<PAGE>
Oregon Municipals Fund
DEAR SHAREHOLDER:
We are pleased to present the first semi-annual report and
unaudited financial statements for the period ended October
31, 1994 for Smith Barney Oregon 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.
THE OREGON ECONOMY
Oregon general obligation debt is rated in the double-A category by
each of the three major rating agencies, Moody's Investors Service,
Inc., Standard & Poor's Corporation and Fitch Investors Service, Inc.
These ratings reflect a growing and diversifying economic base, strong
financial performance to date and a manageable tax-supported debt
burden.
Although Oregon is still coping with the financial challenge of accommodating
the substantial shift of school funding from local property taxes to the state,
as mandated by the previously passed Ballot Measure 5, the state escaped
possibly serious financial stress when voters overwhelmingly defeated two new
initiatives in this year's general election that were of particular concern to
investors. A new Measure 5 would generally have required voter approval of most
state and local tax increases. A second initiative, Measure 20, would have
replaced nearly all state and local government fees and taxes with a flat 2%
"equal" tax on virtually all transactions for goods and services. Passage of
either of these measures would have significantly reduced state and local
revenue raising flexibility and adversely affected the credit quality of the
state and most issuers of municipal debt in the state.
While the failure of Measures 5 & 20 provides comfort to investors with respect
to the creditworthiness of outstanding debt, we take particular hope from the
fact that the margin of defeat was large. It's our hope that this will
discourage proponents of like measures in the future.
In another hopeful development, the Oregon Secretary of State has announced that
he will seek legislative approval of changes in the initiative process. Under
the Secretary of State's proposal it should be more difficult to place
constitutional measures on the ballot but would make it easier to vote on
statutory changes. Statutory changes approved by the voters may be
1
<PAGE>
subsequently changed by the legislature without approval of the voters. If these
changes are adopted, it is considerably less likely that proposals such as
Measures 5 and 20 will be on future ballots.
ECONOMIC OVERVIEW
Since the inception of the Oregon Municipals Fund, the national economy has
continued to exhibit strong economic growth. Consumer spending has been growing
at more than a 3% annual 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 the high 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 Federal funds
rate (the benchmark for short-term interest rates). This policy of monetary
tightening, with six increases in 1994 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.
PERFORMANCE REVIEW AND OUTLOOK
The performance of the Oregon Municipals Fund reflects the difficult market
conditions discussed above, although its performance was significantly enhanced
by the waiver of fees, the reimbursement of expenses and other adjustments. In
the five months since the Fund commenced operations, total return was 2.33% and
2.12%, for Class A and Class B shares, respectively. This compares with a -5.36%
change in the average price on the Bond Buyer 40, a widely followed index of
prices of long-term municipal bonds.
Our ability to reduce volatility was aided by a fairly steady inflow of new
money on a small asset base, an increase in our use of short-term cash
equivalents and an emphasis on quality, with over half the Fund's assets,
committed to double-A rated and triple-A rated securities.
2
<PAGE>
Looking ahead, 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 possible. 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.
We appreciate your confidence and pledge our best efforts on your behalf.
Sincerely yours,
Heath B. McLendon Peter M. Coffey
CHAIRMAN OF THE BOARD AND VICE PRESIDENT AND
INVESTMENT OFFICER INVESTMENT OFFICER
DECEMBER 1, 1994
3
<PAGE>
Smith Barney
Oregon Municipals Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) OCTOBER 31, 1994
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Oregon Municipals Fund investment
securities held at October 31, 1994 by industry classification. The pie is
broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Hospital 11.1%
Utility Revenue 20.8%
General Obligation 24.6%
Short-Term Tax-Exempt Investments and Notes and Net Other Assets
and Liabilities 2.7%
Education 18.2%
Housing 12.6%
Transportation 5.9%
Pollution Control Revenue 4.1%
</TABLE>
SUMMARY OF MUNICIPAL BONDS AND SHORT-TERM TAX-EXEMPT
INVESTMENTS BY COMBINED RATINGS
<TABLE>
<CAPTION>
Percentage
of
Standard & Market
Moody's Poor's Value
<S> <C> <C> <C>
-------------------------------------------
AAA OR AAA 25%
-------------------------------------------
AA AA 32
-------------------------------------------
A A 21
-------------------------------------------
BAA BBB 16
-------------------------------------------
NR NR 6
-------------------------------------------
100%
---------------
</TABLE>
AVERAGE MATURITY 20.7 years
4
<PAGE>
Smith Barney
Oregon Municipals Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) OCTOBER 31, 1994
-------------------------------------------------------------
<TABLE>
<S> <C> <C>
KEY TO INSURANCE DESCRIPTIONS
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Federal Security Assurance
MBIA -- Municipal Bond Investors Assurance
</TABLE>
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 97.3%
OREGON -- 78.6%
$250,000 Beaverton, Oregon,
Refunding Bonds, Water
Revenue,
6.125% due 6/1/14 A A+ $ 234,375
360,000 Clackamas County, Oregon,
Service District, Sewer
Revenue,
6.375% due 10/1/14 NR A+ 343,350
450,000 Douglas County, Oregon,
Hospital Revenue, (Catholic
Health Corporation), Series
B, (MBIA insured),
6.000% due 11/15/15 Aaa AAA 420,750
500,000 Eugene, Oregon, Electric
Utility Revenue, Series C,
5.800% due 8/1/19 A1 AA 449,375
400,000 Gresham, Oregon, Refunding
Bonds, Water Revenue,
Series B,
5.300% due 11/1/15 A A+ 341,000
400,000 Keizer, Oregon, Urban
Renewal Agency, Tax
Increment Revenue (North
River Road Economic
Development Area),
5.600% due 7/1/13 NR A- 356,000
245,000 Klamath Falls, Oregon,
Intercommunity Hospital
Authority, Hospital
Revenue, (Merle West
Medical Center),
7.100% due 9/1/24 NR BBB+ 231,831
500,000 Lane County, Oregon, School
District No. 4J, Refunding
Bonds, Series A,
5.375% due 7/1/13 Aa NR 441,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) OCTOBER 31, 1994
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OREGON -- (CONTINUED)
$500,000 McMinnville, Oregon, Sewer
System Revenue, Series A,
(FGIC insured),
5.000% due 2/1/14 Aaa AAA $ 411,875
500,000 Multnomah County, Oregon,
Educational Facilities,
University Revenue,
(University of Portland
Project),
6.000% due 4/1/14 NR A- 466,250
500,000 Oregon State Department of
General Services, Refunding
Bonds, Certificate of
Participation, Series A,
(MBIA insured),
5.500% due 1/15/15 A NR 443,750
500,000 Oregon State Economic
Development Department,
Bond Bank Revenue, Series
I,
6.700% due 1/1/15 Aaa AAA 496,875
Oregon State Housing &
Community Services,
Refunding Bonds:
215,000 Housing and Finance Revenue
Bonds, Assisted or Insured
Multi-unit Mortgages,
Series A, (FHA insured),
6.800% due 7/1/13 A1 A+ 213,656
350,000 Mortgage Revenue Bonds,
Single Family Mortgage
Program, Series B,
6.875% due 7/1/28 Aa NR 343,000
500,000 Port Umatilla, Oregon,
General Obligation Bonds,
Water Revenue,
6.650% due 8/1/22 Aa1 NR 466,250
400,000 Portland, Oregon, Airport
Way Urban Renewal and
Redevelopment, Refunding
Bonds, Series C,
6.000% due 6/1/07 A NR 385,000
300,000 Portland, Oregon, Housing
Authority, Senior Lien
Revenue, (Fairview Woods
Project), Series A,
6.875% due 8/1/14 NR NR 281,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) OCTOBER 31, 1994
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OREGON -- (CONTINUED)
$400,000 Portland, Oregon, Sewer
System Revenue, Series A,
6.250% due 6/1/15 A1 A+ $ 377,000
350,000 Salem-Keizer, Oregon,
School District No. 24J,
General Obligation Bonds,
(FGIC insured),
5.750% due 6/1/12 Aaa AAA 320,688
350,000 Washington County, Oregon,
School District No. 088J,
(FSA Insured),
6.100% due 6/1/12 Aaa AAA 336,875
300,000 Western Generation Agency,
Oregon, Multiple Utility
Revenue, (James River
Corporation, Wauna
Cogeneration Project),
Series B,
7.250% due 1/1/09 NR NR 292,125
300,000 Yamhill County, Oregon,
School District No. 029J,
General Obligation Bond,
(FSA insured),
5.500% due 6/1/10 Aaa AAA 273,000
------------------------------------------------------------------------------
7,926,150
------------------------------------------------------------------------------
GUAM -- 5.1%
250,000 Guam Government, General
Obligation Bonds, Series A,
5.375% due 11/15/13 NR BBB 204,062
400,000 Guam Power Authority
Revenue, Electric Revenue,
Series A,
5.250% due 10/1/23 NR BBB 309,000
------------------------------------------------------------------------------
513,062
------------------------------------------------------------------------------
PUERTO RICO -- 13.6%
250,000 Commonwealth of Puerto
Rico, Highway &
Transportation Authority,
Fuel Sales Tax Revenue,
Series W,
5.500% due 7/1/15 Baa1 A 214,064
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) OCTOBER 31, 1994
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PUERTO RICO -- (CONTINUED)
$500,000 Commonwealth of Puerto
Rico, Hospital Revenue,
Medical and Environmental
Control Facilities, (Ryder
Memorial Hospital), Series
A,
6.700% due 5/1/24 NR BBB $ 465,626
400,000 Commonwealth of Puerto
Rico, Housing, Bank &
Finance Agency, Refunding
Bonds,
7.500% due 12/1/06 Baa BBB 436,500
300,000 Commonwealth of Puerto
Rico, Refunding Bonds,
5.500% due 7/1/13 Baa1 A 259,876
------------------------------------------------------------------------------
1,376,066
------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $10,312,050) 9,815,278
------------------------------------------------------------------------------
SHORT-TERM TAX-EXEMPT INVESTMENTS -- 3.0%
OREGON -- 3.0%
100,000 Port Portland, Oregon,
Refunding Bonds, Pollution
Control Revenue, (Reynolds
Metals),
3.150% due 12/1/09+ P-1 NR 100,000
200,000 Umatilla County, Oregon,
Hospital Facilities
Authority, Hospital
Revenue, (Franciscan Health
Systems), Series A,
3.600% due 12/1/24+ VMIG1 A-1+ 200,000
------------------------------------------------------------------------------
TOTAL SHORT-TERM TAX-EXEMPT
INVESTMENTS
(Cost $300,000)
300,000
------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $10,612,050*) 100.3% 10,115,278
OTHER ASSETS AND LIABILITIES (NET) (0.3) (28,590)
------------------------------------------------------------------------------
NET ASSETS 100.0% $10,086,688
------------------------------------------------------------------------------
<FN>
+ Variable rate demand notes are payable upon not more than one business day's
notice.
* Aggregate cost for Federal tax purposes.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Oregon Municipals Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) OCTOBER 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$10,612,050) (Note 1)
See accompanying schedule $10,115,278
Cash 262,848
Interest receivable 194,593
Unamortized organization costs (Note 7) 105,200
Receivable for Fund shares sold 60,251
Receivable from investment adviser
(Note 2) 46,741
- -------------------------------------------------------------------------
TOTAL ASSETS 10,784,911
- -------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $501,582
Unamortized organization costs payable 105,635
Payable for Fund shares redeemed 25,012
Accrued shareholder reports expense 15,500
Distribution fee payable (Note 3) 7,864
Service fee payable (Note 3) 5,517
Dividends payable 4,863
Accrued Trustees' fees and expenses
(Note 2) 3,500
Custodian fees payable (Note 2) 1,000
Transfer agent fees payable (Note 2) 450
Accrued expenses and other payables 27,300
- -------------------------------------------------------------------------
TOTAL LIABILITIES 698,223
- -------------------------------------------------------------------------
NET ASSETS $10,086,688
- -------------------------------------------------------------------------
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (8,963)
Accumulated net realized loss on
investments (30,750)
Unrealized depreciation of investments (496,772)
Par value 1,056
Paid-in capital in excess of par value 10,622,117
- -------------------------------------------------------------------------
TOTAL NET ASSETS $10,086,688
- -------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------- OCTOBER 31, 1994
<TABLE>
<S> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($5,329,999 DIVIDED BY 558,213 shares of beneficial interest
outstanding) $ 9.55
- ---------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($9.55 DIVIDED BY 0.955)
(based on sales charge of 4.5% of the offering price on October
31, 1994) $10.00
- ---------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($4,756,689 DIVIDED BY 498,122 shares of beneficial interest
outstanding) $ 9.55
- ---------------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Oregon Municipals Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------
FOR THE PERIOD ENDED OCTOBER 31, 1994*
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 212,036
- -------------------------------------------------------------------------------
EXPENSES:
Legal and audit fees $17,228
Shareholder reports expense 15,500
Trustees' fees and expenses (Note 2) 13,744
Investment advisory fee (Note 2) 12,871
Amortization of organization costs (Note 7) 11,640
Distribution fee (Note 3) 7,864
Administration fee (Note 2) 7,356
Registration and filing fees 6,412
Service fee (Note 3) 5,517
Custodian fees (Note 2) 2,689
Transfer agent fees (Notes 2 and 4) 2,135
Insurance expense 2,000
Other 6,501
Fees waived and/or expenses reimbursed by
investment
adviser and administrator (Note 2) (66,968)
- -------------------------------------------------------------------------------
TOTAL EXPENSES 44,489
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 167,547
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 5)
Net realized loss on investments sold during the
period (30,750)
Net unrealized depreciation of investments
during the period (496,772)
- -------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (527,522)
- -------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(359,975)
- -------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on May 23, 1994.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Oregon Municipals Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD
ENDED
10/31/94*
(UNAUDITED)
<S> <C>
Net investment income $ 167,547
Net realized loss on investments sold during the period (30,750)
Net unrealized depreciation of investments during the
period (496,772)
- ------------------------------------------------------------------------
Net decrease in net assets resulting from operations (359,975)
Distributions to shareholders from net investment
income:
Class A (106,908)
Class B (69,602)
Net increase in net assets from Fund share transactions
(Note 6):
Class A 3,601,143
Class B 5,022,030
- ------------------------------------------------------------------------
Net increase in net assets 8,086,688
NET ASSETS:
Beginning of period 2,000,000
- ------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income
earned to date of $8,963) $10,086,688
- ------------------------------------------------------------------------
<FN>
* The Fund commenced operations on May 23, 1994.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Oregon Municipals Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
10/31/94*
(UNAUDITED)
<S> <C>
Operating performance:
Net Asset Value, beginning of period $ 9.55
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income*** 0.21
Net realized and unrealized gain on investments 0.01
- ----------------------------------------------------------------------------
Total from investment operations 0.22
- ----------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.22)
- ----------------------------------------------------------------------------
Net Asset Value, end of period $ 9.55
- ----------------------------------------------------------------------------
Total return++ 2.33%
- ----------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $5,330
Ratio of operating expenses to average net assets+ 0.98%**
Ratio of net investment income to average net assets 4.79%**
Portfolio turnover rate 11%
- ----------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on May 23, 1994.
** Annualized.
*** Net investment income before waiver of fees and/or reimbursement of expenses
by investment adviser and administrator for the period ended October 31, 1994
was $0.13.
+ Annualized operating expense ratio before waiver of fees and/or reimbursement
of expenses by investment adviser and administrator for the period ended
October 31, 1994 was 2.80%.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Oregon Municipals Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
10/31/94*
(UNAUDITED)
<S> <C>
Operating performance:
Net asset value, beginning of period $ 9.55
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income*** 0.20
Net realized and unrealized gain on investments 0.00
- ----------------------------------------------------------------------------
Total from investment operations 0.20
- ----------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.20)
- ----------------------------------------------------------------------------
Net Asset Value, end of period $ 9.55
- ----------------------------------------------------------------------------
Total Return++ 2.12%
- ----------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $4,757
Ratio of operating expenses to average net assets+ 1.52%**
Ratio of net investment income to average net assets 4.25%**
Portfolio turnover rate 11%
- ----------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class B shares on May 23, 1994.
** Annualized.
*** Net investment income before waiver of fees and/or reimbursement of expenses
by investment adviser and administrator for the period ended October 31, 1994
was $0.12.
+ Annualized operating expense ratio before waiver of fees and/or reimbursement
of expenses by investment adviser and administrator for the period ended
October 31, 1994 was 3.34%.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
Oregon Municipals Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Oregon Municipals Fund (formerly Smith Barney Shearson Oregon
Municipals Fund) (the "Fund") is a non-diversified, open-end management
investment company registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund was
organized on March 10, 1994 under the laws of The Commonwealth of Massachusetts
and is a business entity commonly known as a "Massachusetts business trust." The
Fund commenced operations on May 23, 1994. At the time of this report, the Fund
offered two classes of shares to the general public: Class A shares and Class B
shares. Class A shares are sold with a front-end sales charge. Class B shares
may be subject to a contingent deferred sales charge ("CDSC"). Class B shares
will automatically convert to Class A shares eight years after the original
purchase date. 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, the exchange privilege
of each class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
PORTFOLIO VALUATION: Securities are valued at the close of trading on the New
York Stock Exchange, Inc. 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 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 (as obtained by the
Service from dealers in such securities). Securities for which, in the judgment
of the Service, there are no readily available 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.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Board of Trustees determines that amortized cost reflects the
fair value of those investments.
15
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of 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 on the
last business day of the Smith Barney Inc. ("Smith Barney") 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%
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 Fund intends to qualify as a regulated investment
company, if such qualification is in the best interests of its shareholders, 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.
16
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. INVESTMENT ADVISORY FEE, ADMINISTRATION
FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with a division of Mutual Management Corp., which has been
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 SBMFM a monthly fee at the following annual rates: 0.35% of the value of
the Fund's average daily net assets up to $500 million and 0.32% of the value of
its average daily net assets in excess of $500 million.
The Fund has also entered into an administration agreement (the "Administration
Agreement") with SBMFM (formerly known as Smith Barney Advisers, Inc.). Under
the Administration Agreement, the Fund pays SBMFM a fee computed daily and paid
monthly based on the following annual rates: 0.20% of the value of the Fund's
average daily net assets up to $500 million and 0.18% of the value of the Fund's
average daily net assets in excess of $500 million.
The Fund and SBMFM have also entered into a sub-administration agreement
("Sub-Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-Administration
Agreement, SBMFM pays Boston Advisors a portion of its administration fee at a
rate agreed upon from time to time between SBMFM and Boston Advisors.
From time to time SBMFM may voluntarily waive a portion or all of its advisory
and/or administrative fees otherwise payable to it. For the period ended October
31, 1994, SBMFM voluntarily waived advisory fees of $12,871 and administrative
fees of $7,356. In addition, SBMFM reimbursed expenses in the amount of $46,741.
For the period ended October 31, 1994, SBMFM received $129,820 from investors
representing commissions (sales charges) on sales of Class A shares.
17
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years after the date of purchase. In circumstances
in which the charge is imposed, the amount of the charge ranges between 4.5% and
1.0% of net asset value depending on the number of years since the date of
purchase. For the period ended October 31, 1994, SBMFM received from
shareholders $2,070 in CDSCs on the redemption of Class B shares.
No officer, director or employee of Smith Barney or of any of its affiliates
receives any compensation from the Fund for serving as a Trustee or officer of
the Fund. The Fund pays each Trustee who is not an officer, director, or
employee of Smith Barney or any of its affiliates $2,500 per annum plus $250 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 Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney acts as distributor of the Fund's shares pursuant to a distribution
agreement with the Fund, and sells shares of the Fund through Smith Barney or
its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund 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 B shareholders,
and covers expenses incurred in distributing Class B shares. Smith Barney is
paid an annual service fee with respect to Class A and Class B 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 B shares at the annual rate of 0.50% of
the value of the average daily net assets attributable to those shares. During
the period ended October 31, 1994, the Fund
18
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
incurred $3,158 and $2,359 in service fees for Class A and Class B shares,
respectively. For the period ended October 31, 1994, the Fund incurred $7,864 in
distribution fees for Class B shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated among the classes based upon the relative net assets of each
class. Operating expenses directly attributable to a class of shares are charged
to that class' operations. In addition to the above servicing and distribution
fees, class specific operating expenses for the period ended October 31, 1994
included transfer agent fees of $848 and $1,287 for Class A and Class B shares,
respectively.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the period ended October 31, 1994 amounted to
$11,090,072 and $753,816, respectively.
At October 31, 1994, there was no aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost and the
aggregate gross unrealized depreciation for all securities in which there was an
excess of tax cost over value amounted to $496,772.
19
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
At October 31, 1994, the Fund had an unlimited number of authorized shares of
beneficial interest with a par value of $0.001. These shares were divided into
two classes: Class A and Class B. Changes in shares of beneficial interest
outstanding were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 31, 1994*
CLASS A SHARES: Shares Amount
<S> <C> <C>
- -----------------------------------------------------------------
Sold 345,757 $3,320,909
Capital Infusion** -- 251,349
Issued as reinvestment of dividends 9,448 90,261
Redeemed (6,415) (61,376)
- -----------------------------------------------------------------
Net increase 348,790 $3,601,143
- -----------------------------------------------------------------
<CAPTION>
PERIOD ENDED
OCTOBER 31, 1994*
CLASS B SHARES: Shares Amount
<S> <C> <C>
- -----------------------------------------------------------------
Sold 504,672 $4,862,028
Capital Infusion** -- 221,556
Issued as reinvestment of dividends 5,630 53,756
Redeemed (12,181) (115,310)
- -----------------------------------------------------------------
Net increase 498,121 $5,022,030
- -----------------------------------------------------------------
<FN>
* The Fund commenced operations on May 23, 1994.
** On October 24, 1994, SBMFM made a contribution to capital of $472,905.
</TABLE>
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the fees
and expenses of registering and qualifying its shares for distribution under
Federal and state securities regulations. All such costs are being amortized on
the straight-line method over a period of five years from May 23, 1994
(commencement of operations). In the event any of the initial shares in the Fund
are redeemed during such 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 outstanding at the time of redemption.
20
<PAGE>
Smith Barney
Oregon Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CONCENTRATION OF CREDIT
The Fund primarily invests in debt obligations issued by the State of Oregon and
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 Oregon municipal securities than is a municipal bond fund
that is not concentrated in these issuers to the same extent.
9. CAPITAL STRUCTURE
On July 20, 1994, the Board of Trustees of the Fund approved several changes to
the class and pricing structure of the Smith Barney Shearson mutual funds, to
facilitate consolidation of that fund complex with the Smith Barney mutual fund
complex (the "Uniform Structure"). Under the Uniform Structure, effective
November 7, 1994, shares previously designated as Class A or Class B shares will
retain those designations. In addition, the Fund will offer a new class of
shares, Class Y shares, without imposition of a sales charge, to investors
making an initial investment of at least $5 million. Adoption of the Uniform
Structure will have no effect on the rights and privileges of the Fund's current
shareholders.
21
