Financial Highlights (continued) |
For a share of each class of capital stock outstanding throughout each year ended February 28, unless otherwise noted:
Class B Shares(1) | | 2007 | | 2006 | | 2005 | | 2004(2) | 2003 | |
| | | | | | | | | | | |
Net Asset Value, Beginning of Year | | | $16.30 | | | $16.49 | | | $16.90 | | | $16.74 | | | $16.92 | |
Income (Loss) From Operations: | | | | | | | | | | | | | | | | |
Net investment income | | | 0.64 | | | 0.62 | | | 0.63 | | | 0.66 | | | 0.68 | |
Net realized and unrealized gain (loss) | | | 0.28 | | | (0.20 | ) | | (0.40 | ) | | 0.15 | | | (0.18 | ) |
Total Income From Operations | | | 0.92 | | | 0.42 | | | 0.23 | | | 0.81 | | | 0.50 | |
Less Distributions From: | | | | | | | | | | | | | | | | |
Net investment income | | | (0.64 | ) | | (0.61 | ) | | (0.64 | ) | | (0.65 | ) | | (0.68 | ) |
Total Distributions | | | (0.64 | ) | | (0.61 | ) | | (0.64 | ) | | (0.65 | ) | | (0.68 | ) |
Net Asset Value, End of Year | | | $16.58 | | | $16.30 | | | $16.49 | | | $16.90 | | | $16.74 | |
Total Return(3) | | | 5.74 | % | | 2.63 | % | | 1.44 | % | | 4.94 | % | | 3.02 | % |
Net Assets, End of Year (millions) | | | $46 | | | $72 | | | $101 | | | $134 | | | $157 | |
Ratios to Average Net Assets: | | | | | | | | | | | | | | | | |
Gross expenses | | | 1.20 | %(4) | | 1.23 | % | | 1.22 | % | | 1.20 | % | | 1.22 | % |
Net expenses | | | 1.19 | (4)(5) | | 1.23 | (5) | | 1.22 | (5) | | 1.20 | | | 1.22 | |
Net investment income | | | 3.91 | | | 3.79 | | | 3.82 | | | 3.94 | | | 4.06 | |
Portfolio Turnover Rate | | | 16 | % | | 8 | % | | 3 | % | | 14 | % | | 12 | % |
(1) | Per share amounts have been calculated using the average shares method. |
(2) | For the year ended February 29, 2004. |
(3) | Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
(4) | Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.19% and 1.18%, respectively (Note 11). |
(5) | Reflects fee waivers and/or expense reimbursements. |
See Notes to Financial Statements.
Legg Mason Partners California Municipals Fund 2007 Annual Report | 25 |
Financial Highlights (continued) |
For a share of each class of capital stock outstanding throughout each year ended February 28, unless otherwise noted:
Class C Shares(1) | | 2007 | | 2006 | | 2005 | | 2004(2) | 2003 | |
| | | | | | | | | | | |
Net Asset Value, Beginning of Year | | | $16.28 | | | $16.48 | | | $16.88 | | | $16.72 | | | $16.90 | |
Income (Loss) From Operations: | | | | | | | | | | | | | | | | |
Net investment income | | | 0.63 | | | 0.62 | | | 0.63 | | | 0.65 | | | 0.68 | |
Net realized and unrealized gain (loss) | | | 0.28 | | | (0.21 | ) | | (0.39 | ) | | 0.15 | | | (0.19 | ) |
Total Income From Operations | | | 0.91 | | | 0.41 | | | 0.24 | | | 0.80 | | | 0.49 | |
Less Distributions From: | | | | | | | | | | | | | | | | |
Net investment income | | | (0.63 | ) | | (0.61 | ) | | (0.64 | ) | | (0.64 | ) | | (0.67 | ) |
Total Distributions | | | (0.63 | ) | | (0.61 | ) | | (0.64 | ) | | (0.64 | ) | | (0.67 | ) |
Net Asset Value, End of Year | | | $16.56 | | | $16.28 | | | $16.48 | | | $16.88 | | | $16.72 | |
Total Return(3) | | | 5.69 | % | | 2.54 | % | | 1.46 | % | | 4.91 | % | | 2.99 | % |
Net Assets, End of Year (millions) | | | $55 | | | $55 | | | $59 | | | $60 | | | $62 | |
Ratios to Average Net Assets: | | | | | | | | | | | | | | | | |
Gross expenses | | | 1.25 | %(4) | | 1.26 | % | | 1.26 | % | | 1.24 | % | | 1.26 | % |
Net expenses | | | 1.24 | (4)(5) | | 1.26 | (5) | | 1.25 | (5) | | 1.24 | | | 1.26 | |
Net investment income | | | 3.86 | | | 3.77 | | | 3.79 | | | 3.90 | | | 4.01 | |
Portfolio Turnover Rate | | | 16 | % | | 8 | % | | 3 | % | | 14 | % | | 12 | % |
(1) | Per share amounts have been calculated using the average shares method. |
(2) | For the year ended February 29, 2004. |
(3) | Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
(4) | Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 1.23% and 1.22%, respectively (Note 11). |
(5) | Reflects fee waivers and/or expense reimbursements. |
See Notes to Financial Statements.
26 | Legg Mason Partners California Municipals Fund 2007 Annual Report |
Notes to Financial Statements
pt'color="#009590">1. Organization and Significant Accounting Policies
Legg Mason Partners California Municipals Fund, Inc. (the “Fund”), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, open-end management investment company.
Effective as of close of business April 13, 2007, the Fund is known as Legg Mason Partners California Municipals Fund and is a separate non-diversified series of Legg Mason Partners Income Trust (the “New Trust”). The New Trust, a Maryland business trust, is registered under the 1940 Act, as an open-end management investment company.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment Valuation. Securities are valued at the mean between the bid and asked 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 other relationships between securities. Securities for which market quotations are not readily available or are determined not to reflect fair value, will be valued in good faith by or under the direction of the Fund’s Board of Trustees. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value.
(b) Financial Futures Contracts. The Fund may enter into financial futures contracts typically to hedge a portion of the portfolio. Upon entering into a financial futures contract, the Fund is required to deposit cash or securities as initial margin. Additional securities are also segregated up to the current market value of the financial futures contracts. Subsequent payments, known as variation margin, are made or received by the Fund each day, depending on the daily fluctuation in the value of the underlying financial instruments. The Fund recognizes an unrealized gain or loss equal to the daily variation margin. When the financial futures contracts are closed, a realized gain or loss is recognized equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contracts.
The risks associated with entering into financial futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying instruments. In addition, investing in financial futures contracts involves the risk that the Fund could lose more than the original margin deposit and subsequent payments required for a futures transaction. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
(c) Fund Concentration. Since the Fund 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.
Legg Mason Partners California Municipals Fund 2007 Annual Report | 27 |
Notes to Financial Statements (continued)
(d) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.
(e) Distributions to Shareholders. Distributions from net investment income on the shares of the Fund are declared each business day to shareholders of record, and are paid monthly. The Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized gains, if any, are taxable and are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(f) Class Accounting. Investment income, common expenses and realized/unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that class.
(g) Federal and Other Taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.
(h) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the following reclassifications have been made:
| Undistributed Net
Investment
Income | Accumulated Net
Realized Loss | Paid-in Capital |
(a) | $ | 60,960 | | — | | $(60,960 | ) |
(b) | | (235,833 | ) | $235,833 | | — | |
(a) | Reclassifications are primarily due to book/tax differences in the treatment of various items. |
(b) | Reclassifications are primarily due to differences between book and tax accretion of market discount on fixed income securities. |
2. | Investment Management Agreement and Other Transactions with Affiliates |
Prior to August 1, 2006, Smith Barney Fund Management LLC (“SBFM”), a wholly-owned subsidiary of Legg Mason, Inc. (“Legg Mason”), acted as the investment manager of the Fund. Under the investment management agreement, the Fund paid an investment management fee calculated at an annual rate of 0.50% of the Fund’s average daily net assets up to $500 million and 0.48% of the Fund’s average daily net assets in excess of $500 million. This fee was calculated daily and paid monthly.
28 | Legg Mason Partners California Municipals Fund 2007 Annual Report |
Notes to Financial Statements (continued)
Effective August 1, 2006, Legg Mason Partners Fund Advisor, LLC (“LMPFA”) became the Fund’s investment manager and Western Asset Management Company (“Western Asset”) became the Fund’s subadviser. The portfolio managers who are responsible for the day-to-day management of the Fund remained the same immediately prior to and immediately after the date of these changes. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason.
LMPFA provides administrative and certain oversight services to the Fund. LMPFA has delegated to the subadviser the day-to-day portfolio management of the Fund. The Fund’s investment management fee remains unchanged. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.
During the year ended February 28, 2007, SBFM and LMPFA waived a portion of their fee in the amount of $33,250. In addition, during the year ended February 28, 2007, the Fund was reimbursed for expenses in the amount of $29,289.
Citigroup Global Markets Inc. (“CGM”), PFS Investments Inc. (“PFS”), and Legg Mason Investor Services, LLC (“LMIS”), serve as distributors of the Fund. LMIS is a wholly-owned broker-dealer subsidiary of Legg Mason.
There is a maximum initial sales charge of 4.25% for Class A shares. Effective November 20, 2006, the maximum initial sales charge on Class A shares of the Fund increased from 4.00% to 4.25% for shares purchased on or after that date. There is a contingent deferred sales charge (“CDSC”) of 4.50% on Class B shares, which applies if redemption occurs within one year from purchase payment. This CDSC declines by 0.50% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $500,000 in the aggregate. These purchases do not incur an initial sales charge.
For the year ended February 28, 2007, LMIS and its affiliates received sales charges of approximately $18,000 on sales of the Fund’s Class A shares. In addition, for the year ended February 28, 2007, CDSCs paid to LMIS and its affiliates were approximately:
| Class A | Class B | Class C |
CDSCs | $3,000 | $57,000 | $1,000 |
The Fund has adopted an unfunded, non-qualified deferred compensation plan (the “Plan”) which allows non-interested directors (“Directors”) to defer the receipt of all or a portion of the directors’ fees earned until a later date specified by the Directors. The deferred fees earn a return based on notional investments selected by the Directors. The balance of the deferred fees payable may change depending upon the investment performance. Any gains or losses incurred in the deferred balances are reported in the Statement of Operations under Directors’ fees. Under the Plan, deferred fees are considered a general obligation of the Fund and any payments made pursuant to the Plan will be made from the Fund’s general assets. The Board of Directors voted to discontinue offering the
Legg Mason Partners California Municipals Fund 2007 Annual Report | 29 |
Notes to Financial Statements (continued)
Plan to its members effective January 1, 2007. This change will have no effect on fees previously deferred. As of February 28, 2007, the Fund had accrued $13,422 as deferred compensation payable.
Certain officers and one Trustee of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
3. Investments
During the year ended February 28, 2007, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
Purchases | | $ | 121,366,603 | |
Sales | | | 130,211,076 | |
At February 28, 2007, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
Gross unrealized appreciation | | $ | 79,355,511 | |
Gross unrealized depreciation | | | (57,766 | ) |
Net unrealized appreciation | | $ | 79,297,745 | |
At February 28, 2007, the Fund had the following open futures contracts:
| | Number of
Contracts | | Expiration
Date | | Basis
Value | | Market
Value | | Unrealized
Gain | |
| | | | | | | | | | | |
Contracts to Sell: | | | | | | | | | | | |
U.S. Treasury Bond | | 350 | | 6/07 | | $39,549,731 | | $39,528,125 | | $21,606 | |
| |
4. Class Specific Expenses
The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.15% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.50% and 0.55% of the average daily net assets of each class, respectively. Distribution fees are accrued daily and paid monthly.
For the year ended February 28, 2007, class specific expenses were as follows:
| | Distribution
Fees | | Transfer Agent
Fees | | Shareholder
Reports Expenses | |
| | | | | | | |
Class A | | $ | 1,011,167 | | | | $49,868 | | | | $31,511 | | |
Class B | | | 375,769 | | | | 9,710 | | | | 4,756 | | |
Class C | | | 383,293 | | | | 4,399 | | | | 4,143 | | |
| | | | | | | |
Total | | $ | 1,770,229 | | | | $63,977 | | | | $40,410 | | |
| | | | | | | |
30 | Legg Mason Partners California Municipals Fund 2007 Annual Report |
Notes to Financial Statements (continued)
5. Distributions to Shareholders by Class
| | Year Ended
February 28, 2007 | | Year Ended
February 28, 2006 | |
| | | | | | | |
Net Investment Income: | | | | | | | |
Class A | | $29,557,660 | | | $29,464,173 | | |
Class B | | 2,244,433 | | | 3,192,427 | | |
Class C | | 2,100,205 | | | 2,137,011 | | |
| | | | | | | |
Total | | $33,902,298 | | | $34,793,611 | | |
| | | | | | | |
6. Capital Shares
At February 28, 2007, the Fund had 500 million shares of capital stock authorized with a par value of $0.001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest in the Fund and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.
Transactions in shares of each class were as follows:
| | Year Ended
February 28, 2007 | | Year Ended
February 28, 2006 | |
| | Shares | | Amount | | Shares | | Amount | |
Class A | | | | | | | | | | | |
Shares sold | | 5,677,166 | | $ | 93,637,684 | | 6,662,961 | | $ | 109,266,849 | |
Shares issued on reinvestment | | 923,123 | | | 15,214,537 | | 936,643 | | | 15,322,062 | |
Shares repurchased | | (6,097,697 | ) | | (100,384,258 | ) | (8,780,303 | ) | | (143,638,623 | ) |
Net Increase (Decrease) | | 502,592 | | $ | 8,467,963 | | (1,180,699 | ) | $ | (19,049,712 | ) |
Class B | | | | | | | | | | | |
Shares sold | | 117,378 | | $ | 1,925,722 | | 149,411 | | $ | 2,444,178 | |
Shares issued on reinvestment | | 70,195 | | | 1,154,275 | | 96,988 | | | 1,584,530 | |
Shares repurchased | | (1,787,982 | ) | | (29,383,102 | ) | (2,020,477 | ) | | (33,034,210 | ) |
Net Decrease | | (1,600,409 | ) | $ | (26,303,105 | ) | (1,774,078 | ) | $ | (29,005,502 | ) |
Class C | | | | | | | | | | | |
Shares sold | | 340,807 | | $ | 5,603,958 | | 242,177 | | $ | 3,958,977 | |
Shares issued on reinvestment | | 76,614 | | | 1,259,346 | | 80,280 | | | 1,309,961 | |
Shares repurchased | | (510,148 | ) | | (8,379,482 | ) | (493,518 | ) | | (8,063,035 | ) |
Net Decrease | | (92,727 | ) | $ | (1,516,178 | ) | (171,061 | ) | $ | (2,794,097 | ) |
Legg Mason Partners California Municipals Fund 2007 Annual Report | 31 |
Notes to Financial Statements (continued)
7. Income Tax Information and Distributions to Shareholders
Subsequent to the fiscal year end, the Fund made the following distributions:
Record Date
Payable Date | | Class A | | Class B | | Class C | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Daily | | | | | | | |
03/30/2007 | | $0.063233 | | $0.055342 | | $0.055023 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The tax character of distributions paid during the fiscal years ended February 28, was as follows:
| | 2007 | | 2006 | |
| | | | | |
| | | | | |
| | | | | |
Distributions paid from: | | | | | |
Tax-Exempt Income | | $33,860,654 | | $34,749,787 | |
Ordinary Income | | 41,644 | | 43,824 | |
| | | | | |
| | | | | |
| | | | | |
Total Distributions Paid | | $33,902,298 | | $34,793,611 | |
| | | | | |
| | | | | |
| | | | | |
As of February 28, 2007, the components of accumulated earnings on a tax basis were as follows:
| | | |
Undistributed tax-exempt income — net | | $ 489,817 | |
Capital loss carryforward* | | (31,037,588 | ) |
Other book/tax temporary differences(a) | | (65,606 | ) |
Unrealized appreciation/(depreciation)(b) | | 79,319,351 | |
| | | |
| | | |
| | | |
Total accumulated earnings/(losses) — net | | $ 48,705,974 | |
| | | |
| | | |
| | | |
* | During the taxable year ended February 28, 2007, the Fund utilized $18,446,977 of its capital loss carryover available from prior years. As of February 28, 2007, the Fund had the following net capital loss carryforwards remaining: |
Year of Expiration | | Amount |
2/28/2011 | | $ (3,480,217) |
2/28/2013 | | (26,139,468) |
2/28/2014 | | (1,417,903) |
| | $ (31,037,588) |
These amounts will be available to offset any future taxable capital gains.
(a) | Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized gains on certain futures contracts and differences in the book/tax treatment of various items. |
(b) | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the difference between book & tax accretion methods for market discount on fixed income securities. |
8. Regulatory Matters
On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC’’) issued an order in connection with the settlement of an administrative proceeding against SBFM, the Fund’s prior investment manager, and CGM relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Funds’’).
32 | Legg Mason Partners California Municipals Fund 2007 Annual Report |
Notes to Financial Statements (continued)
The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act’’). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data’’), the Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM’’), the Citigroup business unit that, at the time, included the Fund’s investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million was distributed to the affected Funds.
The order required SBFM to recommend a new transfer agent contract to the Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Fund’s Board selected a new transfer agent for the Fund. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Legg Mason Partners California Municipals Fund 2007 Annual Report | 33 |
Notes to Financial Statements (continued)
Although there can be no assurance, the Fund’s manager does not believe that this matter will have a material adverse effect on the Fund.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
9. Legal Matters
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants’’) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 8. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the advisor for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.
On October 5, 2005, a motion to consolidate the five actions and any subsequently filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.
As of the date of this report, the Fund’s investment manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Fund or the ability of the Fund’s investment manager and its affiliates to continue to render services to the Fund under their respective contracts.
* * *
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM and a number of its then affiliates, including SBFM and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board Members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the
34 | Legg Mason Partners California Municipals Fund 2007 Annual Report |
Notes to Financial Statements (continued)
shareholders of the Funds in which none of the plaintiffs had invested (including the Fund) and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.
On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against CAM, SBAM, SBFM and CGM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the Funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.
10. Other Matters
On September 16, 2005, the staff of the SEC informed SBFM and SBAM that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the 1940 Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a) and related Rule 19a-1 of the Investment Company Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.
Although there can be no assurance, the Fund’s manager believes that this matter is not likely to have a material adverse effect on the Fund.
11. Special Shareholder Meeting and Reorganization
The Board and the shareholders of Legg Mason Partners California Tax Free Bond Fund (formerly known as Salomon Brothers California Tax Free Bond Fund) (the “Acquired Fund”) and the Board of the Fund have approved at the November 2006 Shareholder Meeting, an Agreement and Plan of Reorganization providing for the acquisition of all of the assets and the assumption of all the liabilities of the Acquired Fund, in exchange for shares of the Fund. The reorganization occurred on March 2, 2007.
Legg Mason Partners California Municipals Fund 2007 Annual Report | 35 |
Notes to Financial Statements (continued)
Shareholders of the Fund approved a number of initiatives designed to streamline and restructure the fund complex. These matters generally are expected to be implemented in 2007. As noted in the proxy materials, Legg Mason will pay for a portion of the costs related to these initiatives. The portions of the costs that are borne by the Fund will be recognized in the period during which the expense is incurred. Such expenses relate to obtaining shareholder votes for proposals presented in the proxy, the election of board members, retirement of board members, as well as printing, mailing, and soliciting proxies. The portions of these costs borne by the Fund and reflected in the Statement of Operations are deemed extraordinary and, therefore, not subject to expense limitation agreements, if applicable. See also “Additional Shareholder Information” at the end of this report.
12. Recent Accounting Pronouncements
During June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 prescribes a comprehensive model for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Management must be able to conclude that the tax law, regulations, case law, and other objective information regarding the technical merits sufficiently support the position’s sustainability with a likelihood of more than 50 percent. FIN 48 is effective for fiscal periods beginning after December 15, 2006, which for this Funds will be March 1, 2007. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Funds has determined that adopting FIN 48 will not have a material impact on the Fund’s financial statements.
* * *
On September 20, 2006, FASB released Statement of Financial Accounting Standards No. 157 Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.
36 | Legg Mason Partners California Municipals Fund 2007 Annual Report |
Report of Independent Registered Public
Accounting Firm
The Board of Trustees and Shareholders
Legg Mason Partners Income Trust:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason Partners California Municipals Fund (formerly Smith Barney California Municipals Fund Inc.), a series of Legg Mason Partners Income Trust as of February 28, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 February 28, 2007, by correspondence with the custodian and brokers or by other appropriate auditing procedures. 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 Legg Mason Partners California Municipals Fund as of February 28, 2007, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
April 27, 2007
Legg Mason Partners California Municipals Fund 2007 Annual Report | 37 |
Additional Information (unaudited)
Information about Trustees and Officers
The business and affairs of the Legg Mason Partners California Municipals Fund (“Fund”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers of the Fund is set forth below. The Statement of Additional Information includes additional information about the Fund’s Trustees and is available, without charge, upon request by calling Legg Mason Partners Shareholder Services at 1-800-451-2010.
| Name, Address and
Birth Year | | Position(s)
Held with
Fund | | Term of Office*
and
Length
of Time Served** | | Principal Occupation(s) During Past
Five Years | | Number of Portfolios
in Fund
Complex Overseen
by Trustee | | Other
Board
Memberships
Held by
Trustee | |
| |
| |
| |
| Non-Interested Trustees: |
| Elliott J. Berv
c/o R. Jay Gerken
Legg Mason & Co., LLC
(“Legg Mason”)
399 Park Avenue
4th Floor New York, NY 10022
Birth Year: 1943 | | Trustee | | Since 1989 | | President and Chief Executive Officer, Catalyst (consulting) (since 1984); Chief Executive Officer, Rocket City Enterprises (media) (2000 to 2005); Chief Executive Officer, Landmark City (real estate development) (2001 to 2004); Executive Vice President, DigiGym Systems (personal fitness systems) (2001 to 2004); Chief Executive Officer, Motocity USA (Motorsport Racing) (2004 to 2005) | | 69 | | Board Member, American Identity Corp. (doing business as Morpheus Technologies) (biometric information management) (since 2001); Director, Alzheimer’s Association Lapoint Industries (industrial filter company) (since 2002); Director, (New England Chapter) (since 1998) | |
| A. Benton Cocanougher
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1938 | | Trustee | | Since 1991 | | Dean Emeritus and Professor, Texas A&M University (since 2004); Formerly, Interim Chancellor, Texas A&M University System (2003 to 2004); Formerly, Special Advisor to the President, Texas A&M University (2002 to 2003) | | 69 | | None | |
| Jane F. Dasher
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1949 | | Trustee | | Since 1999 | | Chief Financial Officer, Korsant Partners, LLC (a family investment company) | | 69 | | None | |
38 | Legg Mason Partners California Municipals Fund |
Additional Information (unaudited) (continued)
| Name, Address and
Birth Year | | Position(s)
Held with
Fund | | Term of Office*
and
Length
of Time Served** | | Principal Occupation(s) During Past
Five Years | | Number of Portfolios
in Fund
Complex Overseen
by Trustee | | Other
Board
Memberships
Held by
Trustee | |
| |
| |
| |
| Mark T. Finn
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1943 | | Trustee | | Since 1989 | | Adjunct Professor, College of William & Mary (since 2002); Principal/Member, Balvan Partners (investment management) (since 2002); Chairman, Chief Executive Officer and Owner, Vantage Consulting Group, Inc. (investment management) (since 1988) | | 69 | | None | |
| Rainer Greeven
c/o R. Jay Gerken
Legg Mason 399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1936 | | Trustee | | Since 1994 | | Attorney, Rainer Greeven PC; President and Director, 62nd Street East Corporation (real estate) (since 2002) | | 69 | | None | |
| Stephen Randolph Gross
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1947 | | Trustee | | Since 1986 | | Chairman, HLB Gross Collins, P.C. (accounting and consulting firm) (since 1979); Treasurer, Coventry Limited, Inc. (Senior Living Facilities) (since 1985); Formerly, Managing Director, Fountainhead Ventures, LLC (technology accelerator) (1998 to 2003); Formerly, Partner, Capital Investment Advisory Partners (leverage buyout consulting) (2000 to 2002); Formerly, Secretary, Carint N.A. (manufacturing) (1998 to 2002) | | 69 | | Director,Andersen Calhoun (assisted living) (since 1987); Formerly, Director, United Telesis, Inc. (telecommunications) (1997 to 2002); Formerly, Director, ebank Financial Services, Inc. (1997 to 2004) | |
| Richard E. Hanson, Jr.
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1941 | | Trustee | | Since 1985 | | Retired; Formerly, Headmaster, The New Atlanta Jewish Community High School, Atlanta, Georgia (1996 to 2000) | | 69 | | None | |
Legg Mason Partners California Municipals Fund | 39 |
Additional Information (unaudited) (continued)
| Name, Address and
Birth Year | | Position(s)
Held with
Fund | | Term of Office*
and
Length
of Time Served** | | Principal Occupation(s) During Past
Five Years | | Number of Portfolios
in Fund
Complex Overseen
by Trustee | | Other
Board
Memberships
Held by
Trustee | |
| |
| |
| |
| Diana R. Harrington
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022 Birth Year: 1940 | | Trustee | | Since 1992 | | Professor, Babson College (since 1992) | | 69 | | None | |
| Susan M. Heilbron
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1945 | | Trustee | | Since 1994 | | Independent Consultant (since 2001) | | 69 | | None | |
| Susan B. Kerley
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor New York, NY 10022
Birth Year: 1951 | | Trustee | | Since 1992 | | Investment Consulting Partner, Strategic Management Advisers, LLC (investment consulting) (since 1990) | | 69 | | Chairman and Independent Board Member of Eclipse Fund, Inc. and Eclipse Funds (which trade as Mainstay Funds) (currently supervises 16 investment companies in the Fund complex) (since 1991) | |
| Alan G. Merten
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1941 | | Trustee | | Since 1990 | | President, George Mason University (since 1996) | | 69 | | Trustee, First Potomac Realty Trust (since 2005); Director, Xybernaut Corporation (information technology) (2004 to 2006); Director, Digital Net Holdings, Inc. (2003 to 2004); Director, Comshare, Inc. (information technology) (1985 to 2003) | |
| R. Richardson Pettit
c/o R. Jay Gerken
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1942 | | Trustee | | Since 1990 | | Formerly, Duncan Professor of Finance, University of Houston (1977 to 2006) | | 69 | | None | |
40 | Legg Mason Partners California Municipals Fund |
Additional Information (unaudited) (continued)
| Name, Address and
Birth Year | | Position(s)
Held with
Fund | | Term of Office*
and
Length
of Time Served** | | Principal Occupation(s) During Past
Five Years | | Number of Portfolios
in Fund
Complex Overseen
by Trustee | | Other
Board
Memberships
Held by
Trustee | |
| |
| |
| |
| Interested Trustee: | | | | | | | | | | | |
| R. Jay Gerken, CFA***
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1951 | | Trustee President, Chairman and Chief Executive Officer | | Since 2002 | | Managing Director, Legg Mason; Chairman of the Board and Trustee/ Director of 139 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and its affiliates; President, LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason or its affiliates; Formerly, Chairman, Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management, Inc. (“CFM”) (2002 to 2005); Formerly, Chairman, President and Chief Executive Officer, Travelers Investment Adviser Inc. (2002 to 2005) | | 139 | | None | |
| Officers: | | | | | | | | | | | |
| Kaprel Ozsolak
Legg Mason
125 Broad Street
11th Floor
New York, NY 10004
Birth Year: 1965 | | Chief Financial Officer and Treasurer | | Since 2004 | | Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; Formerly, Controller of certain mutual funds associated with certain predecessor firms of Legg Mason or its predecessors (from 2002 to 2004) | | N/A | | N/A | |
| Steven Frank
Legg Mason
125 Board Street
11th Floor
New York, NY 10004
Birth Year: 1967 | | Controller | | Since 2005 | | Vice President of Legg Mason or its predecessor (since 2002); Controller of certain mutual funds associated with Legg Mason (since 2005); Formerly, Assistant Controller of certain mutual funds associated with Legg Mason (from 2001 to 2005) | | N/A | | N/A | |
Legg Mason Partners California Municipals Fund | 41 |
Additional Information (unaudited) (continued)
| Name, Address and
Birth Year | | Position(s)
Held with
Fund | | Term of Office*
and
Length
of Time Served** | | Principal Occupation(s) During Past
Five Years | | Number of Portfolios
in Fund
Complex Overseen
by Trustee | | Other
Board
Memberships
Held by
Trustee | |
| |
| |
| |
| Ted P. Becker
Legg Mason
399 Park Avenue
4th Floor
New York, NY 10022
Birth Year: 1951 | | Chief Compliance Officer | | Since 2006 | | Director of Global Compliance at Legg Mason (since 2006), Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason, LMPFA and certain affiliates (since 2006); Managing Director of Compliance at Legg Mason or its predecessor (from 2002 to 2005); Prior to 2002, Managing Director — Internal Audit & Risk Review at Citigroup Inc. | | N/A | | N/A | |
| John Chiota
Legg Mason
300 First Stamford Place,
4th Floor
Stamford, CT 06902
Birth Year: 1968 | | Chief Anti-Money Laundering Compliance Officer | | Since 2006 | | Vice President of Legg Mason or its predecessor (since 2004); Chief Anti-Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason or its affiliates (since 2006); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse | | N/A | | N/A | |
| Robert I. Frenkel
Legg Mason
300 First Stamford
Place, 4th Floor
Stamford, CT06902
Birth Year: 1954 | | Secretary and Chief Legal Officer | | Since 2003 | | Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its prede- cessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); Formerly, Secretary of CFM (from 2001 to 2004) | | N/A | | N/A | |
* | Each Trustee and Officer serves until his or her successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal. |
** | Indicates the earliest year in which the Trustee became a Board Member for a fund in the Legg Mason Partners fund complex. |
*** | Mr. Gerken is an “interested person” of the Fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of LMPFA and certain of its affiliates. |
42 | Legg Mason Partners California Municipals Fund |
Additional Shareholder Information (unaudited)
Results of a Special Meeting of Shareholders
On December 11, 2006, a Special Meeting of Shareholders was held to vote on various proposals recently approved by the Fund’s Board Members. The following tables provide the number of votes cast for, against, and authority withheld as well as the number of abstentions and broker non-votes as to the following proposals: (1) Election of Board Members and (2) Revise Fundamental Investment Policies.
1. Election of Board Members
Nominees | | Votes For | | Authority Withheld | | Abstentions |
Elliot J. Berv | | 25,806,422.560 | | 670,087.178 | | 0.000 |
A. Benton Cocanougher | | 25,802,663.972 | | 673,845.766 | | 0.000 |
Jane F. Dasher | | 25,813,565.365 | | 662,944.373 | | 0.000 |
Mark T. Finn | | 25,796,627.229 | | 679,882.509 | | 0.000 |
Rainer Greeven | | 25,790,884.544 | | 685,625.194 | | 0.000 |
Stephen Randolph Gross | | 25,797,310.083 | | 679,199.655 | | 0.000 |
Richard E. Hanson, Jr. | | 25,809,323.864 | | 667,185.874 | | 0.000 |
Diana R. Harrington | | 25,806,010.162 | | 670,499.576 | | 0.000 |
Susan M. Heilbron | | 25,813,565.365 | | 662,944.373 | | 0.000 |
Susan B. Kerley | | 25,813,340.365 | | 663,169.373 | | 0.000 |
Alan G. Merten | | 25,797,784.673 | | 678,725.065 | | 0.000 |
R. Richardson Pettit | | 25,810,578.516 | | 665,931.222 | | 0.000 |
R. Jay Gerken, CFA | | 25,809,209.097 | | 667,300.641 | | 0.000 |
| | | | | | |
| | | | | | |
2. Revise Fundamental Investment Policies
Items Voted On | | Votes For | | Votes Against | | Abstentions | | Broker
Non-Votes |
Borrowing Money | | 23,558,490.833 | | 534,080.833 | | 810,919.072 | | 1,573,019.000 |
Underwriting | | 23,583,085.959 | | 467,228.520 | | 853,176.259 | | 1,573,019.000 |
Lending | | 23,627,961.083 | | 481,438.643 | | 794,091.012 | | 1,573,019.000 |
Issuing Senior Securities | | 23,634,938.656 | | 481,527.544 | | 787,024.538 | | 1,573,019.000 |
Real Estate | | 23,649,293.056 | | 441,914.890 | | 812,282.792 | | 1,573,019.000 |
Commodities | | 23,584,189.318 | | 502,238.643 | | 817,062.777 | | 1,573,019.000 |
Concentration | | 23,657,707.363 | | 442,959.422 | | 802,823.953 | | 1,573,019.000 |
Non-Fundamental | | 23,591,015.974 | | 492,434.767 | | 820,039.997 | | 1,573,019.000 |
| | | | | | | | |
| | | | | | | | |
Legg Mason Partners California Municipals Fund | 43 |
Important Tax Information (unaudited)
All of the net investment income distributions paid monthly by the Fund from March 1, 2006 through November 30, 2006 and from January 1, 2007 through February 28, 2007 qualify as tax-exempt interest dividends for federal income tax purposes.
Additionally, 98.64% of the net investment income distribution paid on December 29, 2006 qualifies as a tax-exempt interest dividend for federal income tax purposes.
Please retain this information for your records.
44 | Legg Mason Partners California Municipals Fund |
| | Legg Mason Partners
California Municipals Fund |
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| | | | INVESTMENT MANAGER |
TRUSTEES |
| | Elliot J. Berv A. Benton Cocanougher Jane F. Dasher Mark T. Finn R. Jay Gerken, CFA Chairman Rainer Greeven Stephen Randolph Gross Richard E. Hanson, Jr. Diana R. Harrington Susan M. Heilbron Susan B. Kerley Alan G. Merten R. Richardson Pettit | | Legg Mason Partners Fund Advisor, LLC SUBADVISER Western Asset Management Company DISTRIBUTORS Citigroup Global Markets Inc. Legg Mason Investor Services, LLC PFS Investments Inc. CUSTODIAN State Street Bank and Trust Company TRANSFER AGENT PFPC Inc. 4400 Computer Drive Westborough, Massachusetts 01581 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 345 Park Avenue New York, New York 10154 |
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This report is submitted for the
general information of the share-
holders of Legg Mason Partners
California Municipals Fund but it
may also be used as sales
literature when preceded or accom-
panied by the current prospectus.
This report must be preceded or
accompanied by a free prospec-
tus. Investors should consider
the Fund’s investment objec-
tives, risks, charges and
expenses carefully before
investing. The prospectus con-
tains this and other important
information about the Fund.
Please read the prospectus care-
fully before investing.
www.leggmason.com/InvestorServices
©2007 Legg Mason Investor
Services, LLC
Member NASD, SIPC
FD2209 4/07 SR07-316
Legg Mason Partners
California Municipals Fund
The Fund is a separate investment fund of Legg Mason Partners
Income Trust, a Maryland business trust.
LEGG MASON PARTNERS CALIFORNIA MUNICIPALS FUND
Legg Mason Partners Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (“SEC”) for the first and
third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are
available on the SEC’s website at www.sec.gov. The Fund’s
Forms N-Q may be reviewed and copied at the SEC’s Public
Reference Room in Washington, D.C., and information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
To obtain information on Form N-Q from the Fund, shareholders can call
Legg Mason Partners Shareholder Services at 1-800-451-2010.
Information on how the Fund voted proxies relating to portfolio securities
during the prior 12-month period ended June 30th, and a
description of the policies and procedures that the Fund uses to determine
how to vote proxies related to portfolio transactions is available
(1) without charge, upon request, by calling 1-800-451-2010, (2) on the
Fund’s website at www.leggmason.com/InvestorServices and (3) on the
SEC’s website at www.sec.gov.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Trustees of the registrant has determined that Stephen Randolph Gross and Jane F. Dasher, the Chairman of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Gross and Ms. Dasher as the Audit Committee’s financial experts. Mr. Gross and Ms. Dasher are “independent” Trustees pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
a) Audit Fees. The aggregate fees billed in the last two fiscal years ending February 28, 2006 and February 28, 2007 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $27,000 in 2006 and $27,900 in 2007.
b) Audit-Related Fees. There were no fees billed in the Reporting Periods for assurance and related services by the Auditor that are reasonably related to the performance of the audit of the Registrant’s financial statements and are not reported under paragraph (a) of this Item 4. In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason Partners California Municipals Fund (Effective as of close of business, April 13, 2007, the Fund is a separate diversified series of Legg Mason Partners Income Tru st) (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to May 6, 2003 services provided by the Auditor were not required to be pre-approved).
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $0 in 2006 and $2,400 in 2007. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Legg Mason Partners Income Trust.
All Other Fees. There were no other non-audit services rendered by the Auditor to Smith Barney Fund Management LLC (“SBFM”), and any entity controlling, controlled by or under common control with SBFM that provided ongoing services to Legg Mason Partners Income Trust Fund requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by Smith Barney Fund Management LLC or Salomon Brothers Asset Management Inc. or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund
(“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Legg Mason Partners Income Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2006 and 2007; Tax Fees were 100% and 0% for 2006 and 2007; and Other Fees were 100% and 0% for 2006 and 2007.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Income Trust and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Legg Mason Partners Income Trust during the reporting period were $0 in 2007.
(h) Yes. Legg Mason Partners Income Trust’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Legg Mason Partners Income Trust or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable.
ITEM 6. | SCHEDULE OF INVESTMENTS |
Included herein under Item 1.
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable.
ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
ITEM 11. | CONTROLS AND PROCEDURES. |
(a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.
(a)(1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Legg Mason Partners Income Trust | | |
By: |
/s/ R. Jay Gerken
| | | |
| R. Jay Gerken | | | |
| Chief Executive Officer of | | | |
| Legg Mason Partners Income Trust | | | |
Date: May 7, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: |
/s/ R. Jay Gerken
| | | |
| (R. Jay Gerken) | | | |
| Chief Executive Officer of | | | |
| Legg Mason Partners Income Trust | | | |
Date: May 7, 2007
By: |
/s/ Kaprel Ozsolak
| | | |
| (Kaprel Ozsolak) | | | |
| Chief Financial Officer of | | | |
| Legg Mason Partners Income Trust | | | |
Date: May 7, 2007
