The obligor's ability to pay interest and repay
principal is
considered
to be strong, but may be more vulnerable to adverse changes
in
economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB are considered to be investment
grade and of
satisfactory credit quality. The obligor's ability to pay
interest and
repay
principal is considered to be adequate. Adverse changes in
economic
conditions
and circumstances, however, are more likely to have adverse
impact on
these
bonds, and therefore impair timely payment. The likelihood
that
the
ratings of
these bonds will fall below investment grade is higher than
for
bonds
with
higher ratings.
Plus and minus signs are used by Fitch with a rating
symbol
to
indicate the
relative position of a credit within the rating category.
Plus
and minus
signs,
however, are not used in the AAA category.
DESCRIPTION OF FITCH SHORT TERM RATINGS:
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 the issuer's
obligations in a
timely
manner.
Fitch's short term ratings are as follows:
F-1+ -- Issues assigned this rating are regarded as
having
the
strongest
degree of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance
of
timely
payment
only slightly less in degree than issues rated F-1+.
F-2 -- Issues assigned this rating have a satisfactory
degree of
assurance
for timely payment but the margin of safety is not as great
as
for
issues
assigned F-1+ and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics
suggesting
that the
degree of assurance for timely payment is adequate, however,
near term
adverse
changes could cause these securities to be rated below
investment grade.
LOC -- The symbol LOC indicates that a Fitch rating is
based on a
letter of
credit issued by a commercial bank.
A-3
Dear Shareholder: We are pleased to present the semi-annual
report and
unaudited financial statements for the six-month period
ended
September
30,
1994 for the Smith Barney Muni Funds: California Portfolio,
California
Limited Term Portfolio and California Money Market
Portfolio.
Below we
have
provided a summary of economic and market conditions, as
well
as a brief
review of the investment strategy used by each Portfolio.
Following
these
Portfolio Highlights, you will find a more detailed summary
of
holdings
in
the Schedule of Investments. We hope you find this
information
useful as
you
evaluate your investments.
Portfolio Highlights Economic Overview Since our last report
in
May, the
U.S.
economy has continued to exhibit strong economic growth.
Consumer
spending
has been growing at more than a 3% rate and job growth
statistics
suggest
that we are near or at full employment. Capital spending is
also strong
and
should continue to be so given a high measurement of
capacity
utilization.
Another indicator of economic expansion is the 20% increase
in
raw
commodity
prices over the past 12 months, as measured by the Journal
of
Commerce
Index.
As with earlier recoveries, a rapidly expanding economy also
has brought
about the fear of returning inflation. In an effort to curb
its
resurgence,
the Federal Reserve Board has implemented a series of
increases
in the
benchmark for short-term interest rates, the Federal Funds
Rate. This
policy
of monetary tightening, with six increases from 3.00% to a
current
5.50%,
has
caused extreme volatility in fixed income markets, along
with a
marked
erosion in the value of municipal bonds.
At this point, the latest move by the Federal Reserve may
not
be
sufficient
to calm the markets and an additional tightening may be
necessary.
Ultimately, however, we believe their policy of monetary
restraint will
succeed in slowing the economy to a more sustainable rate of
growth.
The California Economy In July of 1994, Moodys downgraded
Californias
debt
rating for the third time in two years, this time from Aa to
A1.
Standard
&Poors also cut its rating to A from A+. Despite some signs
of
economic
recovery, the State continues to grapple with a structurally
imbalanced
budget, an accumulated deficit of over $3 billion and short-
term
borrowings
of $7 billion. One widely publicized outcome of the November
elections
was
the approval by voters of the proposition barring illegal
aliens from
receiving state benefits. However, most observers view the
resulting
benefits
as uncertain and anticipate they will be slow in
implementation, given
anticipated legal challenges.
California Portfolio The performance of the California
Portfolio
reflects
the
difficult market conditions discussed in the Economic
Overview
above.
The
one-year total return for the period ended September 30,
1994
was -2.55%
on
net asset value for Class A shares. Though this return was
negative, the
Portfolio was ranked #14 of 74 California Municipal bond
funds
included
in
the September survey by Lipper Anlaytical Services, Inc.
Performance was
also
strong on a three- and five- year basis, as your Fund ranked
in
the top
quartile for each period.
In part, our performance relative to other long-term
municipal
bond
funds
was
aided by significant commitment to pre-refunded bonds. These
issues,
which
comprise approximately 20% of the Portfolio, are bonds that
have been
advance
refunded prior to their initial call date. Pre-refunded
bonds
tend to
reduce
overall credit risk, because they are backed by investments
in
U.S.
Government Securities. They also have less interest rate
sensitivity
than
longer-dated bonds (since the life of the bond has been
permanently
shortened
to the refunding date).
The performance of the Portfolio was also enhanced by our
position in
other
high-coupon premium bonds that are callable before their
stated
maturity.
This positioning had the effect of shortening the average
effective
maturity
of the Portfolio and reduced its sensitivity to rising
interest
rates.
However, many of these defensive characteristics have been
diminished or
lost
over the past month. During late October and the first half
of
November,
municipal bond yields have increased substantially, and many
issues are
no
longer trading at a premium. At this juncture, it is our
view
that much
of
the increase in long-term interest rates is behind us; thus,
we
have
begun
to
replace many of these holdings with issues of similar stated
maturities,
but
with greater call protection. Though this strategy may
result
in some
sacrifice to current yield, it will enhance performance
should
rates
begin
to
decline next year, while not adding to downside risk should
rates rise
further.
Although the municipal market could come under additional
pressure from
year-end tax loss selling and swap activity, we will
endeavor
to stay as
close to fully invested as practicable. Considering our view
that the
Federal
Reserve will be successful in slowing the economy to a more
sustainable
rate
of growth, we believe that current yield levels are
extremely
attractive
and
that municipal bonds are offering excellent value.
California Limited Term Portfolio Reflecting the volatile
municipal bond
market conditions discussed above, the Portfolios total
return
in this
period
was 0.39%. As a result, the Portfolio was ranked the #1 fund
among the
California intermediate municipal funds included in the
September survey
by
Lipper Analytical Services, Inc.
Our relative performance was primarily the result of an
emphasis on
higher
quality issues that are trading at a premium to face value.
In
particular,
we
have concentrated on those bonds that have a shorter
effective
maturity
(e.g.
bonds that are priced to a call date earlier than their
stated
maturity
date,
and issues with sinking funds designed to retire a portion
of
the issue
prior
to maturity.) However, the defensive characteristics of many
of
these
issues
have been diminished or lost over the past month. During
late
October
and
the
first half of November, municipal bond yields have increased
substantially,
and many issues are no longer trading at a premium. Even
though
much of
the
rise in long-term interest rates is probably behind us, the
prospect of
continued tightening of monetary policy by the Federal
Reserve
Board is
likely to sustain at least some upward pressure on the
yields
of
shorter-
term
securities. Accordingly, we intend to increase the use of
short-
term
floating
rate securities and continue to favor higher quality bonds
trading at a
premium to face value. Though this strategy may result in
some
sacrifice
to
current yield, it will reduce volatility if rates rise
further,
while
providing reasonable performance should rates begin to
decline.
California Money Market Portfolio As of September 30, 1994,
the
seven-
day
yield for the Fund was 2.60%, which translates into a 4.84%
taxable-equivalent yield for California residents in the
maximum
combined
effective marginal tax brackets. The average maturity target
for the
Portfolio is in the 30-50 day range, which is where we have
been
positioned
throughout most of 1994. Given an uncertain interest rate
environment
and
the
current high demand for tax-exempt cash equivalent
investments,
we
expect
to
remain in this somewhat defensive maturity range over the
near
term.
***** We hope that you have found this summary on the
California and
California Limited Term Portfolios, as well as the
California
Money
Market
Portfolio, informative. A further description of the
individual
holdings
in
each Portfolio can be found in the Schedule of Investments
that
follows.
We appreciate your confidence and pledge our best efforts on
your
behalf.
Sincerely yours,
Stephen Treadway Chairman and Chief Executive Officer
November
15, 1994
California Money Market California Limited Term and
California
Portfolios
Smith Barney Muni Funds California Limited Term Portfolio
Historical Performance Class A Shares (unaudited)
Net Asset Value Period Beginning End Income Capital
Gain
Total
Ended of Period of Period Dividends Distributions
Returns(1)
9/30/94 $6.41 $6.39 $0.16 $ 2.24%
4/27/93
- -
3/31/94 6.50 6.41 0.24 2.29 Cumulative
Total
Return -
Class A Shares (4/27/93* through 9/30/94) 4.58%
It is the Funds policy to distribute dividends monthlyand
capital gains,
if
any, annually.
Average Annual Total Return Class A Shares (unaudited)
Without Sales Charge(1) With Sales Charge(2) 4/27/93*
through
9/30/94 3.18% 1.68%
Without Sales Charge(1) With Sales Charge(2) 5/18/93*
through
9/30/94 2.88% 2.16% Cumulative Total Return 3.97
Without Sales Charge(1) With Sales Charge(2) 6/23/94*
through
9/30/94 1.62% 0.44% Cumulative Total Return 2.06
*Inception
Average Annual Total Return Class B Shares (unaudited)
Average Annual Total Return Class C Shares (unaudited)
Schedule of Investments September 30, 1994
Smith Barney Muni Funds California Portfolio
Historical Performance Class A Shares (unaudited)
Net Asset Value ddddd Period Beginning End Income
Capital
Gain Total Ended of Period of
Period Dividends Distributions Returns(1)
9/30/94 $12.27 $12.08 $ 0.38 $ 1.54%
3/31/94 12.78 12.27 0.77 0.03 2.15
3/31/93 12.05 12.78 0.78 12.93
3/31/92 11.62 12.05 0.80 11.11
3/31/91 11.47 11.62 0.84 8.90
3/31/90 11.17 11.47 0.85 10.44
3/31/89 10.96 11.17 0.86 10.07
4/3/87
- -
3/31/88 12.50 10.96 0.88 (5.79)
Total $6.16 $0.03 Cumulative
Total
Return -
Class A
Shares (4/3/87* through 9/30/94) 57.42%
It is the Funds policy to distribute dividends monthlyand
capital gains,
if
any, annually.
Average Annual Total Return Class A Shares (unaudited)
Without Sales Charge(1) With Sales Charge(2) Five Years
Ended
9/30/94 7.09% 6.06% 4/3/87* through 9/30/94
6.46 5.80
Without Sales Charge(1) With Sales Charge(2) 1/5/93*
through
9/30/94 3.79% 3.23% Cumulative Total Return
6.67
Without Sales Charge(1) With Sales Charge(2) 1/12/93*
through
9/30/94 4.82% 3.97% Cumulative Total Return
8.42
*Inception
Growth of $10,000 Invested in Class A Shares of the
California
Limited
Term
Portfolio vs.Lehman Ten Year General Obligation Index
(unaudited) April
1993
September 1994
Hypothetical illustration of $10,000 invested in Class A
shares
at
inception
on April 27, 1993, assuming deduction of the maximum 2.00%
sales charge
at
the time of investment and reinvestment of dividends (after
deduction of
applicable sales charges) and capital gains (at net asset
value) through
September 30, 1994. The Index is unmanaged and is not
subject
to the
same
management and trading expenses of a mutual fund. The
performance of the
Portfolios other classes may be greater or less than the
Class
A shares
performance indicated on this chart, depending on whether
greater or
lesser
sales charges and fees were incurred by shareholders
investing
in the
other
classes.
All figures represent past performance and are not a
guarantee
of future
results. Investment returns and principal value will
fluctuate,
and
redemption values may be more or less than the original
cost.
No
adjustment
has been made for shareholder tax liability on dividends or
capital
gains.
(1) Assumes reinvestment of all dividends at maximum
offering
price
and
capital gain distributions at net asset value and does not
reflect
deduction
of the applicable sales charge with respect to Class A
shares
or the
applicable contingent deferred sales charges (CDSC) with
respect to
Class B
and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions
at net asset value. In addition, the deduction of the
maximum
initial
sales
charge of 2.00% with respect to Class A shares and a
deduction
of the
CDSC
of
1.00% with respect to Class B shares and 1.50% with respect
to
Class C
shares
has been factored into these calculations.
Average Annual Total Return Class B Shares (unaudited)
Average Annual Total Return Class C Shares (unaudited)
Smith Barney Muni Funds California Limited Term Portfolio
Historical Performance September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Schedules of Investments (unaudited) September 30, 1994
$ 250,000 AAA Association of Bay Area Government Tax
Allocation Series A 4.20% due 12/15/94 $250,476
1,100,000 A-1+ Burbank Redevelopment Agency Issue A
2.60%(b) 1,100,000 California Alternate Energy Source
Finance
Authority
5,000,000 VMIG 1 (Hydroelectric Revenue) 1986
3.40%(a)(b) 5,000,000 California Health Facilities
Authority:
5,500,000 A-1+ Memorial Health Services 3.75%(b)
5,500,000
2,200,000 VMIG 1 Pooled Loan Program Series 90A
3.55%(b) 2,200,000 California Pollution Control Financial
Authority:
1,000,000 A-1+ PCR (Chevron USA Inc. Project) 2.85% due
11/15/94 1,000,121 300,000 P-1 PCR (Honey Lake
Project)
3.75%(a) 300,000 PCR (Pacific Gas & Electric):
1,000,000 A-1+ 1988A 3.05% due 12/13/94**(a)
1,000,000
8,000,000 A-1+ 1988C 2.85% to 3.05% due by
12/16/94** 8,000,000 3,000,000 A-1+ 1988E
2.90%
and
3.35%
due by 12/19/94** 3,000,000 3,500,000 Aaa PCR (San
Diego Gas
&
Electric) 4.25% due by 9/1/95 3,500,000
6,300,000 A-1+ PCR (Southdown Inc. Project) 3.05%(b)
6,300,000
5,700,000 P-1 Resource Recovery: Burney-Forest
Delmarva
Power
&
Light 1988 3.55%(a)(b) 5,700,000
200,000 P-1 Delano Project Series 1990
3.75%(a)(b)
200,000
4,600,000 P-1 Delano Project Series 1991
3.75%(a)(b) 4,600,000 Southern California Edison:
3,550,000 P-1 1985C 2.80% and 3.00% due by 12/14/94**
3,550,000
2,600,000 P-1 1985D 3.10% and 3.15% due by 11/29/94**
2,600,000
7,000,000 MIG1 California School Cash Reserve Program
Authority Series A 3.75% due 7/5/95 7,038,355
2,000,000 P-1 California State Department of Water
Resources
Water Revenue Series 1, 2.85% due 10/26/94 2,000,000
2,000,000 A-1+ California State Department of Water TOB
(BT-83) 3.65%(b) 2,000,000 6,000,000 A-1+ California
State
GO
FRTC 92-E, 3.95%(b) 6,000,000 2,000,000 P-1 Chula Vista IDR
Bonds
(San Diego Gas & Electric) Series 1992 B 3.85%(a)(b)
2,000,000
6,600,000 VMIG 1 Contra Costa Transportation Authority
Series A
3.55%(b) 6,600,000 3,500,000 A-1+ Delmar Race Track
Authority
3.00%
due 12/20/94 3,500,000 2,000,000 P-1 East Bay Muni
Utility
District
Water Revenue 2.65% due 10/18/94 2,000,000 2,000,000 VMIG
1 Fairfield IDA (R. Dakin & Company Project)
3.10%(b) 2,000,000$ 500,000 A-1+ Fontana Multi-Family
Housing
Revenue Bonds (Apartments PJ) Series A 3.55%(a)(b)
$500,000
1,000,000 VMIG 1 Garden Grove Multi-Family Housing
(Valley
View Senior Villas) 4.05%(a)(b) 1,000,000 2,800,000 A-1+
Glendale
Public Parking (Reliance Development Co.) 1984 A 3.05%(b)
2,800,000
2,000,000 AAA Hemet (City of) Multi-Family Housing Revenue
(Sunwest
Resort) 3.80%(b) 2,000,000 700,000 A-1 Irvine Ranch
Water
3.55%(b) 700,000 Irvine Ranch Water District: 800,000 A-1
Series
B 3.50%(b) 800,000 300,000 VMIG 1 Assessment
No. 94-15
3.50%(b) 300,000 2,900,000 VMIG 1 Series 1993A
3.50%(b) 2,900,000 1,200,000 VMIG 1 San Rafael
(Apartments
Project-A) 3.55%(a)(b) 1,200,000 1,000,000 A-1
Series
1985
B
3.50%(b) 1,000,000 1,600,000 A-1 No. 282 Series A
3.50%(b) 1,600,000 600,000 A-1 No. 284 Series A
3.50%(b) 600,000 3,600,000 VMIG 1 Long Beach Health
Facilities
Authority (Memorial Health Services) 1991 3.75%(b)
3,600,000
1,700,000 VMIG 1 Los Angeles Community Redevelopment
Agency
(Academy
Village Apartments) 3.90%(a)(b) 1,700,000 1,500,000 MIG1
Los
Angeles
County TRAN 3.85% due 6/30/95 1,506,995 4,400,000 VMIG 1
Los
Angeles
County Riverpark (Apartment #90) 3.60%(b) 4,400,000
3,400,000 AAA Los Angeles MTA Sales Tax Revenues 1993 A
3.50%(b) 3,400,000 1,500,000 VMIG 1 Los Angeles COP
(Simon
Wiesenthal Center Project) 3.50%(b) 1,500,000 3,000,000
P-1
Los
Angeles Department of Water & Power TECP 3.10% due
11/22/94
3,000,000
Los Angeles Multi-Family Housing: 6,600,000 A-1+
Series K
3.10%(b) 6,600,000 1,200,000 VMIG 1 Skyline at
Southpark
Apartments Series 85 3.60%(b) 1,200,000 Los Angeles
Wastewater
System:
2,000,000 Aaa TECP 2.90% due 10/12/94 2,000,000
465,000 Aaa Series 1993D 8.70% due 11/1/94
467,198
7,600,000 P-1 Metropolitan Water District of Southern
California TECP 3.05% to 3.30% due by 11/30/94
7,600,000
3,000,000 A-1+ Oakland Childrens Hospital Center 1984 B
3.70%(b) 3,000,000 Orange County Apartment Development
Revenue:
1,700,000 VMIG 1 Wood Canyon Villas 3.85%(a)(b)
1,700,000
4,000,000 VMIG 1 WLCO LF Partners C3 TOB (BTV-1 & 2)
3.70%(b) 4,000,000 100,000 Aa2 Orange County Water
District
1990
Project B 3.45% (b) 100,000 $1,200,000 AAA Paramount (City
of)
Multi-Family Housing (Triangle Development Project)
4.00%(a)(b) $1,200,000 500,000 A-1+ Rancho Mirage
Redevelopment
Agency COP 3.65%(a)(b) 500,000 2,000,000 A-1+
Riverside Sewer
Revenue TOB Custody Receipt (MGT-21) 3.85%(b) 2,000,000
1,000,000 A-1+ Roseville Financial Authority, Placer County
(Hospital Lease) Revenue Series 1989 A 3.55%(b) 1,000,000
Sacramento
Municipal Utility District: 1,000,000 P-1 Series A
3.00% due
12/14/94 1,000,000 1,600,000 P-1 Series H 3.10% due
11/17/94 1,600,000 San Bernadino County IDA IDR:
2,225,000 P-1 Master Halco Series 1986 II 3.75% (a)(b)
2,225,000
300,000 P-1 Ring Can Co. Series 1986 III 3.75%
(a)(b)
300,000
1,130,000 P-1 Tower Industries Series IV 3.75%(a)(b)
1,130,000
3,000,000 MIG1 San Diego (City of) TAN 3.61% due 6/30/95
3,014,011
1,500,000 AAA San Diego La Hoya Point Multi-Family Housing
3.25%
(b) 1,500,000 3,000,000 Aaa San Dimas Redevelopment Agency
(San
Dimas Community Center) 3,00% (b) 3,000,000 San
Francisco
Multi-Family
Housing: 2,940,000 A-1+ Cathedral Hill 3.95%(b)
2,940,000
4,385,000 VMIG 1 Sutter/Post Apartment 3.65%(a)(b)
4,385,000
1,135,000 AAA San Jose Airport Revenue 3.50% due 3/1/95
1,137,273
2,000,000 MIG 1 Santa Ana Housing Authority 1985 Series
C
(Harbor
Point Apartments) 3.80%(b) 2,000,000 2,100,000 A-1+
Simi
Valley
(City of) Redevelopment Agency Multi- Family Housing
Revenue
1985 A
3.35%(b) 2,100,000 600,000 A-1+ Triunfo County District
(Wastewater
Reclamation Facility Project) 1988 3.30%(b) 600,000
500,000
VMIG
1 Vacaville Multi-Family Housing (Western Properties
Sycamore)
3.20%(b) 500,000 6,800,000 A-1+ Vista Multi-Family
Housing
1985 A
3.70%(b) 6,800,000 3,490,000 VMIG 1 West Covina Lease
Revenue
Refunding (The Lake Public Parking Project) 3.50%(b)
3,490,000
1,000,000 AAA Whittier Health Facilities Revenue
(Presbyterian Intercommunity) 3.68% Pre-Refunded 6/1/95 @
102(g) 1,057,188 TOTAL INVESTMENT100%
(Cost$191,591,617)(c)
$191,591,617 WEIGHTED AVERAGE DAYS TO MATURITY: 41
Education
14.2%
$375,000 A* Fresno Unified School District COP Refunding,
Measure
A
Capital Project, Series A,5.40% due 4/1/03 $356,250
150,000
A*
Los
Angeles Unified School District COP,6.60% due 12/15/97
154,125
300,000 A- New Haven Unified School District, Alameida
County,1993
Refunding COP, 5.30% due 7/1/01 294,000 400,000 A
Sulphur
Springs
USD GO, 6.15% due 3/1/00 410,500 1,214,875 Escrowed to
Maturity
5.0%
110,000 AAA Arlington Community Hospital
Corporation,Parkview
Community Hospital 1st Mortgage Revenue, (Escrowed to
Maturity
with U.S.
Government Securities), 8.00% due 6/1/04 117,975 285,000
AAA
Virgin Islands Territory GO, (Escrowed to Maturity
withU.S.
Government
Securities), 8.00% due 3/1/98 313,144 431,119 Finance 5.6%
500,000 A- Foster City, California Public Financing
AuthorityRevenue,
Foster City Community Development PJ LN-A,5.20% due 9/1/00
483,750
General
Obligation 2.5% 200,000 Aa* California State GO, 7.00% due
3/1/04 215,250 Hospital 9.7% 100,000 A+ California
Health
Facilities Finance AuthorityRevenue, La Palma Hospital,
California
HealthFacilities Construction Loan Program,6.875% due 2/1/02
104,500
345,000 AAA City of Marysville Hospital Revenue Refunding
Bonds
(The
Fremont-Rideout Health Group),1993 Series A, AMBAC-Insured,
5.10% due
1/1/03 332,494 400,000 NR Valley Health Systems
California COP
RefundingProject, 6.25% due 5/15/99 395,000 831,994
Housing: Multi-
Family
17.0% 500,000 AAA Housing Authority of Riverside Multi-
Family
Revenue
Bonds, FNMA Pass-Through Program(El Dorado Pointe
Apartments),
1993
Series
A,5.40% due 6/1/03 484,375Housing: Multi-Family 17.0%
(continued)
$500,000 AAA San Luis Obispo Housing Authority Multi-
Family
Housing
Revenue, Parkwood ApartmentsProject, Series A, FNMA-
Collateralized,
5.70%
due
8/1/08 $468,125 525,000 Aaa* City of Santa Rosa,
California
Mortgage
RevenueRefunding, Marlow Apartments Project, FHA-
Insured,5.60%
due
9/1/05 505,969 1,458,469 Housing: Single-Family 3.5%
300,000
Aa* California HFA Home Mortgage Series B-1,5.90% due
8/1/04 297,000 Industrial Development 6.2% 530,000
AA-
Simi
Valley
Community Development Agency COP, Simi Valley Business
Center
Remarket,6.05%
due 10/1/18 534,638 Public Facilities 11.0% 400,000
AA
Berkeley
Revenue, Berkeley YMCA, LOC Banque Nationale De Paris, 4.80%
mandatoryput
6/1/98 388,500 345,000 A* Mendocino County Public
Facilities
AuthorityCorporation COP 1993, 5.50% due 8/15/03 325,162
250,000 A San Francisco City & County COP,San Francisco
Permit
Center,
5.00% due 3/1/03 232,188 945,850 Tax Allocation 21.6%
500,000 A- Burbank Redevelopment Agency Tax
Allocation,1993
Series A
(City Center RedevelopmentProject), 5.30% due 12/1/02
473,750
690,000
AAA Lynwood Redevelopment Agency TaxAllocation,
Project
Area,
Series
A, AMBAC-Insured,5.125% due 7/1/03 663,262 750,000 A-
Paramount
Redevelopment Agency Tax Allocation Refunding, Redevelopment
Project
Area
No.
1, 5.80% due 8/1/03 717,188 1,854,200 Utility 3.7%
325,000 BBB- Trinity County, Public Utilities District CTF
Partn-
Elec
District Facilities, 5.60% due 4/1/00(a) 313,218 TOTAL
INVESTMENTS100%
(Cost$8,843,981)(c) $8,580,363
Education 7.1% $2,000,000 AAA Adelanto, School District
Series-B,
FGIC-Insured,6.70% due 9/1/18 $415,000 1,000,000 Baa*
California
Educational Facilities Authority Revenue,Pooled College &
University
Financing Series B,Refunding, 6.125% due 6/1/09 936,250
2,000,000
AAA California Public School District Financing
AuthorityConvertible
Capital Appreciation Bonds, PalmdaleSchool District, FSA-
Insured, Series
1993B, SteppedCoupon zero coupon to 9/30/99 then 6.20% to
maturity, due
10/1/23 1,310,000 1,000,000 A1* California State
Public
Works
Board
High TechnologyFacility Revenue, San Jose Facility Series-
A,7.75% due
8/1/06 1,086,250 1,000,000 AAA Gilroy Unified
School
District,
COP
Refunding,FSA-Insured, 6.25% due 9/1/12 981,250 1,020,000
AAA Pomona Unified School District, Series B, FGIC-
Insured,6.25%
due
8/1/14 1,005,975 1,185,000 AAA Rio Linda Unified
School
District,
Sacramento County,1992 Government Obligation Bonds,AMBAC-
Insured, 7.40%
due
8/1/10 1,282,762 4,000,000 AAA San Dieguito Union
High
School
District COP, FSA-Insured, zero coupon due 4/1/23 2,815,000
2,500,000
Baa1* Yuba City Unified School District COP, Andors
KarperosSchool
Construction Project, 6.70% due 2/1/13 2,350,000 12,182,487
Escrowed
To
Maturity 4.5% 270,000 AAA Contra Costa County Home
Mortgage,
GNMA-Collateralized, (Escrowed with U.S.
GovernmentSecurities),
7.75%
due
5/1/22(a) 309,487 6,000,000 AAA Pleasanton - Suisun City
Home
Finance AuthorityHome Mortgage Revenue, MBIA-Insured
(Escrowedwith U.S.
Government Securities), zero coupondue 10/1/16 1,350,000
2,140,000
AAA Riverside County Single Family Mortgage
RevenueSeries-
A,
8.30%
due
11/1/12(a) 2,541,250 1,500,000 AAA Sacramento
County
Single
Family
Mortgage Revenue Issue A, 8.125% due 7/1/16 1,805,625
4,310,000
Aaa* San Marcos Public Facilities Authority Public
FacilitiesRevenue,
(Escrowed with U.S. Government Securities),zero coupon due
1/1/19 835,062Escrowed To Maturity 4.5% (continued)
$700,000
AAA Santa Rosa Hospital Revenue, Santa Rosa
MemorialHospital
Project,
10.30% due 3/1/11 (Escrowed with U.S. Government Securities
to
3/1/11
maturity @ par) $921,375 7,762,799 Finance 3.6%
1,000,000
AAA Anaheim Public Financing Tax Allocation 1992,MBIA-
Insured,
9.32%
due 12/28/18(f) 1,001,250 Association of Bay Area
Governments: 765,000
A* Municipal Financing Pool, 8.05% due 9/1/10
822,375
1,000,000
A Finance Corp. California COP, ABAG XXVI-
Series
A,
6.25% due
6/1/11 941,250 500,000 A1* Peninsula Family
YMCA,
LOC
Daiwa
Bank, 6.80% due 10/1/11 486,875 150,000 A-
Concord
Santa Cruz
South Gate COP, 7.625% due 6/1/11 150,000 750,000 AAA
Public
Capital Improvements Financing Authority,BIG-Insured, 8.50%
due
3/1/18 806,250 500,000 Baa* Special District
Financing
Authority,
COP, 8.50%due 7/1/18 546,250 1,405,000 A+ Contra
Costa
County,
COP,
MerrithewMemorial Hospital, 6.50% due 11/1/06 1,413,781
6,168,031
Government Facilities 3.2% State Public Works Board Lease
Revenue:
2,500,000
A1* Franchise Tax Board, Series A, 6.25% due
9/1/11
2,403,125
2,000,000 A1* Various California State University
Projects,
Series A, 6.70% due 10/1/17 1,997,500 1,300,000
BBB
Murrieta,
Financing Authority Police & CivicCenter Lease Revenue,
Series
A, 6.375%
due
8/1/18 1,176,500 5,577,125 Government Obligation 1.0%
1,500,000
AAA Santa Margarita/Dana Point Authority Revenue
B,MBIA-
Insured,
7.25%
due 8/1/14 1,668,750 Hospital 14.7% 1,500,000 A+
Association
of
Bay Area Governments Finance AuthorityNonprofit Corps,
California-
Insured
COP, RehabilitationMental Health Services Inc. Project,
6.55%
due
6/1/22 1,470,000 1,500,000 A Bakersfield Hospital
Revenue,
Bakersfield MemorialHospital, Series A, 6.50% due 1/1/22
1,423,125
Hospital 14.7% (continued) California Health Facilities
Financing
Authority
Revenue: $1,450,000 A+ St. Elizabeth Hospital
Project,
6.20%
due
11/15/09 $1,402,875 1,985,000 Aa1* County Program,
Series
B,
LOC Swiss Bank Corporation, 7.20% due 1/1/12 2,027,181
2,015,000
Aa* Hospital Revenue Bonds (Daughters of Charity
National
Health System), Series 1994A, 5.65% due 10/1/14
1,795,869 1,250,000
A+ South Coast Medical Center, CHFCLI-Insured,
7.25%
due
7/1/15 1,262,500 1,150,000 A+ Episcopal Homes
Foundation
Project, CHFCLI- Insured, 7.70% due 7/1/18 1,224,750
1,000,000
A Pacific Presbyterian Medical Center Series
1989A,
6.85% due
6/1/19 921,250 465,000 Aaa* Community Provider
Pooled Loan
Program Series 1990A, LOC Swiss Bank Corporation, 7.35%
due
6/1/20 484,762 1,000,000 AA- Fresno Health Facilities
Revenue
(Holy
Cross System-St. Agnes), 6.625% due 6/1/21 1,002,500
250,000
BB+ Glendale Hospital Revenue Refunding
(GlendaleMemorial
Hospital),
9.00% due 11/1/17 250,313 1,200,000 A+ California
Statewide
Community DevelopmentCorporation, COP (Villaview Hospital),
CHFCLI-
Insured,
7.00% due 9/1/09 1,227,000 2,000,000 A+ County of
Riverside
Asset
Leasing Corp. LeaseholdRevenue Bonds 1993A , Riverside
Hospital
Project,6.375% due 6/1/09 1,935,000 1,000,000 A+
Inglewood
Insured
Hospital Revenue Bonds (DanielFreeman Hospital Inc.), Series
1991,
CHFCLI-Insured,6.75% due 5/1/13 1,005,000 1,000,000
A
Rancho
Mirage
Joint Powers FinanceAuthority COP Eisenhower Memorial
Hospital,
7.00%due
3/1/22 1,001,250 1,000,000 AA San Bernardino
Health
Care
Systems
Revenue (Sisters of Charity of the Incarnate Word), Series
1991A, 7.00%
due
7/1/21 1,046,250 2,000,000 A San Bernardino
Capital
Facilities
Project, COP Series B,6.875% due 8/1/24 2,180,000 2,750,000
A*
San
Joaquin County COP, General Hospital Project 1993,6.25% due
9/1/13 2,591,875 910,000 A Torrance Hospital Revenue
(Little
Co. of
Mary Hospital), 6.875% due 7/1/15 903,175 25,154,675
Housing:
Multi-Family 4.7% California Housing Finance Agency
Revenue:
$530,000
AAA Multi-Family Housing Revenue, MBIA-Insured,
8.75%
due
8/1/10(d) $559,813 1,750,000 A1* Multi-Unit Rental
Housing
Series A, 6.625% due 2/1/24 1,739,063 1,050,000
AAA
Fontana
Redevelopment Agency Multi-FamilyRevenue Refunding, FHA &
FNMA-
Insured,
7.15%due 5/1/28 1,069,687 2,400,000 Aaa* San
Francisco
City &
County Redevelopment AgencyMulti-Family Revenue Refunding
South
Beach
Project,GNMA-Collateralized, 5.70% due 3/1/29 2,133,000
1,500,000
A2* San Jose Multi-Family Housing Senior
Revenue(Timberwood
Apartments), Series A, LOC Wells FargoBank, 7.50% due 2/1/20
1,524,375
1,100,000 A+ California Statewide Community
Development
Corp.COP
Solheim Lutheran Home, 6.50% due 11/1/17 1,049,125
8,075,063 Housing:
Single-Family 3.3% California Housing Finance Agency Home
Mortgage
Revenue:
70,000 Aa* 9.125% due 12/1/07(d) 72,275
615,000
Aa* 8.25% due 8/1/08(a) 640,369 445,000
Aa* zero coupon due 8/1/15 56,737 770,000
Aa* 8.30% due 8/1/19(a) 799,837 525,000
Aa* Series E, 8.35%, due 8/1/19(a)
547,969
240,000
Aa* 8.60% due 8/1/19(a) 251,400 750,000
AAA California Housing Finance Agency RevenueHousing
Series C,
MBIA-Insured, 7.00% due 8/1/23(a) 760,313 865,000 AAA
Los
Angeles
Single-Family Home Mortgage Revenue, GNMA-Collateralized
Mortgage Backed
SecuritiesProgram Issue A, 7.55% due 12/1/23(a) 886,625
295,000
Baa* Riverside County Housing Authority, 7.90% due
8/1/18
307,906
115,000 AAA San Francisco City & County Single-Family
MortgageRevenue
GNMA & FNMA Mortgage Backed SecuritiesProgram Series 1990,
7.45% due
1/1/24(a) 119,744 40,000 A- Sonoma County Home
Mortgage
Revenue,
9.125%due 6/1/15(d) 40,900Housing: Single-Family 3.3%
(continued)
Southern California Home Financing Authority Single-Family
Mortgage
Revenue
GNMA & FNMA MortgageBacked Securities Program: $195,000
AAA 1990 Issue B, 7.75% due 3/1/24(a) $
206,213
1,000,000
AAA 6.90% due 10/1/24(a) 1,030,000
5,720,288
Industrial
Development 2.7% 1,000,000 Aa3* Los Angeles County
Industrial
Development Authority,IDA Revenue (Altshule Properties
Project)
LOCSecurity
Pacific, 7.20% due 10/1/11 1,011,250 1,100,000 Aa3*
San
Diego
IDA
Revenue (San Diego Gas & Electric Co.),7.625% due 7/1/21
1,163,250
2,470,000 AA- Simi Valley California Community
Development
AgencyCOP,
Simi Valley Business Center Remarket,6.05% due 10/1/18
2,491,613
4,666,113
Miscellaneous 3.8% 1,000,000 A1* COP County of Los
Angeles,
1991
Master RefundingProject-RIBS, 9.646% due 5/1/15(f)
991,250
1,000,000
A1* COP County of Los Angeles, For Multiple
CapitalFacilities
Projects
III SYCC, 7.77% due 11/1/11 1,018,750 Orange County
Community
Facilities
District Special Tax: 1,000,000 A- #87-5A Rancho
Santa
Margarita,
7.80% due 8/15/13 1,115,000 1,500,000 AAA
Rancho
Santa
Margarita, CGIC-Insured, 7.125% due 8/15/17 1,580,625
1,000,000
A* Orange County (Mission Viejo) Series A 1990,
SpecialTax
Bonds
Community Facilities District (Mello Roos),7.80% due 8/15/15
1,145,000
700,000 AAA Pleasant Hill Redevelopment Agency Pleasant
HillCommons
Redevelopment Project Tax Allocation BondSeries 1991 (County
of
Contra
Costa)
CGIC-Insured,6.90% due 7/1/21 728,875 6,579,500 Pollution
Control 4.7%
California Pollution Control Financing Authority: 2,000,000
A1* PCR (Pacific Gas & Electric Co.), 6.35% due
6/1/09(a) 1,997,500 800,000 AAA PCR (Pacific Gas &
Electric
Co.), 8.20% due 12/1/18 869,000 500,000 AA
Resource
Recovery
Revenue Bonds (Waste Management Inc.), 1991 Corporate
Series A,
7.15%
due 2/1/11(a) 540,625Pollution Control 4.7% (continued)
$1,500,000
Aa3* San Diego Gas & Electric Co. Series A, 6.80%
due
6/1/15(a) $1,535,625 1,000,000 AAA Southern
California
Edison
Series-A, 6.90% due 9/1/06(a) 1,060,000 2,125,000
AAA Southern California Edison Series-B, 6.40%
due
12/1/24(a) 2,071,875 8,074,625 Power 2.0% 1,000,000
BBB-
Central
Valley Financing Authority Cogeneration ProjectRevenue
Carson
Ice
General
Project, 6.00% due 7/1/09 925,000 1,110,000 A*
Northern
California
Power Agency (Geothermal Project),5.00% due 7/1/09
950,438
1,000,000
AAA Redding COP Electric System Revenue, 9.106%due
7/1/22(f)
Southern
California Public Power Authority: 985,000 600,000 A
Multiple
Project Revenue 1989 Series, 5.50% due 7/1/20 513,000
3,373,438
Pre-Refunded(e) 20.3% 705,000 AAA Brea Public Finance
Authority
Tax
Allocation, MBIA-Insured, 7.00% due 8/1/15 (Escrowed with
U.S.
Government
Securities to 8/1/01 Call @ 102) 785,194 1,500,000 AAA
California
COP Lease Finance Authority, CSAC-NevadaCounty, 7.60% due
10/1/19
(Escrowed
with U.S.Government Securities to 10/1/98 Call @ 101)
1,638,750
1,245,000
AAA Concord Redevelopment Agency Tax Allocation
Bonds(Central
Concord
Redevelopment Project) BIG-Insured,8.00% due 7/1/18
(Escrowed
with U.S.
GovernmentSecurities to 7/1/98 Call @ 102) 1,394,400
1,500,000
AAA Desert Hospital Corporation Project, COP Series
1990,8.10%
due
7/1/20 (Escrowed with U.S. GovernmentSecurities to 7/1/00
Call
@
102) 1,736,250 320,000 AAA Dublin COP, Public Facilities
Project
No. 1, 9.25%due 2/1/10 (Escrowed with U.S. Government
Securities to
2/1/96
Call @ par) 340,000 750,000 AAA El Camino Hospital
Revenue COP,
8.50% due 9/1/17(Escrowed with U.S. Government Securities to
9/1/97Call
@
102) 829,687Pre-Refunded(e) 20.3% (continued) $550,000
AAA Grossmont Hospital District, MBIA-Insured,
8.00%due
11/15/17
(Escrowed with U.S. Government Securities to 11/15/97 Call @
102)
$609,812
1,200,000 AAA Huntington Beach COP, Civic Center
Project,
7.90%due
8/1/16 (Escrowed with U.S. Government Securities to 8/1/95
Call
@
102) 1,260,000 1,500,000 AAA Kings River Conservation
District,
Pine Flat PowerRevenue Series C, 7.90% due 1/1/20 (Escrowed
with U.S.
Government Securities to 1/1/97 Call @ 102)(d) 1,631,250
640,000
BBB Loma Linda Water Revenue, 9.25% due 12/1/10
687,200
500,000
AAA Los Angeles County Transportation Commission
SalesTax
Revenue
Series A, 8.00% due 7/1/18 (Escrowedwith U.S. Government
Securities to
7/1/98
Call @ 102) 560,000 450,000 AAA Los Angeles
Convention
and
Exhibition Center AuthorityCOP, 9.00% due 12/1/20 (Escrowed
with
U.S.Government Securities to 12/1/05 Call @ par) 572,063
Los
Angeles
Department of Water and Power: 1,000,000 AAA
Electric
Revenue,
7.90% due 5/1/28 (Escrowed with U.S. Government
Securities
to 5/1/98
Call
@ 102) 1,112,500 1,950,000 AAA Electric
Revenue,
7.10%
due
1/15/31 (Escrowed with U.S. Government Securities to
1/15/01
Call @
102) 2,154,750 1,550,000 AAA Water Works Revenue,
7.20% due
2/15/19 (Escrowed with U.S. Government Securities to
2/15/99 Call @
102) 1,703,063 1,200,000 AAA Los Angeles Waste Water
System
Revenue, 8.125%due 11/1/17 (Escrowed with U.S. Government
Securities to
11/1/97 Call @ 102) 1,333,500 425,000 AAA Norwalk
Redevelopment
Agency (Norwalk RedevelopmentArea 1), 9.10% due 12/1/15
(Escrowed with
U.S.
Government Securities to 12/1/95 Call @ 102) 452,094 500,000
AAA Oceanside County COP, AMBAC-Insured, 7.30%due
8/1/21
(Escrowed
with U.S. Government Securitiesto 8/1/02 Call @ 102)
568,125
2,385,000
AAA Pasadena COP, (Capital Improvements Project),
6.75%due
8/1/15
(Escrowed with U.S. Government Securitiesto 8/1/00 Call @
102)
2,602,631
1,000,000 AAA Pittsburg Public Financing Authority
Waste
WaterRevenue,
FGIC-Insured, 6.80% due 6/1/22 1,100,000Pre-Refunded(e)
20.3%
(continued)
$400,000 Baa* Pleasanton Public Facilities Corporation, COP
forCapital
Projects I (Sycamore Water Reservoir) and II(City Office
Building),
8.75%
due
10/1/08 $450,000 1,000,000 AAA Rancho Water District
Finance
Authority Revenue Bonds, Series 1991, RITES, AMBAC-Insured,
9.25% due
8/17/21(Escrowed with U.S. Government Securities to 8/17/01
Call @
104)(f) 1,155,000 2,500,000 AAA Riverside County
Asset
Leasing
Corp. Leasehold Revenue (Riverside County Hospital Project)
7.40% due
6/1/14
(Escrowed with U.S. Government Securities to 6/1/99 Call @
102)
2,775,000
1,500,000 AAA Sacramento COP Community Center and
ExecutiveAirport
Project, 6.50% due 11/1/09 (Escrowed withU.S. Government
Securities to
11/1/98 Call @ 100) 1,582,500 1,000,000 AAA Sacramento
Municipal
Utilities District Electric Revenue,Series P, 8.625% due
7/1/10
(Escrowed
with U.S.Government Securities to 7/1/95 Call @ 102)
1,052,880
1,000,000
AAA San Bernardino County, COP (West Valley
DetentionCenter
Project),
7.70% due 11/1/18 (Escrowed withU.S. Government Securities
to
11/1/98
Call
@
102) 1,116,250 250,000 AAA San Diego Redevelopment Agency
(MarinaRedevelopment Project), 8.75% due 12/1/08 (Escrowed
with
U.S.
Government Securities to 12/1/97 Call @ 101.5) 281,875
500,000
AAA Santa Clara County, 1986 COP Capital Project I
(Courthouse
and
Detention Center), 8.00% due 10/1/16 (Escrowed with U.S.
Government
Securities to 10/1/96 Call @ 102) 542,500 1,000,000 AAA
State
Public Works Board Lease Revenue, Department ofCorrections
(State
Prison-Madera County), 7.00% due 9/1/09 (Escrowed with U.S.
Government
Securitiesto 9/1/00 Call @ 102) 1,107,500 500,000 AAA
Upland
COP,
(Police Building Construction Project),8.20% due 8/1/16
(Escrowed with
U.S.
GovernmentSecurities to 8/1/98 Call @ 102) 541,250
1,000,000
AAA University of California Regents Revenue
Refunding,Multiple
Purpose, Series A, 6.875% due 9/1/16(Escrowed with U.S.
Government
Securities
to 9/1/02Call @ 102) 1,107,500 34,783,524 Public
Facilities
7.2%
$1,000,000 AAA Anaheim COP, Convention Center RITES,
MBIA-Insured,9.32% due 7/16/23(f) $925,000 1,025,000 Baa*
Azusa
COP
Refunding Capital Improvement RefiningProject, 6.625% due
8/1/13
964,781
2,000,000 A- Burbank Redevelopment Agency Tax
Allocation
Series A,
6.00% due 12/1/23 1,762,500 1,000,000 AAA California
Fairs
Financing Authority California-FairsRevenue Bonds Series
1991,
CGIC-
Insured,
6.50%due 7/1/11 1,013,750 1,500,000 Baa* Corona
Public
Finance
Authority 1993 PublicImprovement Refunding Revenue Bonds,
6.00%
due
7/1/14 1,327,500 2,000,000 A* Mendocino County
Public
Facilities
AuthorityCorporation COP, Series 1993, 6.00% due 8/15/23
1,767,500
500,000
AAA San Diego County, COP 1991 (Mts Tower
RefundingProject) San
Diego
Building Authority RITES, MBIA-Insured, 8.896% due
11/18/19(f)
484,375
2,875,000 AAA Santa Anna Finance Authority
LeaseRevenue
Police
Administration and Holding Facility,MBIA-Insured, 6.25% due
7/1/24 2,817,500 1,500,000 NR Valley Health System
COP
Refunding
Project, 6.875%due 5/15/23 1,338,750 12,401,656 Short-
Term
0.2%
400,000
P-1* California Pollution Control Revenue - Burney
ForestProds B,
VRDD, LOC National Westminster,3.55% due 9/1/20(a)(b)
400,000
Solid
Waste
2.0% 1,300,000 A+ Orange County COP, Orange County
Public
Facilities
Corp. (Solid Waste Management), 7.875% due 12/1/07
1,417,000 375,000
AAA Santa Cruz COP, Public Improvement Financing
Corp.,
8.30%
due
12/1/07 383,906 750,000 Baa* Southeast Resource
Recovery
Facilities
Authority, LeaseRevenue, 9.00% due 12/1/08 789,375
1,000,000
A- West Nevada County, COP, Solid Waste, 7.50% due
6/1/21
902,500
3,492,781 Tax Allocation 3.7% 1,000,000 Baa* Azusa
Redevelopment
Agency Tax Allocation RefundingMerged Project Area, Series
A,
6.75% due
8/1/23 950,000Tax Allocation 3.7% (continued) $295,000
AAA
Brea
Public Finance Authority Tax Allocation, MBIA-Insured, 7.00%
due
8/1/15 $310,119 1,000,000 AAA Carson Redevelopment
Agency
Redevelopment Project Area No. 2, 6.00% due 10/1/13
901,250
30,000
AAA Concord Redevelopment Agency Tax Allocation
Bonds(Central
Concord
Redevelopment Project), BIG-Insured, 8.00% due 7/1/18
33,075
1,000,000
AAA La Quinta Redevelopment Agency TaxAllocation
RefundingRedevelopment Project AreaNo. 1, MBIA-Insured,
7.30%
due
9/1/12 1,115,000 1,000,000 Baa* Pomona Public
Finance
Authority
Revenue RefundingSouthwest Pomona Redevelopment, 5.50%due
2/1/08
887,500
2,000,000 AAA South Orange Public Finance
AuthoritySpecial Tax
Revenue
SR Lien Series-A, MBIA Insured, 7.00% due 9/1/10 2,177,500
6,374,444
Transportation 5.7% 1,000,000 AAA Burbank-Glendale-
Pasadena
Airport
Authority, Airport Revenue Refunding, AMBAC-Insured, 6.40%
due
6/1/10 1,011,250 2,000,000 Aa* Long Beach Harbor,
7.25% due
5/15/19(a) 2,135,000 2,500,000 AAA Sacramento
County
Airport
System
Revenue, Series A,FGIC-Insured, 6.00% due 7/1/12(a)
2,387,500
3,000,000
AAA San Francisco City & County Arpts SecondSeries
Issue
5,
FGIC-Insured, 6.50% due 5/1/19 2,981,250 1,250,000
A*
Santa
Barbara
COP Harbor Refunding Project,6.75% due 10/1/27 1,246,875
9,761,875
Utilities 1.0% 1,760,000 BBB- Trinity County Public
Utilities
District COP Electric District Facilities, 6.75% due
4/1/23(a)
1,691,800
Water & Sewer 4.6% 1,200,000 A1* Bakersfield COP
(Waste
Water
Treatment Plant 3 Projects), 8.00% due 1/1/10 1,302,000
1,000,000
AAA Eastern Municipal Water District, Water &
SewerRevenue COP,
FGIC-Insured, 6.75% due 7/1/12 1,057,500 Water & Sewer
4.6% (continued) Irvine Ranch Water District Joint Powers
Agency,Local
Agency Pool Revenue Bonds: $1,750,000 A
7.875%
due
2/15/23(d) $1,852,812 1,000,000 A 8.25%
due
8/15/23(d) 1,078,750 1,000,000 AAA San
Buenaventura
COP (1990
Water
EnterpriseFinancing) AMBAC-Insured, 7.50% due 10/1/20
1,135,000
1,300,000
AAA Yolo County Flood Control & Water
ConservationDistrict COP,
FGIC-Insured, 7.125% due 7/15/15 1,446,250 7,872,312 TOTAL
INVESTMENT100%
(Cost$168,714,194)(c) $171,781,286
(a) Income from these issues is considered a preference
item
for
purposes
of calculating the alternative minimum tax. (b) Variable
rate
obligations
payable at par on demand at any time on no more than seven
days
notice.
(c) The cost for Federal income tax purposes is
substantially
the
same.
(d) Securities segregated by Custodian for open purchase
commitment.
(e) Pre-refunded bonds escrowed by U.S. Government
Securities
are
considered by manager to be triple-A rated even if issuer
has
not
applied
for
new ratings. (f) Residual interest bonds-coupon varies
inversely with
level of short-term tax-exempt interest rates. (g) The
Fund
will
receive
the indicated percentage of par on the specified date.
Equivalent rating
as
determined by manager non-rated securities.
**Variable rate obligations payable at par on demand on the
date
indicated.
See pages 25 and 26 for definitions of ratings and certain
security
descriptions.
Smith Barney Muni Funds
CALIFORNIA money market PORTFOLIO FACE
AMOUNT RATING SECURITY VALUE
Historical Performance September 30, 1994
Hypothetical illustration of $10,000 invested in Class A
shares
at
inception
on April 3, 1987, assuming deduction of the maximum 4.00%
sales
charge
at
the
time of investment and reinvestment of dividends (after
deduction of
applicable sales charges) and capital gains (at net asset
value) through
September, 1994. The Index is unmanaged and is not subject
to
the same
management and trading expenses of a mutual fund. The
performance of the
Portfolios other classes may be greater or less than the
Class
A shares
performance indicated on this chart, depending on whether
greater or
lesser
sales charges and fees were incurred by shareholders
investing
in the
other
classes.
All figures represent past performance and are not a
guarantee
of future
results. Investment returns and principal value will
fluctuate,
and
redemption values may be more or less than the original
cost.
No
adjustment
has been made for shareholder tax liability on dividends or
capital
gains.
(1) Assumes reinvestment of all dividends at maximum
offering
price
and
capital gain distributions at net asset value and does not
reflect
deduction
of the applicable sales charge with respect to Class A
shares
or the
applicable contingent deferred sales charges (CDSC) with
respect to
Class B
and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain
distributions
at net asset value. In addition, the deduction of the
maximum
initial
sales
charge of 4.00% with respect to Class A shares and a
deduction
of the
CDSC
of
1.00% with respect to Class B shares and 1.50% with respect
to
Class C
shares
has been factored into these calculations.
Smith Barney Muni Funds California Portfolio
Growth of $10,000 Invested in Class A Shares of the
California
Portfolio
vs.
Lehman Long Bond Index(unaudited) April 1987 September 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA money market PORTFOLIO FACE
AMOUNT RATING SECURITY VALUE
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA money market PORTFOLIO FACE
AMOUNT RATING SECURITY VALUE
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA limited term PORTFOLIO FACE
AMOUNT RATING SECURITY VALUE
Schedules of Investments (unaudited) (continued) September
30,
1994
Smith Barney Muni Funds
CALIFORNIA limited term PORTFOLIO FACE
AMOUNT RATING SECURITY VALUE
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Schedules of Investments (unaudited) (continued) September
30,
1994
Smith Barney Muni Funds
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Smith Barney Muni Funds
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Schedules of Investments (unaudited) (continued) September
30,
1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Smith Barney Muni Funds
Schedules of Investments (unaudited) (continued) September
30,
1994
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Schedule of Investments September 30, 1994
All ratings are by Standard & Poors Corporation, except
those
identified
by
an asterisk (*) are rated by Moodys Investors Service. The
definitions
of
the
applicable rating symbols are set forth below: Standard &
Poors
Rating
from
AA to BB may be modified by the addition of a plus (+) or
minus
() sign
to
show relative standings within the major rating categories.
AAA
Debt
rated AAA has the highest rating assigned by Standard &
Poors.
Capacity
to
pay interest and repay principal is extremely strong. AA
Debt
rated
AA has a very strong capacity to pay interest and repay
principal and
differs
from the highest rated issue only in a small degree. ADebt
rated A has a
strong capacity to pay interest and repay principal although
it
is
somewhat
more susceptible to the adverse effects of changes in
circumstances and
economic conditions than debt in higher rated categories.
BBB
Debt
rated BBB is regarded as having an adequate capacity to pay
interest and
repay principal. Whereas it normally exhibits adequate
protection
parameters,
adverse economic conditions or changing circumstances are
more
likely to
lead
to a weakened capacity to pay interest and repay principal
for
debt in
this
category than in higher rated categories. BB Debt rated
BB
has
less
near-term vulnerability to default than other speculative
issues.
However,
it
faces major ongoing uncertainties or exposure to adverse
business,
financial,
or economic conditions which could lead to inadequate
capacity
to meet
timely
interest and principal payments. Moodys Numerical
modifiers 1, 2
and
3 may be applied to each generic rating from Aa to Baa,
where 1
is the
highest and 3 the lowest ranking within its generic
category.
Aaa
Bonds that are rated Aaa are judged to be of the
best
quality.
They
carry the smallest degree of investment risk and are
generally
referred
to
as
gilt edge. Interest payments are protected by a large or by
an
exceptionally
stable margin and principal is secure. While the various
protective
elements
are likely to change, such changes as can be visualized are
most
unlikely
to
impair the fundamentally strong position of such issues. Aa
Bonds
that are rated Aa are judged to be of high quality by all
standards.
Together
with the Aaa group they comprise what are generally known as
high grade
bonds. They are rated lower than the best bonds because
margins
of
protection
may not be as large in Aaa securities or fluctuation of
protective
elements
may be of greater amplitude or there may be other elements
present which
make
the long-term risks appear somewhat larger than in Aaa
securities.
ABonds
that are rated A possess many favorable investment
attributes
and are to
be
considered as upper medium grade obligations. Factors giving
security to
principal and interest are considered adequate but elements
may
be
present
which suggest a susceptibility to impairment some time in
the
future.
Baa Bonds that are rated Baa are considered as medium
grade
obligations, i.e., they are neither highly protected nor
poorly
secured.
Interest payments and principal security appear adequate for
the present
but
certain protective elements may be lacking or may be
characteristically
unreliable over any great length of time. Such bonds lack
outstanding
investment characteristics and in fact have speculative
characteristics
as
well. NR Indicates that the bond is not rated by
Standard
&
Poors
Corporation or Moodys Investors Service. SP-1
Standard
& Poors
highest
rate rating indicating very strong or strong capacity to pay
principal
and
interest; those issues determined to possess overwhelming
safety
characteristics are denoted with a plus (+) sign. A-1
Standard &
Poors
highest commercial paper and variable-rate demand obligation
(VRDO)
rating
indicating that the degree of safety regarding timely
payment
is either
overwhelming or very strong; those issues determined to
possess
overwhelming
safety characteristics are denoted with a plus (+) sign.
VMIG 1
Moodys
highest rating for issues having a demand feature (VRDO) P-
1
Moodys
highest rating for commercial paper and for VRDO prior to
the
advent of
the
VMIG 1 rating. MIG 1 Moodys highest rating for
short-
term
municipal
obligations
ABAG Association of Bay Area Governors
AIG American International Guaranty AMBAC AMBAC
Indemnity
Corporation BAN Bond Anticipation Notes BIG
Bond
Investors
Guaranty CGIC Capital Guaranty Insurance Company
CHFCLI California Health Facility Construction Loan
Insurance
COP Certificate of Participation EDA Economic
Development
Authority ETM Escrowed To Maturity FAIRS
Floating
Adjustable
Interest Rate Securities FGIC Financial Guaranty
Insurance
Company
FHA Federal Housing Administration FHLMC
Federal
Home
Loan
Mortgage Corporation FAIRS Floating Adjustable
Interest
Rate
Securities FNMA Federal National Mortgage
Association
FRTC Floating Rate Trust Certificates FSA
Federal
Savings
Association GIC Guaranteed Investment Contract GNMA
Government
National Mortgage Association GO General Obligation
HDC
Housing
Development Corporation HFA Housing Finance Authority
IDA Industrial Development Authority IDB
Industrial
Development
Board IDR Industrial Development Revenue INFLOS
Inverse
Floaters LOC Letter of Credit MBIA Municipal
Bond
Investors
Assurance Corporation MVRICS Municipal Variable Rate
Inverse
Coupon
Security PCR Pollution Control Revenue RAN
Revenue
Anticipation
Notes RIBS Residual Interest Bonds RITES
Residual
Interest
Tax-Exempt Securities TAN Tax Anticipation Notes
TECP
Tax
Exempt Commercial Paper TOB Tender Option Bonds TRAN
Tax
and
Revenue Anticipation Notes SYCC Structured Yield
Curve
Certificate
VA Veterans Administration VRWE Variable Rate
Wednesday
Demand
Note
Smith Barney Muni Funds California Money Market, California
Limited Term
and
California Portfolios
Bond Ratings September 30, 1994
See Notes to Financial Statements.
Schedules of Investments (unaudited) (continued) September
30,
1994
Smith Barney Muni Funds
CALIFORNIA PORTFOLIO FACE AMOUNT RATING SECURITY
VALUE
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Security Descriptions (continued) March 31, 1994
Statements of Assets and Liabilities (unaudited) September
30,
1994
California California Money Market Limited Term
California
Portfolio Portfolio Portfolio ASSETS: Investments, at value
(Cost$191,591,617 $8,843,981 and
$168,714,194) $ 191,591,617 $ 8,580,363 $
171,781,286
Cash
134,509 8,288
Receivable
for
investment
securities sold 10,000 30,000
Receivable
for
Fund
shares sold 367,998 Interest
receivable 925,250 131,577 3,057,213
Prepaid
expenses 560 Other receivables
10,992
Total Assets 192,516,867 8,867,441
175,245,345
LIABILITIES: Payable for Fund shares
reacquired 81,969 475,564
Management
fees
payable 2,633 787 2,152 Distribution
costs
payable 5,129 1,075 8,547 Dividends
payable 210,225 Accrued expenses and other
liabilities 123,486 6,287 37,520
Total
Liabilities 341,473 90,118 523,783
Total
Net
Assets $ 192,175,394 $ 8,777,323 $
174,721,562
NET
ASSETS:
Par value of capital shares $ 191,462 $ 1,373
$
14,460
Capital paid in excess of par
value 191,995,376 9,007,241
171,664,553
Undistributed
net investment income 49,094
256,140
Accumulated net
realized loss on security
transactions (11,444) (16,766) (280,683)
Net
unrealized
appreciation (depreciation) of
investments (263,619) 3,067,092 Total
Net
Assets $ 192,175,394 $ 8,777,323 $
174,721,562
Shares
Outstanding: Class
A 192,186,838 978,660
13,308,201
Class
B 315,481 628,119 Class
C 78,958 523,855 Net
Asset
Value: Class A (and
redemption price) $1.00 $6.39
$12.08
Class
B* $6.39 $12.07 Class
C* $6.39 $12.10 Class A
Maximum
Public
Offering
Price Per Share ($6.39 plus 2.04% and $12.08 plus 4.17% of
net
asset
value per share, respectively) $6.52
$12.58
*Redemption
price is NAV for Class B and Class C shares reduced by 1.00%
or
1.50%,
respectively,if shares are redeemed within 18 months of
purchase.
Smith Barney Muni Funds California Money Market, California
Limited Term
and
California Portfolios
Portfolio of Investments September 30, 1994
Short-Term Security Ratings September 30, 1994
See Notes to Financial Statements.
Security Descriptions
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
See Notes to Financial Statements.
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
For the six months ended September 30, 1994 (unaudited) and
the
year
ended
March 31, 1994
California California Money Market Limited
Term California Portfolio Portfolio Portfolio
bbbbbb bbbbb bbbbb Sept. 30 March 31 Sept. 30 March
31(a) Sept. 30 March 31 OPERATIONS: Net investment
income $2,075,539 $3,268,439 $242,884
$457,146
$5,483,508 $10,731,905
Net realized gain (loss) on security
transactions (2,020) 4,258 (28,110)
11,343
(209,436) 483,893
Increase in net unrealized
depreciation
of
investments (6,851) (256,768) (2,499,909)
(7,814,856)
Increase In Net Assets From
Operations 2,073,519 3,272,697 207,923 211,721
2,774,163
3,400,942
DISTRIBUTIONS TO SHAREHOLDERS FROM (Note 3): Net
investment
income (2,075,539) (3,268,439) (240,940)
(409,996)
(5,461,471) (10,789,706)
Net realized gain from security
transactions (545,063)
Decrease In Net
Assets From Distributions To
Shareholders (2,075,539) (3,268,439) (240,940)
(409,996)
(5,461,471) (11,334,769)
FUND SHARE TRANSACTIONS: Net proceeds from sales of
shares 483,006,791 1,043,269,466 685,799 15,494,663
15,765,801 53,466,294
Net value of shares issued for
reinvestment
of
dividends
1,908,577 3,127,064 160,978 283,108 1,864,232
4,422,622
Cost of shares reacquired
(482,520,990) (1,016,298,261) (2,911,451)
(4,704,482)
(16,939,026) (38,954,545)
Increase (Decrease) In Net Assets From Fund
Share
Transactions 2,394,378 30,098,269
(2,064,674)
11,073,289 691,007 18,934,371
Increase (Decrease) In Net
Assets 2,392,358 30,102,527 (2,097,691) 10,875,014
(1,996,301)
11,000,544
NET ASSETS Beginning of
period 189,783,036 159,680,509 10,875,014
176,717,863
165,717,319
End of
period* $192,175,394 $189,783,036 $8,777,323
$10,875,014
$174,721,562 $176,717,863
*Includes undistributed net investment income
of $ $ $49,094 $47,150 $256,142 $234,105 (a)For
the
period
from April 27, 1993 (commencement of operations) to March
31,
1994.
Statements of Changes in Net Assets
Smith Barney Muni Funds
Statements of Operations (unaudited)
For the six months ended September 30, 1994 California
California
Money
Market Limited Term California Portfolio Portfolio
Portfolio
INVESTMENT INCOME:
Interest $ 2,677,795 $ 263,370 $
5,977,077
EXPENSES: Management fees (Note
4) 476,603 21,663 400,826 Distribution
costs
(Note
4) 95,321 4,099 29,614 Shareholder
servicing
agent
fees 13,029 900 14,040 Audit and legal
fees 4,523 6,000 4,463 Registration
fees 4,036 600 6,017 Shareholder
communications 4,011 1,000 13,037
Custodian
fees 700 9,527 Trustees
fees 2,489 3,200 3,009 Pricing
service 1,800 11,533
Other 2,244 1,400 1,503
Total
Expenses 602,256 41,362 493,569 Less:
Management Fee
Waiver 20,876 Expenses Net of Management
Fee
Waiver 602,256 20,486 493,569 Net
Investment
Income 2,075,539 242,884 5,483,508
REALIZED
AND
UNREALIZED LOSS ON INVESTMENTS: Realized Loss From Security
Transactions
(excluding short-term securities*): Proceeds from
sales 9,599,270 926,763 29,307,326 Cost
of
securities
sold 9,601,290 954,873 29,516,762 Net
Realized
Loss (2,020) (28,110) (209,436) Change in
Net
Unrealized
Appreciation/ (Depreciation) of Investments: Beginning
of
period (256,768) 5,567,001 End of
period (263,619) 3,067,092 Increase
in
Net
Unrealized
Depreciation (6,851) (2,499,909) Net
Gain
(Loss) On
Investments (2,020) (34,961)
(2,709,345)
Increase In
Net Assets Resulting From
Operations $2,073,519 $ 207,923 $
2,774,163
*Represents
only short-term securities for the California Money Market
Portfolio.
Portfolio of Investments September 30, 1993
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Notes to Financial Statements (unaudited) (continued)
Smith Barney Muni Funds
Notes to Financial Statements (unaudited)
1. Significant Accounting Policies
The California Money Market, California Limited Term and
California
Portfolios (Portfolios) are separate investment portfolios
of
the Smith
Barney Muni Funds (Fund). The Fund, a Massachusetts business
trust, is
registered under the Investment Company Act of 1940, as
amended, as a
non-diversified, open-end management investment company and
consists of
these
Portfolios and ten other separate investment portfolios:
Florida,
Georgia,
New Jersey, New York, National, Ohio, Pennsylvania, Limited
Term,
Florida
Limited Term and New York Money Market Portfolios. The
financial
statements
and financial highlights for the other portfolios are
presented
in
separate
annual reports. The significant accounting policies
consistently
followed
by
the Portfolios are: (a) security transactions are accounted
for
on the
trade
date; (b) securities are valued at bid prices provided by an
independent
pricing service that are based on transactions in municipal
obligations,
quotations from municipal bond dealers, market transactions
in
comparable
securities and various relationships between securities;
short-
term
securities maturing within 60 days are valued at cost plus
(minus)
accreted
discount (amortized premium), if any, which approximates
value;
(c)
gains
or
losses on the sale of securities are calculated by using the
specific
identification method; (d) interest income, adjusted for
amortization of
premiums and accretion of market and original issue
discounts,
is
recorded
on
the accrual basis; (e) direct expenses are charged to each
portfolio and
each
class; management fees and general fund expenses are
allocated
on the
basis
of relative net assets; and (f) the Fund intends to comply
with
the
requirements of the Internal Revenue Code pertaining to
regulated
investment
companies and to make the required distributions to
shareholders;
therefore,
no provision for Federal income taxes has been made.
2. Portfolio Concentration
Since each Portfolio invests primarily in obligations of
issuers within
California, it is subject to possible concentration risks
associated
with
economic, political, or legal developments or industrial or
regional
matters
specifically affecting California.
3. Exempt-Interest Dividends and Other Distributions
California Money Market Portfolio declares and records a
dividend of
substantially all its net investment income on each business
day. Such
dividends are paid or reinvested monthly in fund shares on
the
payable
date.
Furthermore, all Portfolios intend to satisfy conditions
that
will
enable
interest from municipal securities, which is exempt from
Federal income
tax
and from designated state income taxes, to retain such tax-
exempt status
when
distributed to the shareholders of the Portfolio.
Capital gain distributions, if any, are taxable to
shareholders, and are
declared and paid at least annually. At March 31, 1994 the
California
Money
Market and California Portfolios had net capital loss
carryovers of
$9,425
and $71,246, respectively, available to offset future
capital
gains. To
the
extent that this carryover loss is used to offset capital
gains
it is
probable that any gains so offset will not be distributed.
The
amount
and
expiration of the carryovers are indicated below. Expiration
occurs on
March
31 of the year indicated. 1999 2001 2002 California
Money
Market
Portfolio $7,369 $2,056 California Portfolio
$71,246
4. Management Agreements and Transactions with Affiliated
Persons
Mutual Management Corp. (MMC), a subsidiary of Smith Barney
Holdings
Inc.
(SBH) acts as investment manager to the Fund. As
compensation
for its
services, the California Money Market, California Limited
Term
and
California
Portfolios pay MMC a daily management fee calculated at the
annual rate
of
0.50%, 0.45% and 0.45%, respectively, of their average daily
net assets.
MMC
waived $20,876 of its management fees for California Limited
Term for
the
six
months ended September 30, 1994.
Smith Barney Inc. (SB), another subsidiary of Smith Barney
Holdings
Inc.,
acts as Distributor of Fund shares. SB advised the Fund that
it
received
sales charges of approximately $176,460 (paid by purchasers
of
California
Limited Term and California Class A shares) for the six
months
ended
September 30, 1994. A contingent deferred sales charge of
1.00%
and
1.50%
is
imposed on Class B and Class C shares, respectively, and
remitted to SB
if
redemptions occur within 18 months from the date such
investment was
made.
For the six months ended September 30, 1994, $4,717 was paid
with
respect
to
such redemptions. All officers and one Trustee of the Fund
are
employees
of
Smith Barney Inc. Pursuant to Distribution Plans, the
California
and
California Limited Term Portfolios make payments to SB for
distribution
related services on Class B shares at an annual rate of
0.70%
and 0.35%
of
the average daily net assets, respectively, and on Class C
shares at an
annual rate of 0.15% of the average daily net assets. The
California
Money
Market Portfolio makes payments to SB for distribution
related
services
at
an
annual rate of 0.10% of average daily net assets.
5. Investments
During the six months ended September 30, 1994, the
aggregate
cost of
purchases and proceeds from sales (including maturities, but
excluding
short-term securities) of investments were as follows:
California California Money Market Limited Term
California
Portfolio Portfolio Portfolio
Purchases $1,043,049 $33,306,260 Sales
(including
maturities) 926,763 29,307,326 At September
30,
1994,
the
gross
unrealized appreciation and depreciation of investments for
Federal
income
tax purposes were as follows: California California
Money
Market Limited Term California Portfolio Portfolio
Portfolio
Gross unrealized appreciation $ 8,673 $
6,239,761
Gross
unrealized depreciation (272,292)
(3,172,669)
Net
unrealized appreciation
(depreciation) $ (263,619) $ 3,067,092
6. Capital Shares
At September 30, 1994, there were an unlimited amount of
shares
of $.001
par
value capital stock authorized. The Fund has multiple
classes
of shares
within each Portfolio of the Fund. Each share of a class
represents an
identical interest in its respective Portfolio and has the
same
rights,
except that each class bears certain expenses specifically
related to
the
distribution of its shares. At March 31, 1994, paid in
capital
amounted
to
the following for each class and respective
Portfolio:Portfolio
Class
A Class B Class C California Money Market
$192,186,838
California
Limited Term 6,423,543 $2,101,486 $ 483,585
California 156,967,959 8,015,498 6,695,556
Transactions
in shares of
each class were as follows: Six Months Ended Year Ended
California
Money September 30, 1994 March 31, 1994 dddd dddd
Market
Portfolio Shares Amount Shares Amount Class AShares
sold 483,006,791 $483,006,791 1,043,269,466
$1,043,269,466
Shares
issued on reinvestment 1,908,577 1,908,577 3,127,064
3,127,064
Shares
redeemed (482,520,990) (482,520,990) (1,016,298,261)
(1,016,298,261)
Net Increase 2,394,378 $2,394,378 30,098,269
$30,098,269
California Limited Term Portfolio (a) Class A Shares
sold 77,273 $493,683 1,698,497 $11,136,992 Shares issued
on
reinvestment 17,023 109,318 37,037 246,457 Shares
redeemed (367,123) (2,343,881) (484,046) (3,219,025) Net
Increase
(Decrease) (272,827) $(1,740,880) 1,251,488 $8,164,424
Class B
Shares sold 29,938 $192,116 386,889 $2,558,573
Shares
issued
on
reinvestment 6,129 39,346 4,738 31,447 Shares
redeemed (89,196) (567,570) (23,016) (152,426) Net
Increase
(Decrease) (53,129) $(336,108) 368,611 $2,437,594
Class C
Shares
sold $ 274,912 $1,799,098 Shares issued on
reinvestment 1,916 12,314 793 5,204 Shares
redeemed (198,663) (1,333,031) Net
Increase 1,916 $12,314 77,042 $471,271
(a)For the period from April 27, 1993 (commencement of
operations) to
March
31, 1994. Six Months Ended Year Ended September 30, 1994
March 31,
1994 dddd dddd California
Portfolio Shares Amount Shares Amount Class A
Shares
sold 775,225 $9,453,452 2,938,814 $38,173,347 Shares
issued
on reinvestment 141,094 1,723,595 313,867 4,066,011
Shares
redeemed (1,042,459) (12,695,511) (2,305,447)
(29,781,514) Net
Increase (Decrease) (126,140) $(1,518,464) 947,234
$12,457,844
Class B Shares sold 139,599 $1,696,567 457,886 $
5,950,014
Shares issued on reinvestment 8,547 104,293 8,761
113,273
Shares redeemed (31,541) (384,510) (94,684)
(1,212,861)
Net
Increase 116,605 $1,416,350 371,963 $ 4,850,426
Class C
Shares
sold 379,464 $4,615,782 717,140 $ 9,342,933 Shares
issued on
reinvestment 2,967 36,344 18,708 243,338
Shares
redeemed (315,923) (3,859,005) (614,734) (7,960,170) Net
Increase
66,508 $793,121 121,114 $ 1,626,101
Schedule of Investments September 30, 1994
Schedule of Investments September 30, 1994
Smith Barney Muni Funds
Notes to Financial Statements (unaudited) (continued)
Smith Barney Muni Funds
Notes to Financial Statements (unaudited) (continued)
Schedule of Investments September 30, 1994
Schedule of Investments September 30, 1994
Smith Barney Muni Funds California Money Market Portfolio
For a share of each class of capital stock outstanding
throughout each
period:
Class A Shares: 1994(a) 1994 1993 1992 1991(b) Net
Asset
Value, Beginning of Period $1.00 $1.00 $1.00
$1.00 $1.00
Income from Investment Operations: Net investment
income 0.011 0.018 0.021 0.035 0.044
Total
Income from
Investment Operations 0.011 0.018 0.021 0.035
0.044 Less
Distributions: Dividends from net investment
income (0.011) (0.018) (0.021) (0.035) (0.044)
Total
Distributions (0.011) (0.018) (0.021) (0.035)
(0.044)
Net
Asset Value, End of Period $1.00 $1.00 $1.00
$1.00 $1.00 Total
Return 1.09% 1.84% 2.05% 3.51% 4.49% Net
Assets, End of Period
(000s) $192,175 $189,783 $159,681 $167,172 $135,608
Ratios
to
Average Net Assets: Expenses 0.63% 0.64% 0.67%
0.60% 0.46% Net
Investment Income 2.18% 1.82 2.05 3.46 4.73 (a) For
the
six
months ended September 30, 1994 (unaudited). (b) From May
10,
1990
(inception date) to March 31, 1991. Annualized. Not
annualized,
as the
result
may not be representative of the total return for the year.
For
a share
of
each class of capital stock outstanding throughout each
period:
Class A Class B Class C bbbb bbbb bbb
9/30/94(a) 3/31/94(b) 9/30/94(a) 3/31/94(c)
9/30/94(a) 3/31/94(d)
Net Asset Value, Beginning of
Period $6.41 $6.50 $6.41 $6.51 $6.41
$6.57 Income from
Investment Operations: Net investment
income 0.17 0.27 0.15 0.25 0.16 0.15 Net realized and
unrealized loss on
investments (0.03) (0.12) (0.02) (0.12)
(0.02)
(0.15) Total
Income from Investment
Operations 0.14 0.15 0.13 0.13 0.14 0.00 Less
Distributions: Dividends from net investment
income (0.16) (0.24) (0.15) (0.23) (0.16)
(0.16)
Distributions from net realized gains on security
transactions
Total
Distributions (0.16) (0.24) (0.15) (0.23)
(0.16)
(0.16) Net
Asset Value, End of Period $6.39 $6.41 $6.39
$6.41 $6.39 $
6.41 Total Return 2.24% 2.29% 2.06 1.87% 2.17
N.A. Net
Assets, End of Period
(000s) $6,256 $8,020 $2,016 $2,361 $505 $494
Ratios to
Average Net Assets:
Expenses 0.29% 0.19% 0.59% 0.53% 0.43%
0.35% Net Investment
Income 4.37 4.99 4.08 4.52 4.37 4.84 Portfolio Turnover
Rate 8.49% 47.91% 8.49% 47.91% 8.49%
47.91%
(a) For the six months ended September 30, 1994
(unaudited).
(b)
From
April 27, 1993 (inception date) to March 31, 1994. (c) From
May
18,
1993
(inception date) to March 31, 1994. (d) From June 23, 1993
(inception
date) to March 31, 1994. Annualized. Not annualized, as the
result may
not
be
representative of the total return for the year.
Financial Highlights
Smith Barney Muni Funds
Notes to Financial Statements (unaudited) (continued)
Schedule of Investments September 30, 1994
Smith Barney Muni Funds California Portfolio
For a share of each class of capital stock outstanding
throughout each
period:
Class A Shares: 1994(a) 1994 1993 1992 1991 1990 Net
Asset
Value, Beginning of
Period $12.27 $2.78 $12.05
$11.62
$11.47 $11.17
Income from Investment Operations: Net Investment
Income 0.38 0.76 0.78 0.81 0.84
0.84
Net realized and unrealized gain (loss) on
investments (0.19) (0.47) 0.73
0.42
0.15 0.81
Total Income from Investment
Operations 0.19 0.29 1.51 1.23 0.99
1.15
Less Distributions: Dividends from net investment
income (0.38) (0.77) (0.78)
(0.80)
(0.84) (0.85)
Distributions from net realized gains on security
transactions
(0.03) Total
Distributions (0.38) (0.80) (0.78)
(0.80) (0.84) (0.85)
Net Asset Value, End of
Period $12.08 $12.27 $12.78
$12.05 $11.62 $11.47
Total
Return 1.54% 2.15% 12.93%
11.11%
8.90% 10.44%
Net Assets, End of Period
(000s) $160,801 $164,833 $159,635 $ 123,268 $
98,740 $78,135
Ratios to Average Net Assets:
Expenses 0.52% 0.51% 0.53%
0.38% 0.21%
0.20%
Net Investment
loss 6.20 5.90 6.32 6.78 7.25
7.16
Portfolio Turnover
Rate 16.97% 38.68% 24.28%
44.03%
45.37% 23.87%
Financial Highlights (continued)
Class B Shares: 1994(a) 1994 1993(b) Net Asset Value,
Beginning
of
Period $12.26 $12.77 $12.46 Income
from
Investment
Operations: Net investment income 0.34 0.68
0.20
Net
realized and unrealized gain on security
transactions (0.19) (0.48) 0.29 Total
Income from
Investment Operations 0.15 0.20 0.49 Less
Distributions:
Dividends from net investment
income (0.33) (0.68) (0.18)
Distributions
from net
realized gains on security transactions
(0.03) Total
Distributions (0.33) (0.71) (0.18) Net
Asset Value, End
of Period $12.07 $12.26 $12.77 Total
Return 1.16% 1.45% 3.95% Net
Assets,
End of
Period
(000s) $7,584 $6,269 $1,784 Ratios to Average Net
Assets:
Expenses 1.22% 1.22% 1.20% Net
Investment
loss 5.49 5.15 5.44 Portfolio Turnover
Rate 16.97% 38.68% 24.28% (a) For
the
six
months
ended September 30, 1994 (unaudited). (b) From January 5,
1993
(inception
date) to March 31, 1993. Annualized. Not annualized, as the
result may
not
be
representative of the total return for the year.
Schedule of Investments September 30, 1994
Financial Highlights
Smith Barney Muni Funds California Limited Term Portfolio
On November 7, 1994, the Smith Barney mutual funds and the
Smith Barney
Shearson mutual funds were combined into a unified Smith
Barney
Family
of
Funds. In order to provide more consistent service within
the
Family, as
well
as exchange flexibility among funds, the use of a single
transfer agent
for
all funds is necessary. Therefore, The Shareholder Services
Group, Inc.,
a
subsidiary of First Data Corporation (TSSG) of Boston, MA,
which has
served
as a transfer agent of the Smith Barney Shearson Funds since
1983,
replaced
PFPC, Inc. of Wilmington, DE, as transfer agent for the
Smith
Barney
Funds.
If you have any questions regarding this information, please
contact
your
Financial Consultant.
Administrative Update
Financial Highlights (continued)
Smith Barney Muni Funds California Portfolio
For a share of each class of capital stock outstanding
throughout each
period:
Class C Shares: 1994(a) 1994 1993(b) Net Asset Value,
Beginning
of
Period $12.28 $12.78 $12.34 Income
from
Investment
Operations: Net investment income 0.39 0.73
0.16
Net
realized and unrealized gain (loss) on
investments (0.20) (0.45) 0.41 Total
Income
from
Investment Operations 0.19 0.28 0.57 Less
Distributions:
Dividends from net investment
income (0.37) (0.75) (0.13)
Distributions
from net
realized gains on security transactions
(0.03) Total
Distributions (0.37) (0.78) (0.13) Net
Asset Value, End
of Period $12.10 $12.28 $12.78 Total
Return 1.54% 2.09% 4.59% Net
Assets,
End of
Period
(000s) $6,336 $5,616 $4,298 Ratios
to
Average Net
Assets: Expenses(1) 0.69% 0.66% 0.65%
Net
investment
income 6.36% 5.83 5.81 Portfolio
Turnover
Rate 16.97% 38.68% 24.28% (a) For
the
six
months
ended September 30, 1994 (unaudited). (b) From January
12,
1993
(inception
date) to March 31, 1993. Annualized. Not annualized, as the
result may
not
be
representative of the total return for the year.
(1) The manager has waived all or part of its fees in the
five
year
period
ended March 31, 1994. If such fees were not waived, the per
share effect
on
expenses and the ratios of expenses to average net assets
would
be as
follows: Portfolio Per Share Increase in Expense Ratios
1994 1993 1992 1991 1990 California Money
Market $ $ $ $0.001 $ California Limited
Term
Class
A .. 0.032 California Limited Term Class B . 0.041
California
Limited Term Class C .. 0.011 California Class
A 0.017 0.029 0.029
Portfolio Expense Ratios Without Fee Waivers
1994 1993 1992 1991 1990 California Money
Market 0.60% California Limited Term
Class
A .. 0.75% California Limited Term Class B . 1.18
California
Limited Term Class C .. 0.011 California Class
A 0.51% 0.46% 0.45%
Smith Barney Muni Funds California Money Market, California
Limited Term
and
California Portfolios
[This page intentionally left blank]
<PAGE>
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing palm
trees
in front of a high-rise building.
SMITH BARNEY
INTERMEDIATE
1994
ANNUAL MATURITY
REPORT
CALIFORNIA
MUNICIPALS
FUND
-------------------
NOVEMBER 30, 1994
SMITH BARNEY MUTUAL FUNDS
[LOGO] INVESTING FOR YOUR FUTURE.
EVERYDAY.
<PAGE>
INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
DEAR SHAREHOLDER:
We are pleased to present the annual report and
audited financial statements for the fiscal year ended
November
30, 1994
for
Smith Barney Intermediate Maturity California Municipals
Fund.
Below we
have
provided a summary of economic and market conditions as well
as
a brief
review
of the investment strategy used by the Fund. We hope you
find
this
information
useful as you evaluate your investment.
ECONOMIC AND INTEREST RATE OVERVIEW
Over the past year the bond market experienced significant
volatility.
After falling to their lowest levels in 15 years in November
1993,
yields on
municipal bonds retraced their path during the course of the
year and in
November 1994 they reached their highest levels in three
years.
The
reason for
this change in interest rates was the improving economy. In
late 1993
and early
1994, the U.S. economy was clearly showing signs of moderate
growth. In
addition, a significant amount of leverage also had built up
in
the
fixed
income markets. To curb the possibility of higher inflation
and
to stem
the
growth of leverage in the market, the Federal Reserve began
to
raise
short-term
interest rates for the first time since 1988. The Federal
Reserve
continued
this policy of higher short-term rates throughout 1994,
raising
the
Federal
funds rate to 5.50% and the discount rate to 4.75%. Both are
sensitive
indicators of the direction of interest rates.
In response to the Federal Reserve's policy of higher short-
term
interest rates, our investment strategy has been to keep the
portfolio's
average maturity between approximately 8 1/2 and 9 years.
This
enables
the Fund
to maximize its tax-exempt income while minimizing its
exposure
to
changing
short-term interest rates. All of the securities in the
portfolio are
rated
investment grade by either Moody's Investor Services, Inc.
or
Standard &
Poor's
Corporation, and they are also widely diversified by
investment
sector.
Throughout 1994 the California economy has shown signs of
improvement.
Significant gains in employment coupled with a firmer real
estate market
have
boded well for state tax revenues. However, we have avoided
general
obligation
bonds issued by the state as well as lease revenue bonds
that
rely on
state
budget appropriations to pay bondholders because of our
concern
over the
state's
ongoing budget deficits and the legislature's inability to
balance the
budget.
We have instead invested the Fund's assets in essential
service
revenue
bonds --
transportation, water and sewer bonds -- and debt issued by
local
communities
for redevelopment projects and various civic improvements.
The problems of Orange County's investment pool have
dominated
the
municipal
market since early December when Orange County filed for
bankruptcy. The
1
<PAGE>
investment pool consists of deposits from Orange County,
agencies in
Orange
County (such as Orange County Sanitation District and Orange
County
Transportation Authority) and various local communities. The
pool
suffered
substantial losses through the use of leverage and risky
derivative
investments.
At the end of this fiscal year, approximately 3.70% of the
Fund's assets
were
invested in Orange County Development Agency Tax Allocation
bonds.
Although
these bonds are issued under the name of Orange County, they
rely on a
dedicated
property tax to pay debt service. We believe that the
bankruptcy
proceeding will
not have any material impact on the ability of the issuer to
make its
scheduled
interest and principal payments and therefore will have
little,
if any,
effect
on the Fund.
PORTFOLIO SUMMARY
Despite the volatility of the municipal market over the past
year, our
outlook
for the future is much more positive. We believe that the
Federal
Reserve has
done a credible job of fighting inflation, and this should
translate
into lower
yields and lower volatility in the bond markets.
For the near future, our investment strategy will be to
increase the
Fund's
holdings of AA- and AAA- rated securities. We believe that
this
strategy
should
provide the Fund with an opportunity to see an increase in
the
value of
its
holdings during a better market environment, yet at the same
time
maximize its
tax-exempt dividend income.
DIVIDEND POLICY
The Fund does not pay a level monthly dividend rate but
instead
distributes to
shareholders the accrued monthly income earned by the
portfolio. We will
continue to strive to offer an attractive dividend
distribution
as we
also face
uncertain interest rates and continued volatility.
We appreciate your confidence during the difficult
investment
environment of
1994, and join you in looking forward to a more benign 1995.
Should you
have any
questions about your investment in the Fund or how other
Smith
Barney
mutual
funds may be useful in helping you reach your financial
goals,
please
speak with
your Smith Barney Financial Consultant.
Sincerely,
/s/ Heath B. McLendon /s/ Joseph P.
Deane
Heath B. McLendon Joseph P. Deane
Chairman of the Board Vice President and
and Investment Officer Investment Officer
January 16, 1995
2
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------
- ---
- ---------
- ----
PORTFOLIO HIGHLIGHTS (UNAUDITED) NOVEMBER
30,
1994
- ------------------------------------------------------------
- ---
- ---------
- ----
DESCRIPTION OF PIE CHART IN SHAREHOLDER REPORT
Industry Breakdown
Pie chart depicting the allocation of the Income Trust
Intermediate
Maturity
California Municipals Fund investment securities held at
November 30,
1994
by industry classification. The pie is broken in pieces
representing
industries in the following percentages:
INDUSTRY PERCENTAGE
<S> <C>
Education 16.1%
Housing 5.2%
Transportation 14.1%
Pollution Control 10.0%
General Obligation 23.2%
Other Municipal Bonds and Notes 15.5%
Hospital 7.5%
Utility 3.3%
Net Other Assets and Liabilities 5.1%
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF MUNICIPAL BONDS AND SHORT-TERM
TAX-EXEMPT INVESTMENTS BY COMBINED RATINGS
Standard &
Percent
Moody's Poor's
of
Value
<S> <C>
- ------------------------------------------------------------
- ---
- ---------
- ----
Aaa OR AAA
17.3%
- ------------------------------------------------------------
- ---
- ---------
- ----
Aa AA
17.9
- ------------------------------------------------------------
- ---
- ---------
- ----
A A
35.4
- ------------------------------------------------------------
- ---
- ---------
- ----
Baa BBB
29.4
- ------------------------------------------------------------
- ---
- ---------
- ----
100.0%
-----
- ---
- ---------
- ----
</TABLE>
AVERAGE MATURITY 8.4 years
3
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- --------
HISTORICAL PERFORMANCE - CLASS A SHARES (UNAUDITED)
- ------------------------------------------------------------
- ---
- ---------
- --------
<CAPTION>
Year Ended Net Asset Value Capital Gains
Dividends
Total
November 30 Beginning Ending Distributed
Paid
Return*
<S> <C> <C> <C>
<C>
<C>
- ------------------------------------------------------------
- ---
- ---------
- --------
12/31/91 -
11/30/92 $7.90 $8.04 --
$0.35
6.33 %
- ------------------------------------------------------------
- ---
- ---------
- --------
1993 8.04 8.50 --
0.39
10.70 %
- ------------------------------------------------------------
- ---
- ---------
- --------
1994 8.50 7.80 $ 0.01
0.39
(3.65)%
- ------------------------------------------------------------
- ---
- ---------
- --------
Total $ 0.01
$1.13
- ------------------------------------------------------------
- ---
- ---------
- --------
Cumulative Total Return -- (12/31/91 through 11/30/94)
13.42 %
- ------------------------------------------------------------
- ---
- ---------
- --------
<FN>
* Figures assume reinvestment of all dividends and capital
gains
distributions at net asset value and do not reflect
deduction of a
front-end sales charge (maximum 2.00%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- --------
AVERAGE ANNUAL TOTAL RETURN** - CLASS A SHARES (UNAUDITED)
- ------------------------------------------------------------
- ---
- ---------
- --------
<CAPTION>
Without Sales Charges With
Sales
Charges***
With fees Without fees With
fees
Without fees
waived and waived and waived
and
waived and
expenses expenses
expenses
expenses
reimbursed reimbursed
reimbursed
reimbursed
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------
- ---
- ---------
- --------
Year Ended 11/30/94 (3.65)% (4.15)%
(5.57)%
(6.06)%
- ------------------------------------------------------------
- ---
- ---------
- --------
Inception (12/31/91)
through 11/30/94 4.41 % 3.39 %
3.69 %
2.68 %
- ------------------------------------------------------------
- ---
- ---------
- --------
<FN>
** All average annual total return figures shown reflect
the
reinvestment
of dividends and capital gains distributions at net
asset
value. The
investment adviser and administrator waived fees and/or
reimbursed
expenses from December 31, 1991 to the present. A
shareholder's
actual
return for the period during which waivers were in
effect
would be
the
higher of the two numbers shown.
*** Average annual total return figures shown assume the
deduction of a
maximum 2.00% sales charge.
</TABLE>
NOTE: On November 7, 1994, existing shares of the Fund
were
designated
Class A shares. Class A shares are sold subject to a
2.00%
front-end
sales charge; however, purchases of Class A shares,
which
when
combined
with current holdings of Class A shares offered with a
sales charge
equal or exceed $500,000 in the aggregate, will be made
at
net asset
value with no initial sales charge but will be subject
to a
1.00%
contingent deferred sales charge if redeemed within 12
months of
purchase. Class A shares of the Fund are subject to a
service fee of
0.15% of the value of the average daily net assets
attributable to
that
class.
4
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES
OF
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS
FUND
VS. LEHMAN BROTHERS 10 YEAR MUNICIPAL BOND
INDEX
AND LIPPER ANALYTICAL SERVICES, INC. PEER GROUP
AVERAGE
INDEX+
- ------------------------------------------------------------
- ---
- ---------
- ----
December 31, 1991 - November 30, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SMITH BARNEY COVERS (CLASS
A)
A line graph depicting the total growth (including
reinvestment
of
dividends
and capital gains) of a hypothetical investment of $10,000
in
Smith
Barney
Income Trust Intermediate Maturity California Municipals
Fund
Class A
shares on
December 31, 1991 through November 30, 1994 as compared with
the growth
of a
$10,000 investment in the Lehman Brothers 10 Year Muncipal
Bond
Index
and the
Lipper Analytical Services, Inc. Peer Group Average Index.
The
plot
points
used to draw the line graph were as follows:
<CAPTION>
GROWTH OF $10,000
GROWTH OF
$10,000
INVESTMENT IN THE
INVESTMENT IN
THE
GROWTH OF $10,000 LEHMAN BROTHERS
LIPPER
ANALYTICAL
INVESTED IN CLASS A 10 YEAR MUNICIPAL
SERVICES, INC.
PEER
MONTH ENDED SHARES OF THE FUND BOND INDEX
GROUP
AVERAGE
INDEX
<S> <C> <C>
<C>
12/31/91 $ 9,800 $10,000
$10,000
12/91 $ 9,800 -
- -
3/92 $ 9,764 $ 9,991
$
9,979
6/92 $10,105 $10,380
$10,301
9/92 $10,346 $10,682
$10,552
12/92 $10,544 $10,892
$10,731
3/93 $10,894 $11,312
$11,064
6/93 $11,286 $11,686
$11,364
9/93 $11,628 $12,104
$11,724
12/93 $11,758 $12,281
$11,870
3/94 $11,213 $11,629
$11,396
6/94 $11,334 $11,800
$11,490
9/94 $11,428 $11,882
$11,592
11/94 $11,115 $11,488
$11,255
<FN>
+ Illustration of $10,000 invested in Class A shares at
inception on
December 31, 1991 through November 30, 1994 assuming
deduction of a
maximum 2.00% sales charge at the time of investment and
reinvestment
of
dividends and capital gains at net asset value.
</TABLE>
LEHMAN BROTHERS 10 YEAR MUNICIPAL BOND INDEX, which began
in
January
1980, is an unmanaged, broad-based index comprised of
approximately
5,200
bonds totaling approximately $63 billion in market
capitalization.
The
bonds are all municipal bonds with an average maturity of
9.8 years,
an
average yield of 4.93% and a duration of 7.08 years.
LIPPER ANALYTICAL SERVICES, INC. PEER GROUP AVERAGE INDEX
is
composed
of
an average of the Fund's peer group of mutual funds (27
as
of
November
30, 1994) investing in intermediate maturity California
tax-
exempt
bonds.
This period was one in which municipal bond prices
fluctuated and the
results should not be considered as a representation of
the
dividend
income or capital gain or loss which may be realized from
an
investment
in the Fund today. No adjustment has been made for
shareholder tax
liability on dividends or capital gains.
NOTE: All figures cited here represent past performance
and
do not
guarantee future results.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS
REPORT.
5
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------
- ---
- ---------
- ------------------
HISTORICAL PERFORMANCE - CLASS C SHARES (UNAUDITED)
- ------------------------------------------------------------
- ---
- ---------
- ------------------
Net Asset Value Capital
Gains
Dividends Total
Beginning Ending Distributed
Paid
Return*
<S> <C> <C> <C>
<C>
<C>
- ------------------------------------------------------------
- ---
- ---------
- ------------------
Inception (11/8/94)
through 11/30/94 $7.76 $7.80 --
$0.02 0.72 %
- ------------------------------------------------------------
- ---
- ---------
- ------------------
<FN>
* Figures assume reinvestment of all dividends and capital
gains
distributions
at net asset value and do not reflect the deduction of
any
contingent
deferred sales charge.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
- ---
- ---------
- ------------------
CUMULATIVE TOTAL RETURN** - CLASS C SHARES (UNAUDITED)
- ------------------------------------------------------------
- ---
- ---------
- ------------------
With
fees
Without fees
waived
waived
<S> <C>
<C>
- ------------------------------------------------------------
- ---
- ---------
- ------------------
Inception (11/8/94) through 11/30/94 0.72
%
0.70 %
- ------------------------------------------------------------
- ---
- ---------
- ------------------
<FN>
** All cumulative total return figures shown reflect the
reinvestment
of
dividends and capital gains distributions at net asset
value. The
investment adviser and administrator waived fees from
November 8,
1994
to the present. A shareholder's actual return for the
period during
which waivers were in effect would be the higher of the
two
numbers
shown.
NOTE: On November 7, 1994, the Fund began offering Class C
and
Class Y
shares.
Class C shares may be subject to a 1.00% contingent deferred
sales
charge if
redeemed within 12 months of purchase and are subject to
annual
service
and
distribution fees of 0.15% and 0.20%, respectively, of the
value of the
average
daily net assets attributable to that class. As of November
30,
1994, no
Class Y
shares had been sold.
</TABLE>
6
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
PORTFOLIO OF INVESTMENTS
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
KEY TO INSURANCE ABBREVIATIONS
- ------------------------------------------------------------
- ---
- ---------
- -------
AMBAC -- American Municipal Bond
Assurance
Corporation
FGIC -- Federal Guaranty Insurance
Corporation
MBIA -- Municipal Bond Investors
Assurance
GNMA -- Government National Mortgage
Association
<TABLE>
<CAPTION>
RATINGS MARKET
(UNAUDITED) VALUE
FACE VALUE
MOODY'S
S&P (NOTE 1)
<C> <S>
<C>
<C> <C>
-------------------------------------------------------
- ---
- ---------
- -------------------
MUNICIPAL BONDS AND NOTES - 94.9%
CALIFORNIA - 94.9%
Belmont, California, Redevelopment Agency, Tax
Allocation Project, (Los Costanos Community
Development), Series A:
$ 150,000 5.850% due 8/1/02
A
A- $143,625
160,000 5.950% due 8/1/03
A
A- 152,600
California Educational Facilities Authority,
Revenue Bonds:
320,000 (Loyola Marymount University), Series B,
6.300% due 10/1/03
A1
NR 319,200
200,000 (Mills College),
6.500% due 9/1/02
Baa1
NR 199,750
985,000 (Saint Mary's College),
4.900% due 10/1/03
A
NR 881,575
500,000 (University of Southern California),
5.300% due 10/1/04
Aa
AA 467,500
California Health Facilities Financing
Authority:
200,000 (Adventist Health System/West Agency),
Series B,
(MBIA Insured),
6.150% due 3/1/99
Aaa
AAA 204,500
200,000 (Sisters of Providence),
6.200% due 10/1/03
A1
AA- 191,000
400,000 (St. Elizabeth Hospital Project),
5.900% due 11/15/03
A1
A+ 378,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
<TABLE>
<CAPTION>
RATINGS
MARKET
(UNAUDITED) VALUE
FACE VALUE
MOODY'S
S&P (NOTE 1)
<C> <S>
<C>
<C> <C>
-------------------------------------------------------
- ---
- ---------
- ------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
California Housing Finance Agency Revenue,
Home Mortgage:
$ 5,000 10.000% due 2/1/02
Aa
AA- $ 5,025
Series E1:
700,000 5.900% due 2/1/05
Aa
AA- 655,375
700,000 5.900% due 8/1/05
Aa
AA- 654,500
California State, General Obligation Bonds:
100,000 9.800% due 10/1/00
A1
A+ 117,500
200,000 6.000% due 9/1/03
A1
A 197,000
1,200,000 California Statewide Community Development,
Certificates of Participation, (St. Josephs
Health),
5.875% due 7/1/05
Aa
AA 1,134,000
190,000 Escondido, California, Unified School District,
Certificates of Participation, Series A,
5.400% due 7/1/03
A
A- 173,375
Fresno, California, Joint Powers Financing
Authority, Series A:
1,500,000 5.750% due 9/2/98
NR
BBB 1,464,375
355,000 Lease Revenue, (Street Light Acquisition),
Project A,
5.375% due 8/1/03
A
A+ 324,381
855,000 Garden Grove, California, Tax Allocation
Revenue, (Garden Grove Community Project),
5.375% due 10/1/03
NR
A 769,500
1,000,000 Hawthorne, California, Community Redevelopment
Agency, (Tax Allocation Redevelopment Project,
Area 2),
6.200% due 9/1/05
Baa
NR 936,250
Irvine Ranch, California, Water District, Joint
Powers Agency, Local Pool Revenue, Issue II:
800,000 7.200% due 8/15/96
NR
A+ 821,000
480,000 7.800% due 8/15/01
NR
A+ 505,200
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
<TABLE>
<CAPTION>
RATINGS
MARKET
(UNAUDITED)
VALUE
FACE VALUE MOODY'S
S&P
(NOTE 1)
- ------------------------------------------------------------
- ---
- ---------
- --------
<C> <S> <C>
<C>
<C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 285,000 Kern, California, High School
District, Series C, (MBIA Insured),
8.750% due 8/1/03 Aaa
AAA
$330,600
Kings County, California, Waste
Management Revenue Bonds:
400,000 6.500% due 10/1/03 NR
BBB
387,500
310,000 6.500% due 10/1/04 NR
BBB
300,312
230,000 Kings River Conservation District,
(California Pine Flat Power Revenue
Project), Series D,
5.375% due 2/1/00 Aa
AA
225,687
30,000 Los Angeles County, California,
Multiple Capital Facilities,
Certificates of Participation,
(Project III),
5.800% due 11/1/98 A
A-
29,738
1,000,000 Los Angeles County, California,
General Obligation Bonds, Series A,
5.250% due 9/1/06 Aa1
AA
882,500
Los Angeles County, California,
Transportation Authority,
Transportation Commission,
Certificates of Participation:
500,000 Series B,
6.200% due 7/1/03 A1
A+
496,875
45,000 Series G,
6.100% due 1/1/00 A
NR
45,338
500,000 Modesto, California, High School
District, (Stanislaus Company),
(FGIC Insured),
5.300% due 8/1/04 Aaa
AAA
465,000
Mojave, California, Water District,
California, Improvement District,
(Moronogo Basin):
250,000 6.250% due 9/1/02 Baa
BBB+
243,125
280,000 6.375% due 9/1/03 Baa
BBB+
272,300
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- -------------------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- -------------------
<CAPTION>
RATINGS
MARKET
(UNAUDITED) VALUE
FACE VALUE
MOODY'S
S&P (NOTE 1)
- ------------------------------------------------------------
- ---
- ---------
- -------------------
<C> <S>
<C>
<C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
Orange County, California, Development Agency
Tax Allocation, (Santa Ana Heights Project):+
$ 500,000 5.500% due 9/1/00
Baa1
BBB $ 476,250
500,000 5.600% due 9/1/01
Baa1
BBB 474,375
Palm Springs, California, Financing Authority,
Airport Revenue, (Palm Springs Regional
Airport), (MBIA Insured):
200,000 5.400% due 1/1/03
Aaa
AAA 188,500
400,000 5.500% due 1/1/04
Aaa
AAA 376,500
385,000 Pinole, California, Redevelopment Agency,
Series A, (Pinole Vista Redevelopment Project
Tax Allocation), (MBIA Insured),
5.500% due 8/1/03
Aaa
AAA 366,713
795,000 Redding, California, Joint Powers Financing
Authority, Solid Waste and Corporate Yard,
Series A,
5.000% due 1/1/04
A
BBB+ 699,600
150,000 Riverside County, California, Transportation
Commission, Sales Tax Revenue, Series A,
6.500% due 6/1/00
A
A+ 154,688
Sacramento, California, Regional Transportation
District, Certificates of Participation,
Series A:
300,000 6.375% due 3/1/02
A1
NR 300,750
350,000 6.400% due 3/1/03
A1
NR 349,125
100,000 San Diego, California, Certificates of
Participation, Unified School District,
Series B,
6.000% due 7/1/03
Aa
AA- 98,625
San Francisco, California, City and County
Revenue, (South Beach Project), (GNMA Insured):
340,000 4.750% due 3/1/02
Aaa
NR 312,800
305,000 4.900% due 3/1/03
Aaa
NR 279,075
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
<TABLE>
<CAPTION>
RATINGS MARKET
(UNAUDITED) VALUE
FACE VALUE
MOODY'S
S&P (NOTE 1)
<C> <S>
<C>
<C> <C>
- ------------------------------------------------------------
- ---
- ---------
- -----------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
San Francisco, California, Downtown Parking
Corporation, Parking Revenue, Series R:
$ 450,000 6.000% due 4/1/02
A1
NR $ 428,625
280,000 6.150% due 4/1/03
A1
NR 266,350
San Jose, California, Airport Revenue:
800,000 (FGIC Insured),
5.400% due 3/1/04
Aaa
AAA 734,000
500,000 (MBIA Insured),
5.750% due 3/1/03
Aaa
AAA 488,125
Santa Barbara, California, Certificates of
Participation, (Harbor Refunding Project):
270,000 6.400% due 10/1/02
A
NR 268,650
285,000 6.500% due 10/1/03
A
NR 282,506
Sierra Sands Unified School District,
California, Sierra Sands School Financing
Corporation, Certificates of Participation:
450,000 5.250% due 3/1/00
Baa
NR 420,750
470,000 5.350% due 3/1/01
Baa
NR 435,925
1,000,000 South Napa, California, Waste Management
Facilities,
6.000% due 2/15/04
Baa1
NR 922,500
450,000 Southern California Rapid Transit Authority,
District A2, Special Benefit Assessment,
6.100% due 9/1/03
Baa
A- 433,125
105,000 Tehachapi, California, Unified School District,
School Facilities Corporation, Certificates of
Participation,
5.900% due 8/1/03
Baa
NR 96,206
500,000 Ukiah, California, Unified School District,
Certificates of Participation, (Measure A
Capital Projects),
5.625% due 9/1/02
Baa1
BBB 460,000
200,000 University of California, Multiple Purpose
Projects, Series A, (MBIA Insured),
6.100% due 9/1/00
Aaa
AAA 202,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
PORTFOLIO OF INVESTMENTS (continued)
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
<TABLE>
<CAPTION>
RATINGS MARKET
(UNAUDITED) VALUE
FACE VALUE
MOODY'S
S&P (NOTE 1)
<C> <S>
<C>
<C> <C>
-------------------------------------------------------
- ---
- ---------
- ------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 205,000 Upland, California, Certificates of
Participation, (Police Building Refunding
Project), (AMBAC Insured),
6.200% due 8/1/02
Aaa
AAA S 207,306
- ------------------------------------------------------------
- ---
- ---------
- ------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $25,313,309)
24,098,275
- ------------------------------------------------------------
- ---
- ---------
- ------------------
TOTAL INVESTMENTS (Cost $25,313,309*)
94.9%
24,098,275
============================================================
===
=========
==================
OTHER ASSETS AND LIABILITIES (NET)
5.1
1,305,804
============================================================
===
=========
==================
NET ASSETS
100.0%
$25,404,079
============================================================
===
=========
==================
<FN>
* Aggregate cost for Federal tax purposes.
+ See Note 10.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- ----------------
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
- ------------------------------------------------------------
- ---
- ---------
- ----------------
<CAPTION>
<S>
<C>
<C>
ASSETS:
Investments, at value (Cost $25,313,309)(Note 1)
See accompanying schedule
$24,098,275
Cash
34,300
Receivable for Fund shares sold
977,222
Interest receivable
408,039
Unamortized organization costs (Note 7)
25,088
- ------------------------------------------------------------
- ---
- ---------
- ----------------
TOTAL ASSETS
25,542,924
============================================================
===
=========
================
LIABILITIES:
Dividends payable
$71,859
Accrued shareholder reports expense
23,000
Accrued legal and audit expense
20,750
Registration and filing fees payable
8,100
Service fee payable (Note 3)
3,378
Investment advisory fee payable (Note 2)
2,828
Custodian fees payable (Note 2)
2,500
Administration fee payable (Note 2)
1,330
Transfer agent fees payable (Note 2)
1,000
Payable for Fund shares redeemed
500
Accrued expenses and other payables
3,600
- ------------------------------------------------------------
- ---
- ---------
- ---------------
TOTAL LIABILITIES
138,845
============================================================
===
=========
===============
NET ASSETS
$25,404,079
============================================================
===
=========
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
<TABLE>
<S>
<C>
NET ASSETS CONSIST OF:
Accumulated net realized loss on investments sold
$
(755,382)
Unrealized depreciation of investments
(1,215,034)
Par value
3,259
Paid-in capital in excess of par value
27,371,236
- ------------------------------------------------------------
- ---
- ---------
- --------
TOTAL NET ASSETS
$25,404,079
- ------------------------------------------------------------
- ---
- ---------
- --------
NET ASSET VALUE:
CLASS A SHARES
NET ASSET VALUE per share+
($25,358,843 / 3,253,075 shares of beneficial interest
outstanding)
$7.80
- ------------------------------------------------------------
- ---
- ---------
- --------
MAXIMUM OFFERING PRICE PER SHARE ($7.80 / 0.98) (based
on
sales
charge of 2.00% of the offering price at November 30,
1994)
$7.96
- ------------------------------------------------------------
- ---
- ---------
- --------
CLASS C SHARES
NET ASSET VALUE and offering price per share+
($45,236 / 5,799 shares of beneficial interest
outstanding)
$7.80
- ------------------------------------------------------------
- ---
- ---------
- --------
</TABLE>
+ Redemption price per share is equal to net asset value
less
any
applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- ----------------
STATEMENT OF OPERATIONS FOR THE
YEAR ENDED
NOVEMBER 30, 1994
- ------------------------------------------------------------
- ---
- ---------
- ----------------
<S>
<C>
<C>
INVESTMENT INCOME:
Interest
$1,744,106
- ------------------------------------------------------------
- ---
- ---------
- ----------------
EXPENSES:
Investment advisory fee (Note 2)
$
111,347
Administration fee (Note 2)
63,627
Service fee (Note 3)
47,724
Registration and filing fees
42,586
Shareholder reports expense
39,264
Legal and audit fees
30,079
Custodian fees (Note 2)
16,491
Amortization of organization costs (Note 7)
12,042
Transfer agent fees (Notes 2 and 4)
11,824
Trustees' fees and expenses (Note 2)
5,520
Distribution fee (Note 3)
3
Other
12,923
Fees waived by investment adviser and administrator
(Note
2)
(154,816)
- ------------------------------------------------------------
- ---
- ---------
- ----------------
TOTAL EXPENSES
238,614
- ------------------------------------------------------------
- ---
- ---------
- ----------------
NET INVESTMENT INCOME
1,505,492
============================================================
===
=========
================
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized loss on investments during the year
(731,956)
Net unrealized depreciation of investments during the
year
(1,997,496)
============================================================
===
=========
================
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(2,729,452)
============================================================
===
=========
================
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(1,223,960)
============================================================
===
=========
================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- -----------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
- ---
- ---------
- -----------------
<CAPTION>
YEAR
YEAR
ENDED
ENDED
11/30/94
11/30/93
<S>
<C>
<C>
Net investment income
$
1,505,492
$ 886,464
Net realized gain/(loss) on investments sold during the
year
(731,956)
25,380
Net unrealized appreciation/(depreciation) of investments
during the year
(1,997,496)
673,107
- ------------------------------------------------------------
- ---
- ---------
- -----------------
Net increase/(decrease) in net assets resulting from
operations
(1,223,960)
1,584,951
Distributions to shareholders from net investment income:
Class A
(1,505,401)
(886,464)
Class C
(91)
- --
Distribution to shareholders from net realized gain on
investments:
Class A
(44,755)
- --
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A
(4,380,596)
21,148,865
Class C
45,000
- --
- ------------------------------------------------------------
- ---
- ---------
- -----------------
Net increase/(decrease) in net assets
(7,109,803)
21,847,352
NET ASSETS:
Beginning of year
32,513,882
10,666,530
- ------------------------------------------------------------
- ---
- ---------
- -----------------
End of year
$25,404,079
$32,513,882
- ------------------------------------------------------------
- ---
- ---------
- -----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- -------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------
- ---
- ---------
- -------
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION> YEAR
YEAR
PERIOD
ENDED
ENDED
ENDED
11/30/94*
11/30/93
11/30/92*
<S> <C>
<C>
<C>
Net asset value, beginning of year $ 8.50
$
8.04 $
7.90
- ------------------------------------------------------------
- ---
- ---------
- -------
Income from investment operations:
Net investment income+ 0.39
0.39
0.35
Net realized and unrealized gain/(loss) on
investments (0.69)
0.46
0.14
- ------------------------------------------------------------
- ---
- ---------
- -------
Total from investment operations (0.30)
0.85
0.49
- ------------------------------------------------------------
- ---
- ---------
- -------
Less distributions:
Distributions from net investment income (0.39)
(0.39)
(0.35)
Distributions from net realized capital gains (0.01)
- --
- --
- ------------------------------------------------------------
- ---
- ---------
- -------
Total distributions (0.40)
(0.39)
(0.35)
- ------------------------------------------------------------
- ---
- ---------
- -------
Net asset value, end of year $ 7.80 $
8.50 $
8.04
- ------------------------------------------------------------
- ---
- ---------
- -------
Total return++ (3.65)%
10.70%
6.33%
- ------------------------------------------------------------
- ---
- ---------
- -------
Ratios/Supplemental data:
Net assets, end of year (in 000's) $25,359
$32,514
$10,667
Ratio of operating expenses to average net
assets+++ 0.75%
0.72%
0.65%**
Ratio of net investment income to average net
assets 4.73%
4.45%
4.81%**
Portfolio turnover rate 39%
16%
46%
<FN>
* The Fund commenced operations on December 31, 1991.
Those
shares in
existence
prior to November 7, 1994 were designated Class A
shares.
** Annualized.
+ Net investment income before waiver of fees by
investment
adviser
and
administrator for the year ended November 30, 1994 and
waiver of
fees and
reimbursement of expenses by investment adviser, sub-
investment
adviser and
administrator, and/or custodian and distributor for the
year ended
November
30, 1993 and period ended November 30,1992 were $0.35,
$0.32 and
$0.24
respectively.
++ Total return represents aggregate total return for the
period
indicated and
does not reflect any applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees
by
investment
adviser and administrator for the year ended November
30,
1994 and
before
waiver of fees and before waiver of fees and
reimbursement
of
expenses by
investment adviser, sub-investment adviser and
administrator, and/or
custodian and distributor for the year ended November
30,
1993 and
period
ended November 30, 1992 were 1.24%, 1.49% and 2.18%
respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
<TABLE>
- ------------------------------------------------------------
- ---
- ---------
- --------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<CAPTION>
PERIOD
ENDED
11/30/94*
<S>
<C>
Net asset value, beginning of period
$ 7.76
- ------------------------------------------------------------
- ---
- ---------
- --------------
Income from investment operations:
Net investment income+
0.01
Net realized and unrealized gain on investments
0.05#
- ------------------------------------------------------------
- ---
- ---------
- --------------
Total from investment operations
0.06
- ------------------------------------------------------------
- ---
- ---------
- --------------
Less distributions:
Distributions from net investment income
(0.02)
- ------------------------------------------------------------
- ---
- ---------
- --------------
Total distributions
(0.02)
- ------------------------------------------------------------
- ---
- ---------
- --------------
Net asset value, end of period
$ 7.80
============================================================
===
=========
==============
Total return++
0.72%
============================================================
===
=========
==============
Ratios/Supplemental data:
Net assets, end of period (in 000's)
$ 45
Ratio of operating expenses to average net assets+++
0.95%**
Ratio of net investment income to average net assets
4.53%**
Portfolio turnover rate
39%
============================================================
===
=========
==============
<FN>
* The Fund commenced selling Class C shares on November 8,
1994.
** Annualized.
+ Net investment income before waiver of fees by
investment
adviser
and
administrator for the period ended November 30, 1994 was
$0.01.
++ Total return represents aggregate total return for the
period
indicated and
does not reflect any applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees
by
investment
adviser and administrator for the period ended November
30,
1994 was
1.44%.
# The amount in this caption for each share outstanding
throughout the
period
may not accord with the change in aggregate gains and
losses in the
portfolio
securities for the period because of the timing of
purchases and
withdrawals
of shares in relation to the fluctuating market values
of
the
portfolio.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Trust (the "Trust") was organized as a
"Massachusetts
business trust" under the laws of the Commonwealth of
Massachusetts on
October
17, 1991. The Trust is registered with the Securities and
Exchange
Commission
under the Investment Company Act of 1940, as amended (the
"1940
Act"),
as an
open-end management investment company. The Trust consists
of
the
following four
funds: Smith Barney Limited Maturity Treasury Fund, Smith
Barney Limited
Maturity Municipals Fund, Smith Barney Intermediate Maturity
California
Municipals Fund (the "Fund") and Smith Barney Intermediate
Maturity New
York
Municipals Fund. At the time of this report, the Fund
offered
three
classes of
shares: Class A shares, Class C shares and Class Y shares.
Class A
shares are
sold with a front-end sales charge. Class C shares may be
subject to a
contingent deferred sales charge ("CDSC") if redeemed within
12
months
of
purchase. Class Y shares are available to investors making
an
initial
investment
of at least $5 million and are not subject to any sales
charges,
distribution or
service fees. As of November 7, 1994, the Fund began
offering
Class C
and Class
Y shares, however, as of November 30, 1994, only Class C
shares
had been
sold.
All shares of the Fund existing prior to November 7, 1994,
were
designated Class
A shares. Each class of shares has identical rights and
privileges
except with
respect to the effect of the respective sales charges, the
distribution
and/or
service fees borne by each class, expenses allocable
exclusively to each
class,
voting rights on matters affecting a single class and the
exchange
privilege of
each class. The following is a summary of significant
accounting
policies
consistently followed by the Fund in the preparation of its
financial
statements.
Portfolio valuation: Securities are valued by The Boston
Company
Advisors, Inc.
("Boston Advisors") after consultation with an independent
pricing
service (the
"Service") approved by the Board of Trustees. When, in the
judgment of
the
Service, quoted bid prices for securities are readily
available
and are
representative of the bid side of the market, these
investments
are
valued at
the mean between the quoted bid prices and asked prices.
Securities for
which,
in the judgment of the Service, there are no readily
obtainable
market
quotations (which may constitute a majority of the portfolio
securities)
are
carried at fair value as determined by the Service, based on
methods
which
include consideration of: yields or prices of municipal
securities of
comparable
quality, coupon, maturity and type; indications as to values
from
dealers; and
general market conditions. Securities, not valued by the
19
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
NOTES TO FINANCIAL STATEMENTS (continued)
Service, for which market quotations are not readily
available
are
valued at
fair value as determined in good faith by or under the
direction of the
Board of
Trustees. Short-term investments that mature in 60 days or
less
are
valued at
amortized cost.
Securities transactions and investment income: Securities
transactions
are
recorded as of the trade date. Securities purchased or sold
on
a when-
issued or
delayed-delivery basis may be settled one month or more
after
the trade
date.
Interest income is recorded on the accrual basis. Realized
gains and
losses from
securities sold are recorded on the identified cost basis.
Investment
income and
realized and unrealized gains and losses are allocated based
upon the
relative
net assets of each class.
Dividends and distributions to shareholders: Dividends from
net
investment
income are determined on a class level and are declared
daily
and paid
generally
on the 10th day of the calendar statement month.
Distributions
determined on a
Fund level, if any, of any net short- and long-term capital
gains earned
by the
Fund will be declared and paid annually after the close of
the
fiscal
year in
which they are earned. Additional distributions of net
investment income
and
capital gains for the Fund may be made at the discretion of
the
Board of
Trustees in order to avoid the application of a 4.00%
nondeductible
excise tax
on certain undistributed amounts of net investment income
and
capital
gains. To
the extent net realized capital gains can be offset by
capital
losses
and loss
carryforwards, it is the policy of the Fund not to
distribute
such
gains.
Income distributions and capital gain distributions on a
Fund
level are
determined in accordance with income tax regulations which
may
differ
from
generally accepted accounting principles. These differences
are
primarily due to
differing treatments of income and gains on various
investment
securities held
by the Fund, timing differences and differing
characterization
of
distributions
made by the Fund as a whole.
Federal income taxes: The Trust intends that the Fund
separately
qualify as a
regulated investment company, if such qualification is in
the
best
interest of
its shareholders, which distributes exempt-interest
dividends,
by
complying with
the requirements of the Internal Revenue Code of 1986, as
amended,
applicable to
regulated investment companies and by distributing
substantially all of
its
earnings to its shareholders. Therefore, no Federal income
tax
provision
is
required.
20
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
NOTES TO FINANCIAL STATEMENTS (continued)
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement
(the
"Advisory
Agreement") with a division of Mutual Management Corp.,
which
was
transferred
effective November 7, 1994 to Smith Barney Mutual Funds
Management Inc.
("SBMFM"). Mutual Management Corp. and SBMFM are both wholly
owned
subsidiaries
of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned
subsidiary of The Travelers Inc. Under the Advisory
Agreement,
the Fund
pays a
monthly fee at the annual rate of 0.35% of the value of its
average
daily net
assets.
Prior to April 20, 1994, the Fund was party to an
administration
agreement (the
"Administration Agreement") with Boston Advisors, an
indirect
wholly
owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the
Administration
Agreement, the Fund paid a monthly fee at the annual rate of
0.20% of
the value
of its average daily net assets.
As of the close of business on April 20, 1994, SBMFM
(formerly
known as
"Smith,
Barney Advisers, Inc.") succeeded Boston Advisors as the
Fund's
administrator.
The new administration agreement contains substantially the
same terms
and
conditions, including the level of fees, as the predecessor
agreement.
As of the close of business on April 20, 1994, the Fund and
SBMFM also
entered
into a sub-administration agreement (the "Sub-Administration
Agreement")
with
Boston Advisors. Under the Sub-Administration Agreement,
SBMFM
pays
Boston
Advisors a portion of its administration fee at a rate
agreed
upon from
time to
time between SBMFM and Boston Advisors.
From time to time, the investment adviser and administrator
may
voluntarily
waive a portion or all of its investment advisory and/or
administrative
fees
otherwise payable to it. For the year ended November 30,
1994,
the
investment
adviser and administrator voluntarily waived fees of $98,519
and
$56,297,
respectively.
For the year ended November 30, 1994, Smith Barney Inc.
("Smith
Barney")
received $69,353 from investors representing commissions
(sales
charges)
on
sales of Class A shares.
A CDSC is generally payable by Class C shareholders and may
be
payable
by
certain Class A shareholders in connection with the
redemption
of shares
within
one year
21
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
NOTES TO FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------
- ---
- ---------
- --------
after the date of purchase. For the year ended November 30,
1994,
$18,705 in
CDSC were paid to Smith Barney by Class A shareholders.
No officer, director or employee of Smith Barney or any of
its
affiliates
receives any compensation from the Trust for serving as a
Trustee or
officer of
the Trust. The Trust pays each Trustee who is not an
officer,
director
or
employee of Smith Barney or any of its affiliates $4,000 per
annum plus
$500 per
meeting attended and reimburses each such Trustee for travel
and out-of-
pocket
expenses.
Boston Safe Deposit and Trust Company an indirect wholly
owned
subsidiary of
Mellon, serves as the Trust's custodian. The Shareholder
Services Group,
Inc., a
subsidiary of First Data Corporation, serves as the Trust's
transfer
agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares
pursuant
to a
distribution
agreement with the Trust and sells shares of the Fund
through
Smith
Barney or
its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Trust has
adopted a
services and
distribution plan (the "Plan"). Under this Plan, the Fund
compensates
Smith
Barney for servicing shareholder accounts for Class A and
Class
C
shareholders,
and covers expenses incurred in distributing Class C shares.
Smith
Barney is
paid an annual service fee with respect to Class A and Class
C
shares of
the
Fund at the annual rate of 0.15% of the value of the average
daily net
assets of
each respective class of shares. Smith Barney is also paid
an
annual
distribution fee with respect to Class C shares at the
annual
rate of
0.20% of
the value of the average daily net assets of that class. For
the year
ended
November 30, 1994, the Fund incurred $47,722 and $2 in
service
fees for
Class A
and Class C shares, respectively. For the period ended
November
30,
1994, the
Fund incurred $3 in distribution fees for Class C shares.
Under its terms, the Plan shall remain in effect from year
to
year,
provided
that such continuance is approved annually by vote of the
Trust's
Trustees,
including a majority of those Trustees who are not
"interested
persons"
of
the Trust and who have no direct or indirect financial
interest
in the
operation of the Plan.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the
operations of any
class of
shares are prorated among the classes based upon the
relative
net assets
of each
class.
22
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
NOTES TO FINANCIAL STATEMENTS (continued)
Operating expenses directly attributable to a class of
shares
are
charged to
that class' operations. In addition to the above service and
distribution fees,
class specific operating expenses for the year ended
November
30, 1994
included
transfer agent fees of $11,823 and $1 for Class A and Class
C
shares,
respectively.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities,
excluding
short-term
investments, for the year ended November 30, 1994 were
$11,912,855 and
$18,229,993, respectively.
At November 30, 1994, aggregate gross unrealized
appreciation
for all
securities
in which there was an excess of value over tax cost was
$7,209
and
aggregate
gross unrealized depreciation for all securities in which
there
was an
excess of
tax cost over value was $1,222,243.
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of
beneficial
interest
which
are divided into three classes (Class A, Class C and Class
Y)
with a
$.001 par
value. Changes in shares of beneficial interest in the Fund
were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED
11/30/94*
11/30/93
Class A Shares Shares
Amount
Shares Amount
============================================================
===
=========
======================
<S> <C> <C>
<C>
<C>
Sold 1,242,342
$10,299,195
2,773,792 $23,473,658
Issued as reinvestment of dividends 146,296
1,207,127
81,600 688,363
Redeemed (1,962,629)
(15,886,918)
(355,224) (3,013,156)
- ------------------------------------------------------------
- ---
- ---------
- ----------------------
Net increase/(decrease) (573,991)
$(4,380,596)
2,500,168 $21,148,865
============================================================
===
=========
======================
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
11/30/94*
Class C Shares Shares Amount
==========================================================
<S> <C> <C>
Sold 5,799 $45,000
- ----------------------------------------------------------
Net increase 5,799 $45,000
==========================================================
<F/N>
* The Fund began offering Class C and Class Y shares on
November 7,
1994. Those
shares in existence prior to November 7, 1994 were
designated Class A
shares.
As of November 30, 1994, no Class Y shares had been sold.
</TABLE>
23
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
NOTES TO FINANCIAL STATEMENTS (continued)
- ------------------------------------------------------------
- ---
- ---------
- --------
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization
including
the fees
and expenses of registering and qualifying its shares for
distribution
under
Federal and state securities regulations. All such costs are
being
amortized on
the straight-line method over a period of five years from
the
commencement of
operations of the Fund. In the event that any of the initial
shares of
the Fund
are redeemed during such amortization period, the Fund will
be
reimbursed for
any unamortized organization costs in the same proportion as
the number
of
shares redeemed bears to the number of initial shares held
at
the time
of
redemption.
8. CONCENTRATION OF CREDIT
The Fund primarily invests in debt obligations issued by the
State of
California, its political subdivisions, agencies and public
authorities
to
obtain funds for various public purposes. The Fund is more
susceptible
to
factors adversely affecting issuers of California municipal
securities
than is a
municipal bond fund that is not concentrated in these
issuers
to the
same
extent.
9. CAPITAL LOSS CARRYFORWARD
As of November 30, 1994, the Fund had available for Federal
tax
purposes
unused
capital loss carryforward of $557,124 expiring in the year
2002.
10. SUBSEQUENT EVENT
On December 6, 1994, Orange County, California ("Orange
County") filed
for
bankruptcy. Approximately 3.70% of the Fund's portfolio at
November 30,
1994 was
invested in Orange County bonds and notes. The Fund believes
that the
bankruptcy
proceeding will not have any material impact on the ability
of
the
issuer to
make its scheduled interest and principal payments and
therefore will
have
little, if any, effect on the Fund.
24
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------
- ---
- ---------
- --------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY INCOME TRUST:
We have audited the accompanying statement of assets and
liabilities,
including
the schedule of portfolio investments, of Smith Barney
Intermediate
Maturity
California Municipals Fund, of Smith Barney Income Trust
(formerly Smith
Barney
Shearson Income Trust), as of November 30, 1994, and the
related
statement of
operations for the year then ended, the statement of changes
in
net
assets for
each of the two years in the period then ended, and the
financial
highlights for
each of the two years in the period then ended and for the
period from
December
31, 1991 (commencement of operations) to November 30, 1992.
These
financial
statements and financial highlights are the responsibility
of
the Fund's
management. Our responsibility is to express an opinion on
these
financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally
accepted
auditing
standards. Those standards require that we plan and perform
the
audits
to obtain
reasonable assurance about whether the financial statements
and
financial
highlights are free of material misstatement. An audit
includes
examining, on a
test basis, evidence supporting the amounts and disclosures
in
the
financial
statements. Our procedures included confirmation of
securities
owned as
of
November 30, 1994 by correspondence with the custodian and
brokers. An
audit
also includes assessing the accounting principles used and
significant
estimates
made by management, as well as evaluating the overall
financial
statement
presentation. We believe that our audits provide a
reasonable
basis for
our
opinion.
In our opinion, the financial statements and financial
highlights
referred to
above present fairly, in all material respects, the
financial
position
of Smith
Barney Intermediate Maturity California Municipals Fund, of
Smith Barney
Income
Trust, as of November 30, 1994, the results of its
operations
for the
year then
ended, the changes in its net assets for each of the two
years
in the
period
then ended, and the financial highlights for each of the two
years in
the period
then ended and for the period from December 31, 1991
(commencement of
operations) to November 30, 1992, in conformity with
generally
accepted
accounting principles.
Coopers
&
Lybrand L.L.P.
Boston, Massachusetts
January 25, 1995
25
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
TAX INFORMATION (UNAUDITED) FISCAL YEAR
ENDED
NOVEMBER
30, 1994
- ------------------------------------------------------------
- ---
- ---------
- --------
Of the dividends paid by the Fund from investment income for
the year
ended
November 30, 1994, 100% are tax-exempt for regular Federal
income tax
purposes.
26
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- --------
PARTICIPANTS
- ------------------------------------------------------------
- ---
- ---------
- --------
DISTRIBUTOR COUNSEL
Smith Barney Inc. Willkie Farr &
Gallagher
388 Greenwich Street 153 East 53rd
Street
New York, New York 10013 New York, New York
10022
INVESTMENT ADVISER AND
ADMINISTRATOR TRANSFER AGENT
Smith Barney Mutual Funds The Shareholder
Services Group,
Inc.
Management Inc. Exchange Place
388 Greenwich Street Boston,
Massachusetts
02109
New York, New York 10013
CUSTODIAN
SUB-ADMINISTRATOR
Boston Safe Deposit
The Boston Company Advisors, Inc. and Trust Company
One Boston Place One Boston Place
Boston, Massachusetts 02108 Boston,
Massachusetts
02108
27
<PAGE>
Smith Barney
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND
- ------------------------------------------------------------
- ---
- ---------
- -------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
- ------------------------------------------------------------
- ---
- ---------
- -------
CAPITAL GAIN (OR LOSS): This is the increase (or decrease)
in
the
market value
(price) of a security in your portfolio. If a stock or bond
appreciates
in
price, there is a capital gain; if it depreciates there is a
capital
loss. A
capital gain or loss is "realized" upon the sale of a
security;
if net
capital
gains exceed net capital losses, there may be a capital gain
distribution to
shareholders.
CDSC (CONTINGENT DEFERRED SALES CHARGE): One kind of back-
end
load, a
CDSC may
be imposed if shares are redeemed during the first few years
of
ownership. The
CDSC may be expressed as a percentage of either the original
purchase
price or
the redemption proceeds. Most CDSCs decline over time, and
some
will not
be
charged if shares are redeemed after a certain period of
time.
DISTRIBUTION RATE: This is the rate at which a mutual fund
pays out (or
distributes) interest, dividends and realized capital gains
to
shareholders. A
fund's distribution rate is usually expressed as an
annualized
percent
of the
fund's offering price.
DIVIDEND: This is income generated by securities in a
portfolio and
distributed after expenses to shareholders.
FRONT-END SALES CHARGE: This is the sales charge applied to
an
investment at
the time of initial purchase.
NET ASSET VALUE (NAV): Net asset value is the total market
value of all
securities held by a fund, minus any liabilities, divided by
the number
of
shares outstanding. It is the value of a single share of a
mutual fund
on a
given day. The total value of your investment would be the
NAV
multiplied by the
number of shares you own.
SEC YIELD: This standardized calculation of a mutual fund's
yield is
based on a
formula developed by the Securities and Exchange Commission
(SEC) to
allow funds
to be compared on an equal basis. It is an annualized yield
based on the
portfolio's potential earnings from dividends, interest and
yield to
maturity of
its holdings, and it reflects the payments of all portfolio
expenses for
the
most recent 30-day period. Mutual funds are required to use
this figure
when
stating yield.
TOTAL RETURN: Total return measures a fund's performance,
taking into
account
the combination of dividends paid and the gain or loss in
the
value of
the
securities held in the portfolio. It may be expressed on an
average
annual basis
or cumulative basis (total change over a given period). In
addition,
total
return may be expressed with or without the effects of sales
charges or
the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must
also
report the
average
annual total return according to the standardized
calculation
developed
by the
SEC. This standardized calculation was introduced to insure
that
investors can
compare different funds on an equal basis. The SEC average
annual total
return
calculation includes the effects of all fees and sales
charges
and
assumes the
reinvestment of all dividends and capital gains.
28
<PAGE>
INTERMEDIATE SMITH BARNEY
MATURITY ------------
CALIFORNIA A Member of TravelersGroup
MUNICIPALS [LOGO]
FUND
TRUSTEES
Burt N. Dorsett
Elliot S. Jaffe
Heath B. McLendon
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
Joseph P. Deane
Vice President and This report is submitted
for
the
1994
Investment Officer general information of the
ANNUAL
shareholders of Smith
Barney
REPORT
Lewis E. Daidone Intermediate Maturity
California
Senior Vice President Municipals Fund. It is not
and Treasurer authorized for distribution
to
prospective investors
unless
Christina T. Sydor accompanied by an effective
Secretary Prospectus for the Fund,
which
contains information
concerning
the Fund's investment
policies,
fees and expenses as well
as
other
pertinent information.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 165, 480, 496
FD 0310 A5
[LOGO] Recycled
Recyclable
SMITH BARNEY INCOME TRUST
PART C
OTHER INFORMATION
Item
15.
Indemnification
The response to this item is incorporated by reference to
"Liability of Trustees" under the caption "Comparative
Information on Shareholders' Rights" in Part A of this
Registration Statement.
Item
16.
Exhibits
All References are to Registrant's Registration Statement on
Form N-1A (the "Registration Statement") as filed with the
Securities and Exchange Commission on October 21, 1991 (File
Nos. 33-43446 and 811-6444)
(1)(a)
Registrant's Master Trust Agreement dated October 17, 1991
and
Amendments to the Master Trust Agreement dated November 20,
1991
and July 30, 1993, respectively, are incorporated by
reference
to Post-Effective Amendment No. 4.
(b)
Amendment Nos. 2 and 3 dated October 14, 1994 and November
7,
1994, respectively, to the Master Trust Agreement are filed
herein.
(2)
Registrant's By-laws are incorporated by reference to the
Registration Statement.
(3)
Not Applicable.
(4)
Agreement and Plan of Reorganization is filed herein as
Exhibit
A to Registrant's Prospectus/Proxy Statement contained in
Part
A
of this Registration Statement.
(5)
Registrant's form of stock certificate is incorporated by
reference to Pre-Effective Amendment No. 1 to the
Registration
Statement ("Pre-Effective Amendment No. 1").
(6) (a)
Investment Advisory Agreement between the Registrant and
Greenwich Street Advisors dated July 30, 1993 is
incorporated
by
reference to Post-Effective Amendment No. 3 ("Post-Effective
Amendment No. 3").
(b)
Form of Transfer of Investment Advisory Agreement dated
November
7, 1994 is filed herein.
(7)
Distribution Agreement between the Registrant and Smith
Barney
Shearson Inc. dated July 30, 1993 is incorporated by
reference
to Post-Effective Amendment No. 3.
(8)
Not Applicable.
(9) (a)
Administration Agreement dated April 20, 1994 between the
Registrant and Smith, Barney Advisers, Inc. ("SBA") is filed
herein.
(b)
Sub-Administration Agreement dated April 20, 1994 between
the
Registrant, SBA and The Boston Company Advisors, Inc. is
filed
herein.
(c)
Custodian Agreement between the Registrant and Boston Safe
Deposit and Trust Company is incorporated by reference to
Pre-
Effective Amendment No. 1.
(d)
Transfer Agency Agreement between the Registrant and Boston
Safe
Deposit and Trust Company is incorporated by reference to
Pre-
Effective Amendment No. 1.
(10)
Amended Services and Distribution Plan pursuant to Rule 12b-
1
between the Registrant and Smith Barney is filed herein.
(11)
Opinion and Consent of Willkie Farr & Gallagher with respect
to
legality will be filed by amendment.
(12)
Opinion and Consent of Willkie Farr & Gallagher with respect
to
tax matters will be filed by amendment.
(13)
Not Applicable.
(14)
Consent of Cooper's & Lybrand will be filed by amendment.
(15)
Not Applicable.
(16)
Not Applicable.
(17)
Proxy Card and Instructions will be filed by amendment.
Item
17.
Undertakings
(1)
The undersigned Registrant agrees that prior to any
public reoffering of the securities registered through the
use of a prospectus which is a part of this registration
statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the
Securities Act of 1933, as amended, the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the
information called for by the other items of the
applicable form.
(2)
The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a
part of an amendment to the Registration Statement and
will not be used until the amendment is effective, and
that, in determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment
shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial
bona fide offering of them.
EXHIBIT INDEX
Exhibit Number
Description
(1) (a)
Amendments to the Master Trust Agreement
(4)
Agreement and Plan of Reorganization*
(6) (b)
Form of Transfer of Investment Advisory
Agreement
(9) (a)
Administration Agreement between the
Registrant and SBA
(b)
Sub-Administration Agreement between the
Registrant, SBA and The Boston Company
Advisors, Inc.
(10)
Amended Services and Distribution
Agreement pursuant to Rule 12b-1 between
the Registrant and Smith Barney
______________________________
* Filed herein as Exhibit A to Registrant's
Prospectus/Proxy
Statement
contained in Part A of this Registration Statement.
SIGNATURES
As required by the Securities Act of 1933, this
Registration
Statement on Form N-14 has been signed on behalf of the
registrant, in
the City of New York and State of New York on the 27th day
of
march,
1995.
Smith Barney Income
Trust
By:
__________________
Heath B.
McLendon
Chief
Executive
Officer
We, the undersigned, hereby severally constitute and
appoint Heath
B. McLendon, Christina T. Sydor and Lee D. Augsburger and
each
of them
singly, our true and lawful attorneys, with full power to
them
and each
of them to sign for us, and in our hands and in the
capacities
indicated
below, any and all Amendments to this Registration Statement
and to file
the same, with all exhibits thereto, and other documents
therewith, with
the Securities and Exchange Commission, granting unto said
attorneys,
and each of them, acting alone, full authority and power to
do
and
perform each and every act and thing requisite or necessary
to
be done
in the premises, as fully to all intents and purposes as he
might or
could do in person, hereby ratifying and confirming all that
said
attorneys or any of them may lawfully do or cause to be done
by
virtue
thereof.
WITNESS our hands on the date set forth below.
As required by the Securities Act of 1933, this
Registration
Statement on Form
N-14 and the above Power of Attorney has been signed by the
following
persons in the capacities and on the dates indicated.
Signature
Title
Date
_________________
Chairman of the Board
3/27/95
Heath B. McLendon
Chief Executive Officer
_________________
Lewis E. Daidone
Senior Vice President and
Treasurer (Chief Financial
and Accounting Officer)
3/27/95
_________________
Burt N. Dorsett
Trustee
3/27/95
_________________
Elliot S. Jaffe
Trustee
3/27/95
____________________
Cornelius C. Rose, Jr.
Trustee
2/7/95
domestic\clients\shearson\funds\slit\imca\n-14.doc
SMITH BARNEY SHEARSON INCOME TRUST
AMENDMENT NO. 3 TO THE MASTER TRUST AGREEMENT
(Change of Name of the Trust, Change of Names of Existing Sub-Trusts and
Change of Emeritus Policy )
The undersigned, Assistant Secretary of Smith Barney Shearson Income
Trust (the "Trust"), does hereby certify that pursuant to Article I,
Section 1.1 and Article VII, Section 7.3 of the Master Trust Agreement
dated October 17, 1991, the following votes were duly adopted by the Board
of Trustees at a Regular Meeting of the Board held on July 20, 1994:
(Change of Name of the Trust)
VOTED: That the name of the Trust previously established and
designated pursuant to the Trust's Master Trust Agreement be modified and
amended as set forth below:
Current Name: Name as Amended:
Smith Barney Shearson Smith Barney
Income Trust Income Trust
; and further
(Change of Names of Existing Sub-Trusts)
VOTED: That the names of the Sub-Trusts previously established and
designated pursuant to Section 4.2 be modified and amended as set forth
below:
Current Name: Name as Amended:
Smith Barney Shearson Smith Barney
Limited Maturity Municipals Fund Limited Maturity Municipals Fund
Smith Barney Shearson Smith Barney
Intermediate Maturity Intermediate Maturity
California Municipals Fund California Municipals Fund
Smith Barney Shearson Smith Barney
Intermediate Maturity Intermediate Maturity
New York Municipals Fund New York Municipals Fund
Smith Barney Shearson Smith Barney
Limited Maturity Limited Maturity
Treasury Fund Treasury Fund
; and further
(Change of Emeritus Policy)
VOTED: That Article III, Sections 3.1(i) and 3.1(j) of the Trust's
Master Trust Agreement be and are hereby amended and restated in their
entirety as follows:
Section 3.1(i)
A Trustee who has reached the age of seventy two (72) years may elect
the status of Trustee Emeritus provided that the Trustee has served for ten
(10) years as a member of the Board of the Trust or of the Board of
Trustees of another investment company distributed, advised or administered
by an entity under common control with the Trust's distributor, investment
adviser or administrator. Upon reaching eighty (80) years of age, a
Trustee must elect status as a Trustee Emeritus. (The foregoing provisions
shall not be deemed to restrict a Trustee's ability to resign.)
Section 3.1(j)
A Board Member designated as a Trustee Emeritus may attend meetings
of the Board of Trustees, however, he or she shall have no voting rights
and shall not be under a duty to manage or direct the business and affairs
of the Trust. A Trustee Emeritus shall not be deemed to stand in a
fiduciary relation to the Trust and shall not be responsible to discharge
the duties of a Trustee or to exercise that diligence, care or skill which
a Trustee would ordinarily be required to exercise under applicable laws.
In addition, a Trustee Emeritus shall be indemnified to the full extent
that an officer or Trustee of the Trustee may be indemnified under the
Trust's governing documents and applicable state and federal laws.
As long as a Board Member is a Trustee Emeritus, but in no event for
more than a period of ten (10) years, provided the Trust has net assets in
excess of $100 million, a Trustee Emeritus will receive 50% of the annual
retainer and annual meeting fees paid to active Board Members. In any
event, a Trustee Emeritus shall be entitled to reasonable out-of-pocket
expenses for each meeting attended; and further
VOTED: That the appropriate officers of the Fund be, and each hereby
is, authorized to execute and file any notices required to be filed
reflecting the foregoing changes; to execute amendments to the Fund's
Master Trust Agreement and By-Laws reflecting the foregoing change; and to
execute and file all requisite certificates, documents and instruments and
to take such other actions required to cause said amendment to become
effective and to pay all requisite fees and expenses incident thereto.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this _____ day of October, 1994.
Lee D. Augsburger
Assistant Secretary
SMITH BARNEY INCOME TRUST
AMENDMENT NO. 4 TO THE MASTER TRUST AGREEMENT
WHEREAS, Section 4.1 of the Master Trust Agreement of Smith Barney
Income
Trust (the "Trust") dated October 17, 1991, as amended, authorizes the
Trustees of the Trust
to issue classes of shares of any Sub-Trust or divide the Shares of any
Sub-Trust into classes,
having different dividend, liquidation, voting and other rights as the
Trustees may determine;
WHEREAS, the Trustees have not previously established and designated
any classes
of shares for the four Sub-Trusts of the Trust: Smith Barney Limited
Maturity Treasury
Fund, Smith Barney Limited Maturity Municipals Fund, Smith Barney
Intermediate Maturity
New York Municipals Fund, and Smith Barney Intermediate Maturity California
Municipals
Fund;
WHEREAS, the Trustees unanimously voted on July 20, 1994 to establish
and
designate the existing class of shares of each Sub-Trust as Class A shares,
such change to be
effective concurrently with the effectiveness of the Supplement to the
Prospectus of each
Sub-Trust describing said Class A shares; and
WHEREAS, the Trustees unanimously voted on July 20, 1994 to establish
and
designate the exisitng class of shares of each Sub-Trust as Class C shares.
NOW, THEREFORE, the undersigned Assistant Secretary of the Trust
hereby states
as follows:
1. That, pursuant to the vote of the Trustees, the existing shares
of each of the
aforementioned Sub-Trusts be designated as Class A shares. Such class of
shares shall have
the rights and preferences as set forth in the Supplement to the Prospectus
of each Sub-Trust
dated November 7, 1994, as such Prospectus may be further amended from time
to time.
2. That, pursuant to the vote of the Trustees, each of the
aforementioned Sub-
Trusts be divided into an additional class of shares established and
designated as Class C
shares. Such class of shares shall have the rights and preferences as set
forth in the
Supplement to the Prospectus of each Sub-Trust dated November 7, 1994, as
such Prospectus
may be further amended from time to time.
IN WITNESS WHEREOF, the undersigned hereby sets his hand this ___ day
of
November, 1994.
SMITH BARNEY INCOME TRUST
______________________________
By: Lee D. Augsburger
Title: Assistant Secretary
FORM OF TRANSFER AND ASSUMPTION OF
INVESTMENT ADVISORY AGREEMENT
for
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND, A
SERIES OF SMITH BARNEY INCOME TRUST
TRANSFER AND ASSUMPTION OF INVESTMENT ADVISORY AGREEMENT,
made as of
the 7th day of November, 1994, by and among Smith Barney Intermediate
Maturity California
Municipal Fund a Massachusetts business trust (the "Trust"), Mutual
Management Corp., a New
York corporation ("MMC"), and Smith Barney Mutual Funds Management Inc.
("SBMFM") a Delaware corporation.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Trust consists of several distinct investment portfolios
or series (collectively, the "Funds"); and
WHEREAS, the Trust, on behalf of the Funds, and MMC entered into an
Investment Advisory Agreement on July 30, 1993, under which MMC serves as
the investment adviser (the "Investment Adviser") for the Funds of the
Trust; and
WHEREAS, MMC desires that its interest, rights, responsibilities and
obligations in and under the Investment Advisory Agreement be transferred
to SBMFM and SBMFM desires to assume MMC's interest, rights,
responsibilities and obligations in and under the Investment Advisory
Agreement; and
WHEREAS, this Agreement does not result in a change of actual control
or management of the Investment Adviser to the Trust and, therefore, is not
an "assignment" as defined in Section 2(a)(4) of the Act nor an
"assignment" for the purposes of Section 15(a)(4) of the Act.
NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Assignment. Effective as of November 7, 1994 (the "Effective
Date"), MMC hereby transfers to SBMFM all of MMC's interest, rights,
responsibilities and obligations in and under the Investment Advisory
Agreement dated July 30, 1993, to which MMC is a party with the Trust.
2. Assumption and Performance of Duties. As of the Effective
Date, SBMFM hereby accepts all of MMC's interest and rights, and assumes
and agrees to perform all of MMC's responsibilities and obligations in, and
under the Investment Advisory Agreement; SBMFM agrees to subject to all of
the terms and conditions of said Agreement; and SBMFM shall indemnify and
hold harmless MMC from any claim or demand made thereunder arising or
incurred after the Effective Date.
3. Representation of SBMFM. SBMFM represents and warrants that:
(1) it is registered as an investment adviser under the Investment Advisers
Act of 1940, as amended; and (2) Smith Barney Holdings Inc. is its sole
shareholder.
4. Consent. The Trust hereby consents to this transfer by MMC to
SBMFM of MMC's interest, rights, responsibilities and obligations in and
under the Investment Advisory Agreement and to the acceptance and
assumption by SBMFM of the same. The Trust agrees, subject to the terms
and conditions of said Agreement, to look solely to SBMFM for the
performance of the Investment Adviser's responsibilities and obligations
under said Agreement from and after the Effective Date, and to recognize as
inuring solely to SBMFM the interest and rights heretofore held by MMC
thereunder.
5. Limitation of Liability of Trustees, Officers and Shareholders.
It is expressly agreed that the obligations of the Trust hereunder shall
not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of the Trust, personally, but shall bind only the
trust property of the Trust, as provided in the Declaration of Trust of the
Trust. The execution and delivery of this Agreement have been authorized
by the Trustees of the Trust and signed by the President of the Trust,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by
any of them individually of to impose any liability on any of them,
personally, but shall bond only the trust property of the Trust as provided
in its Declaration of Trust.
6. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers hereunto duly attested.
Attest:
By:
Secretary Smith Barney Intermediate Maturity California
Municipal Fund
Attest:
By:
Secretary Mutual Management Corp.
Attest:
By:
Secretary Smith Barney Mutual Funds
Management Inc.
shared/domestic/clients/shearosn/fund/slit/imca
SMITH BARNEY SHEARSON INCOME TRUST
SMITH BARNEY SHEARSON INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
ADMINISTRATION AGREEMENT
April 20, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Smith Barney Shearson Income Trust, a business trust organized under
the laws of the Commonwealth of Massachusetts, confirms its agreement with
Smith, Barney Advisers, Inc. ("SBA") and its sub-trust Smith Barney
Shearson Intermediate Maturity California Municipal Fund (the "Fund")
as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 27, 1991 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information as
from time to time in effect and in such manner and to such extent as may
from time to time be approved by the Board of Trustees of the Fund (the
"Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
SBA. Greenwich Street Advisors, a division of Mutual Management Corp.
("Greenwich Street Advisors") serves as the Fund's investment adviser, and
the Fund desires to employ and hereby appoints SBA to act as its
administrator. SBA accepts this appointment and agrees to furnish the
services to the Fund for the compensation set forth below. SBA is hereby
authorized to retain third parties and is hereby authorized to delegate
some or all of its duties and obligations hereunder to such persons
provided that such persons shall remain under the general supervision of
SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations except
those performed by the Fund's investment adviser under its investment
advisory agreement; (b) supply the Fund with office facilities (which may
be in SBA's own offices), statistical and research data, data processing
services, clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of (i) the net
asset value of shares of the Fund, (ii) applicable contingent deferred
sales charges and similar fees and charges and (iii) distribution fees,
internal auditing and legal services, internal executive and administrative
services, and stationary and office supplies; and (c) prepare reports to
shareholders of the Fund, tax returns and reports to and filings with the
Securities and Exchange Commission (the "SEC") and state blue sky
authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month a
fee for the previous month at an annual rate of .20 of 1.00% of the Fund's
average daily net assets. The fee for the period from the date the Fund's
initial registration statement is declared effective by the SEC to the end
of the month during which the initial registration statement is declared
effective shall be prorated according to the proportion that such period
bears to the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month shall be
prorated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to SBA, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
SBA will bear all expenses in connection with the performance
of its services under this Agreement. The Fund will bear certain other
expenses to be incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of the members of the Board of
the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc. or its affiliates or any person who is an affiliate of any
person to whom duties may be delegated hereunder; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest, taxes,
brokerage and, if permitted by state securities commissions, extraordinary
expenses) exceed the expense limitations of any state having jurisdiction
over the Fund, SBA will reimburse the Fund for that excess expense to the
extent required by state law in the same
proportion as its respective fees bear to the combined fees for investment
advice and administration. The expense reimbursement obligation of SBA
will be limited to the amount of its fees hereunder. Such expense
reimbursement, if any, will be estimated, reconciled and paid on a monthly
basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the services
listed in paragraph 2 above, and SBA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, provided that
nothing herein shall be deemed to protect or purport to protect SBA against
liability to the Fund or to its shareholders to which SBA would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of SBA's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other investment
companies, and the Fund has no objection to SBA so acting. In addition,
the Fund understands that the persons employed by SBA or its affiliates to
assist in the performance of its duties hereunder will not devote their
full time to such service and nothing contained herein shall be deemed to
limit or restrict the right of SBA or its affiliates to engage in and
devote time and attention to other businesses or to render services of
whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers, directors,
employees, affiliates, controlling persons, agents (including persons to
whom responsibilities are delegated hereunder) ("indemnitees") against any
loss, claim, expense or cost of any kind (including reasonable attorney's
fees) resulting or arising in connection with this Agreement or from the
performance or failure to perform any act hereunder, provided that no such
indemnification shall be available if the indemnitee violated the standard
of care in paragraph 6 above. This indemnification shall be limited by the
1940 Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the 1940
Act and the rules, regulations and interpretations thereof as in effect
from time to time.
10. Limitation of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund, SBA and Boston Advisors, and signed by an
authorized officer of each, acting as such. Neither the authorization by
the Board members of the Fund, nor the execution and delivery by the
officer of the Fund shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but
shall bind only the assets and property of the Fund as provided in the
Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed
copy hereof.
Very truly yours,
Smith Barney ShearsonIncome Trust
Smith Barney Shearson Intermediate
Maturity California Municipal Fund
By:
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
Smith, Barney Advisers, Inc.
By: __________________________
Name: Christina Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
Form 8613
Form 1120-RIC
Board Members' and Shareholders' 1099s
Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Master Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA ADMN2.DOC
A-5
SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA ADMN2.DOC
SMITH BARNEY SHEARSON INCOME TRUST
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
SUB-ADMINISTRATION AGREEMENT
April 20, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02109
Dear Sirs:
Smith Barney Shearson Income Trust, a business trust organized
under the laws of the Commonwealth of Massachusetts and Smith, Barney
Advisers, Inc. ("SBA") confirm their agreement with The Boston Company
Advisors, Inc. ("Boston Advisors") and its sub-trust Smith Barney
Intermediate Maturity
California Municipal Fund (the "Fund") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 27, 1991 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information as
from time to time in effect, and in such manner and to such extent as may
from time to time be approved by the Board of Trustees of the Fund (the
"Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and SBA,
Boston Advisors will: (a) assist in supervising all aspects of the Fund's
operations except those performed by the Fund's investment adviser under
the Fund's investment advisory agreement; (b) supply the Fund with office
facilities (which may be in Boston Advisor's own offices), statistical and
research data, data processing services, clerical, accounting and
bookkeeping services, including, but not limited to, the calculation of (i)
the net asset value of shares of the Fund, (ii) applicable contingent
deferred sales charges and similar fees and changes and (iii) distribution
fees, internal auditing and legal services, internal executive and
administrative services, and stationery and office supplies; and (c)
prepare reports to shareholders of the Fund, tax returns and reports to and
filings with the Securities and Exchange Commission (the "SEC") and state
blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of each
month a fee for the previous month calculated in accordance with the terms
set forth in Appendix B, and as agreed to from time to time by the Fund,
SBA and Boston Advisors. Upon any termination of this Agreement before the
end of any month, the fee for such part of a month shall be prorated
according to the proportion which such period bears to the full monthly
period and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to Boston Advisors, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of the Board members
of the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc., Boston Advisors of their affiliates; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and its Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston Advisory
will reimburse the Fund for that excess expense to the extent required by
state law in the same proportion as its respective fees bear to the
combined fees for investment advice and administration. The expense
reimbursement obligation of Boston Advisors will be limited to the amount
of its fees hereunder. Such expense reimbursement, if any, will be
estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in rendering
the services listed in paragraph 2 above. Boston Advisors shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport
to protect Boston Advisors against liability to the Fund or to its
shareholders to which Boston Advisors would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of Boston Advisor's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without the
written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or more
other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and nothing
contained herein shall be deemed to limit or restrict the right of Boston
Advisors or its affiliates to engage in and devote time and attention to
other businesses or to render services of whatever kind of nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including reasonable
attorney's fees) resulting or arising in connection with this Agreement or
from the performance or failure to perform any act hereunder, provided that
not such indemnification shall be available if the indemnitee violated the
standard of care in paragraph 6 above. This indemnification shall be
limited by the 1940 Act, and relevant state law. Each indemnitee shall be
entitled to advancement of its expenses in accordance with the requirements
of the 1940 Act and the rules, regulations and interpretations thereof as
in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Master Trust
Agreement and Bylaws.
The execution and delivery of this Agreement has been duly authorized by
the Fund, SBA and Boston Advisors, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board Members of
the Fund, nor the execution and delivery by the officer of the Fund shall
be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the assets and
property of the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Trust
Smith Barney Shearson Intermediate Maturity
California Municipal Fund
By: ____________________
Name: Heath B. McLendon
Title: Chairman of the Board
Smith, Barney Advisers, Inc.
By: _____________________
Name: Christina Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _________________________
Name: Francis J. McNamara, III
Title: Senior Vice President and General Counsel
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act" ), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide an Assistant Treasurer for the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
Monitor mark-to-market comparisons for money market funds;
Recommend valuations to be used for securities which are not
readily saleable;
Function as a liaison with the Fund's outside auditors and
arrange for audits;
Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
Prepare and file forms with the Internal Revenue Service
Form 8613
Form 1120-RIC
Board Members' and Shareholders' 1099s
Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
Prepare and file proxy statements;
Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
Provide an Assistant Secretary for the Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder meetings;
Maintain Master Trust Agreement and By-Laws of the Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
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FORM OF AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY INTERMEDIATE MATURITY
CALFORNIA MUNICIPAL FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Intermediate Maturity
Calfornia Municipal Fund. a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .15% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .15% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(c) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .20% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(d) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone facilities, answering routine inquires regarding the Fund,
processing shareholder transactions and providing any other shareholder
services not otherwise provided by the Fund's Transfer agent; and (e)
accruals for interest on the amount of the foregoing expenses that exceed
the Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY INTERMEDIATE MATURITY
CALFORNIA MUNICIPAL FUND
By:_______________________
Heath B. McLendon
Chairman of the Board
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