Effective April 7, 2006, Florida Portfolio was renamed Legg Mason Partners Florida Municipals Fund (the “Fund”). The Fund is a separate non-diversified investment fund of Legg Mason Partners Municipal Funds (formerly known as Smith Barney Muni Funds) (“Trust”). The Trust, a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended (“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.
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.
Notes to Financial Statements (continued)
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 | | Accumulated |
| | | | | Investment | | Net Realized |
| | | | | Income | | Loss |
|
| (a) | | | | $(22,368) | | $22,368 |
|
(a) Reclassifications are primarily due to differences between book and tax amortization of market discount on fixed income securities.2. Investment Management Agreement and Other Transactions with Affiliates
On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business, Citigroup Asset Management (“CAM”), to Legg Mason, Inc. (“Legg Mason”). As a result, the Fund’s investment manager, Smith Barney Fund Management LLC (the “Manager” or “SBFM”), previously an indirect wholly-owned subsidiary of Citigroup, became a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Fund’s then existing investment management contract to terminate. The Fund’s shareholders approved a new investment management contract between the Fund and the Manager, which became effective on December 1, 2005.
Legg Mason, whose principal executive offices are in Baltimore, Maryland, is a financial services holding company.
Prior to the Legg Mason transaction and continuing under the new investment management agreement, the Fund pays the Manager a fee calculated at an annual rate of 0.50% of the Fund’s average daily net assets. This fee is calculated daily and paid monthly.
24 Legg Mason Partners Florida Municipals Fund 2006 Annual Report
Notes to Financial Statements (continued)
During the year ended March 31, 2006, the Fund’s Class A, B and C shares had voluntary expense limitations in place of 0.85%, 1.35% and 1.40%, respectively. These expense limitations can be terminated at any time.
During the year ended March 31, 2006, the Manager voluntarily waived a portion of its fees amounting to $4,482.
The Fund’s Board has approved PFPC Inc. (“PFPC”) to serve as transfer agent for the Fund, effective January 1, 2006. The principal business office of PFPC is located at 4400 Computer Drive Westborough, MA 01581. Prior to January 1, 2006, Citicorp Trust Bank, fsb. (“CTB”), a subsidiary of Citigroup, acted as the Fund’s transfer agent. Also, prior to January 1, 2006, PFPC acted as the Fund’s sub-transfer agent. CTB received account fees and asset-based fees that varied according to the size and type of account. PFPC was responsible for shareholder recordkeeping and financial processing for all shareholder accounts and was paid by CTB. For the period ended March 31, 2006, the Fund paid transfer agent fees of $30,589 to CTB.
The Fund’s Board has appointed the Fund’s current distributor, Citigroup Global Markets Inc. (“CGM”), a subsidiary of Citigroup, and Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, as co-distributors of the Fund. The Fund’s Board also approved an amended and restated Rule 12b-1 Plan. CGM and other broker-dealers, financial intermediaries and financial institutions (each called a “Service Agent”) that currently offer Fund shares will continue to make the Fund’s shares available to their clients. Additional Service Agents may offer Fund shares in the future.
There is a maximum initial sales charge of 4.00% for Class A shares. 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 thereafter by 0.50% the first year after purchase payment and thereafter 1.00% 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 addition, 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 period ended March 31, 2006, LMIS, CGM and its affiliates received sales charges of approximately $30,000 on sales of the Fund’s Class A shares. In addition, for the period ended March 31, 2006, CDSCs paid to LMIS, CGM and its affiliates were approximately:
| | | | | Class A | | Class B | | Class C |
|
| CDSCs | | | | $1,500 | | $22,000 | | $0* |
|
* Amount represents less than $1,000 The Fund has adopted an unfunded, non-qualified deferred compensation plan (the “Plan”) which allows non-interested trustees (“Trustees”) to defer the receipt of all or a portion of the trustees’ fees earned until a later date specified by the Trustees. The deferred fees earn a return based on notional investments selected by the Trustees. 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
Legg Mason Partners Florida Municipals Fund 2006 Annual Report 25
Notes to Financial Statements (continued)
Trustees’ 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. Effective January 1, 2006, the Board of Trustees voted to discontinue offering the Plan to its members. This change will have no effect on fees previously deferred. As of March 31, 2006, the Fund has accrued $16,927 as deferred compensation payable under the Plan.
Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
3. Investments
During the year ended March 31, 2006, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | | $ | 22,844,449 |
|
| Sales | | | 44,749,340 |
|
At March 31, 2006, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| Gross unrealized appreciation | | $ | 9,702,522 | |
| Gross unrealized depreciation | | | (693,421 | ) |
|
| Net unrealized appreciation | | $ | 9,009,101 | |
|
At March 31, 2006, the Fund had the following open futures contracts:
| | | Number of | | Expiration | | Basis | | Market | | Unrealized |
| | | Contracts | | Date | | Value | | Value | | Gain |
|
Contracts to Sell: | | | | | | | | | | |
| U.S. Treasury Bond | | 580 | | 6/06 | | $64,847,508 | | $63,310,625 | | $1,536,883 |
|
4. Class Specific Expenses
The Fund has adopted a Rule 12b-1distribution 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 March 31, 2006, class specific expenses were as follows:
| | | | | | | | | Shareholder |
| | | Distribution | Transfer | Reports |
| | | Fees | Agent Fees | Expenses |
|
| Class A | | $ | 240,550 | | $ | 24,381 | | $ | 42,875 | |
| Class B | | | 178,336 | | | 8,847 | | | 14,605 | |
| Class C | | | 125,258 | | | 4,611 | | | 7,223 | |
|
| Total | | $ | 544,144 | | $ | 37,839 | | $ | 64,703 | |
|
26 Legg Mason Partners Florida Municipals Fund 2006 Annual Report
Notes to Financial Statements (continued)
LMIS, CGM and its affiliates have agreed to reimburse the Fund for any amount which exceeds the payments made by the Fund with respect to the distribution plan for Class A shares over the cumulative unreimbursed amounts spent by CGM in performing their services under the distribution plan. During the year ended March 31, 2006, LMIS, CGM and its affiliates reimbursed the Fund for $23,658.
5. Distributions to Shareholders by Class
| | | Year Ended | Year Ended |
| | | March 31, 2006 | March 31, 2005 |
|
| Net Investment Income | | | | | | | |
| Class A | | $ | 7,700,645 | | $ | 8,261,193 | |
| Class B | | | 1,163,811 | | | 1,620,045 | |
| Class C | | | 752,325 | | | 852,829 | |
|
| Total | | $ | 9,616,781 | | $ | 10,734,067 | |
|
6. Shares of Beneficial Interest
At March 31, 2006, the Trust had an unlimited number of shares of beneficial interest 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 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 | | Year Ended |
| | | March 31, 2006 | | March 31, 2005 |
| |
|
| | | Shares | | | | Amount | | | Shares | | | | Amount | |
|
| Class A | | | | | | | | | | | | | | |
| Shares sold | | 1,934,632 | | | $ | 25,013,220 | | | 2,016,455 | | | $ | 26,233,162 | |
| Shares issued on reinvestment | | 222,608 | | | | 2,871,605 | | | 235,126 | | | | 3,061,857 | |
| Shares repurchased | | (2,204,390 | ) | | | (28,476,562 | ) | | (3,226,616 | ) | | | (42,069,429 | ) |
|
| Net Decrease | | (47,150 | ) | | $ | (591,737 | ) | | (975,035 | ) | | $ | (12,774,410 | ) |
|
| Class B | | | | | | | | | | | | | | |
| Shares sold | | 41,905 | | | $ | 539,910 | | | 111,760 | | | $ | 1,455,697 | |
| Shares issued on reinvestment | | 30,561 | | | | 393,030 | | | 44,841 | | | | 582,546 | |
| Shares repurchased | | (684,558 | ) | | | (8,808,859 | ) | | (948,339 | ) | | | (12,351,026 | ) |
|
| Net Decrease | | (612,092 | ) | | $ | (7,875,919 | ) | | (791,738 | ) | | $ | (10,312,783 | ) |
|
| Class C | | | | | | | | | | | | | | |
| Shares sold | | 201,142 | | | $ | 2,590,074 | | | 140,087 | | | $ | 1,818,424 | |
| Shares issued on reinvestment | | 29,964 | | | | 385,508 | | | 33,195 | | | | 431,303 | |
| Shares repurchased | | (270,516 | ) | | | (3,483,933 | ) | | (278,810 | ) | | | (3,623,560 | ) |
|
| Net Decrease | | (39,410 | ) | | $ | (508,351 | ) | | (105,528 | ) | | $ | (1,373,833 | ) |
|
Legg Mason Partners Florida Municipals Fund 2006 Annual Report 27
Notes to Financial Statements (continued)
7. Income Tax Information and Distributions to Shareholders
Subsequent to the fiscal year end, the Fund has made the following distributions:
| Record Date | | | | | | | | |
| Payable Date | | | | Class A | | Class B | | Class C |
|
| Daily | | | | | | | | |
| 4/28/2006 | | | | $0.047733 | | $0.042821 | | $0.042315 |
|
The tax character of distributions paid during the fiscal years ended March 31, were as follows:
| | | 2006 | | 2005 |
|
Distributions paid from: | | | | |
| Tax-Exempt Income | | $9,616,781 | | $10,734,067 |
|
| Total Distributions Paid | | $9,616,781 | | $10,734,067 |
|
As of March 31, 2006, the components of accumulated earnings on a tax basis were as follows:
| Undistributed tax-exempt income — net | | $ | 170,337 | |
| Capital loss carryforward (*) | | | (8,964,086 | ) |
| Other book/tax temporary differences (a) | | | (1,554,463 | ) |
| Unrealized appreciation/(depreciation) (b) | | | 10,545,984 | |
|
| Total accumulated earnings — net | | $ | 197,772 | |
|
| (*) | During the taxable year ended March 31, 2006, the Fund utilized $102,492 of its capital loss carryforwards available from prior years. As of March 31, 2006, the Fund had the following net capital loss carryforwards remaining: |
| |
| Year of Expiration | | | Amount | |
| 3/31/2009 | | $ | (666,089 | ) |
| 3/31/2012 | | | (1,458,394 | ) |
| 3/31/2013 | | | (6,839,603 | ) |
| |
|
| | | $ | (8,964,086 | ) |
| |
|
| | 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 tax deferral of losses on wash sales and the difference between book and tax amortization 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 and CGM relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Funds”).
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
28 Legg Mason Partners Florida Municipals Fund 2006 Annual Report
Notes to Financial Statements (continued)
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 Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or subtransfer 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.
Although there can be no assurance, SBFM does not believe that this matter will have a material adverse effect on the Funds.
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”)
Legg Mason Partners Florida Municipals Fund 2006 Annual Report 29
Notes to Financial Statements (continued)
based on the May 31, 2005 settlement order issued against the Defendants by the SEC based 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 Funds or the ability of the Fund’s investment manager and it affiliates to continue to render services to the Funds under their respective contracts.
* * *
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. and a number of its affiliates, including SBFM and Salomon Brothers Asset Management Inc (the “Advisers”), substantially all of the mutual funds managed by the Advisers, including the Fund (the “Funds”), and directors or trustees of the 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 Advisers caused the 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 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 Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Funds’ contracts with the Advisers, recovery of all fees paid to the Advisers 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. While the lawsuit is in its earliest stages, to the extent that the Complaint purports to state causes of action against the Funds, the Fund’s investment manager believes the Funds have significant defenses to such allegations, which the Funds intend to vigorously assert in responding to the Complaint.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed against the Defendants in the future.
As of the date of this report, the Fund’s investment mangaer and the Funds believe that the resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Advisers and their affiliates to continue to render services to the Funds under their respective contracts.
The Defendants have moved to dismiss the Complaint. Those motions are pending before the court.
30 Legg Mason Partners Florida Municipals Fund 2006 Annual Report
Notes to Financial Statements (continued)
10. Other Matters
On September 16, 2005, the staff of the Securities and Exchange Commission (the “Commission”) informed SBFM and Salomon Brothers Asset Management Inc (“SBAM”) that the staff is considering recommending that the Commission institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the Commission 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, SBFM and SBAM believes that this matter is not likely to have a material adverse effect on the Fund or SBFM and SBAM’s ability to perform investment management services relating to the Fund.
Legg Mason Partners Florida Municipals Fund 2006 Annual Report 31
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders
Legg Mason Partners Municipal Funds (formerly, Smith Barney Muni Funds):
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason Partners Florida Municipals Fund (formerly, Florida Portfolio), a series of Legg Mason Partners Municipal Funds, as of March 31, 2006, 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 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 at March 31, 2006, by correspondence with the custodian and brokers or 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 Florida Municipals Fund, as of March 31, 2006, 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.
KPMG LLP
New York, New York
May 24, 2006
32 Legg Mason Partners Florida Municipals Fund 2006 Annual Report
Board Approval of Management Agreement (unaudited)
On June 23, 2005, Citigroup Inc. entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. (“Legg Mason”) under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which includes the Adviser, to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.
The consummation of the Transaction resulted in the automatic termination of the Fund’s current adviser agreement in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Adviser (the “New Management Agreement”).
On July 11, 2005, members of the Board discussed with CAM management and certain Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding CAM’s business and its combination with Legg Mason’s business. The Board Members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.
At a meeting held on August 1, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition and asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup.
Representatives of CAM and Legg Mason also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement. The Independent Board Members of the Board also conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.
In their deliberations concerning the New Management Agreement, among other things, the Board Members considered:
(i) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;
(ii) that Legg Mason is an experienced and respected asset management firm, and that Legg Mason has advised the Board Members that (a) it may wish to combine certain CAM operations with those of certain Legg Mason subsidiaries; (b) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board oversight and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio man-
Legg Mason Partners Florida Municipals Fund 33
Board Approval of Management Agreement (unaudited)
(continued)
agement teams will remain in place; and (c) in the future, it may recommend that Legg Mason subsidiaries be appointed as the adviser or subadviser to some or all of the CAM funds, subject to applicable regulatory requirements;
(iii) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;
(iv) that, following the Transaction, CAM will be part of an organization focused on the asset management business;
(v) that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services;
(vi) that Legg Mason has advised the Board that it has no present intention to alter the expense waivers and reimbursements currently in effect and, while it reserves the right to do so in the future, it would consult with the Board before making any changes;
(vii) that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any of the requirements of Section 15(f) of the 1940 Act not to be met;
(viii) the assurances from Citigroup and Legg Mason that, for a three year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;
(ix) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason sponsored funds;
(x) that Citigroup and Legg Mason would derive benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;
(xi) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction;
(xii) the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same;
(xiii) the terms and conditions of the New Management Agreement, including the differences from the current management agreement, and the benefits of a single, uniform form of agreement covering these services;
(xiv) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;
(xv) that the Fund would avail itself of permissions granted under certain licensing arrangements between Citigroup and Legg Mason that would permit the Fund (including any share classes thereof) to maintain its current name, as well as all logos, trademarks and service marks, related to Citigroup or any of its affiliates for some agreed upon time period after the closing of the Transaction ; and
(xvi) that, as discussed in detail above, within the past year the Board had performed a full annual review of the current management agreement as required by the 1940 Act. In
34 Legg Mason Partners Florida Municipals Fund
Board Approval of Management Agreement (unaudited)
(continued)
that regard, the Board, in its deliberations concerning the New Management Agreement, considered the same factors regarding the nature, quality and extent of services provided, costs of services provided, profitability, fall out benefits, fees and economies of scale and investment performance as it did when it renewed the current management agreement, and reached substantially the same conclusions.
Legg Mason Partners Florida Municipals Fund 35
Additional Information (unaudited)
Information about Trustees and Officers
The business and affairs of the Legg Mason Partners Florida Municipals Fund (formerly known as Florida Portfolio) (“Fund”) are managed under the direction of the Legg Mason Partners Municipal Funds (formerly known as Smith Barney Muni Funds) (“Trust”) Board of Trustees. Information pertaining to the Trustees and Officers of the Trust is set forth below. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling Shareholder Services at 1-800-451-2010.
| | | | | | | | | Number of | | |
| | | | | Term of | | | | Portfolios | | |
| | | | | Office* and | | Principal | | In Fund | | Other Board |
| | | Position(s) | | Length | | Occupation(s) | | Complex | | Memberships |
| Name, Address | | Held with | | of Time | | During Past | | Overseen | | Held by |
| and Birth Year | | Fund | | Served | | Five Years | | by Trustee | | Trustee |
|
| NON-INTERESTED TRUSTEES: | | | | | | | | |
| Lee Abraham | | Trustee | | Since | | Retired; Former Director | | 27 | | None |
| 13732 LeHavre Drive | | | | 1999 | | of Signet Group PLC | | | | |
| Frenchman’s Creek | | | | | | | | | | |
| Palm Beach Gardens, FL | | | | | | | | | | |
| 33410 | | | | | | | | | | |
| Birth Year: 1927 | | | | | | | | | | |
| | | | | | | | | | | |
| Jane F. Dasher | | Trustee | | Since | | Controller of PBK | | 27 | | None |
| Korsant Partners | | | | 1999 | | Holdings Inc., a family | | | | |
| 283 Greenwich Avenue | | | | | | investment company | | | | |
| 3rd Floor | | | | | | | | | | |
| Greenwich, CT 06830 | | | | | | | | | | |
| Birth Year: 1949 | | | | | | | | | | |
| | | | | | | | | | | |
| Donald R. Foley | | Trustee | | Since | | Retired | | 18 | | None |
| 3668 Freshwater Drive | | | | 1985 | | | | | | |
| Jupiter, FL 33477 | | | | | | | | | | |
| Birth Year: 1922 | | | | | | | | | | |
| | | | | | | | | | | |
| Richard E. Hanson, Jr. | | Trustee | | Since | | Retired; Former Head of | | 27 | | None |
| 2751 Vermont Route 140 | | | | 1999 | | the New Atlanta Jewish | | | | |
| Poultney, VT 05764 | | | | | | Community High School | | | | |
| Birth Year: 1941 | | | | | | | | | | |
| | | | | | | | | | | |
| Paul Hardin | | Trustee | | Since | | Professor of Law and | | 34 | | None |
| 12083 Morehead | | | | 1994 | | Chancellor Emeritus | | | | |
| Chapel Hill, NC | | | | | | at the University of | | | | |
| 27514-8426 | | | | | | North Carolina | | | | |
| Birth Year: 1931 | | | | | | | | | | |
| | | | | | | | | | | |
| Roderick C. Rasmussen | | Trustee | | Since | | Investment Counselor | | 27 | | None |
| 9 Cadence Court | | | | 1985 | | | | | | |
| Morristown, NJ 07960 | | | | | | | | | | |
| Birth Year: 1926 | | | | | | | | | | |
| | | | | | | | | | | |
| John P. Toolan | | Trustee | | Since | | Retired | | 27 | | None |
| 7202 Southeast Golf | | | | 1985 | | | | | | |
| Ridge Way | | | | | | | | | | |
| Hobe Sound, FL 33455 | | | | | | | | | | |
| Birth Year: 1930 | | | | | | | | | | |
36 Legg Mason Partners Florida Municipals Fund
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | |
| | | | | Term of | | | | Portfolios | | |
| | | | | Office* and | | Principal | | In Fund | | Other Board |
| | | Position(s) | | Length | | Occupation(s) | | Complex | | Memberships |
| Name, Address | | Held with | | of Time | | During Past | | Overseen | | Held by |
| and Birth Year | | Fund | | Served | | Five Years | | by Trustee | | Trustee |
|
| INTERESTED TRUSTEE: | | | | | | | | | | |
| R. Jay Gerken, CFA** | | Chairman, | | Since | | Managing Director of | | 169 | | Trustee, Consulting |
| Legg Mason & Co., LLC | | President | | 2002 | | Legg Mason; President | | | | Group Capital |
| (“Legg Mason”) | | and Chief | | | | and Chief Executive Officer | | | | Markets Funds |
| 399 Park Avenue, 4th Floor | | Executive | | | | of Smith Barney Fund | | | | |
| New York, NY 10022 | | Officer | | | | Management LLC (“SBFM”) | | | | |
| Birth Year: 1951 | | | | | | and Citi Fund Management Inc. | | | | |
| | | | | | | (“CFM”); President and Chief | | | | |
| | | | | | | Executive Officer of certain | | | | |
| | | | | | | mutual funds associated | | | | |
| | | | | | | with Legg Mason; Formerly, | | | | |
| | | | | | | Chairman of SBFM and CFM | | | | |
| | | | | | | (2002 to 2006); Formerly, | | | | |
| | | | | | | Chairman, President and Chief | | | | |
| | | | | | | Executive Officer of Travelers | | | | |
| | | | | | | Investment Adviser, Inc. (from | | | | |
| | | | | | | 2002 to 2005) | | | | |
| |
| OFFICERS: | | | | | | | | | | |
| Andrew B. Shoup | | Senior Vice | | Since | | Director of Legg Mason; | | N/A | | N/A |
| Legg Mason | | President | | 2003 | | Senior Vice President and | | | | |
| 125 Broad Street | | and Chief | | | | Chief Administrative Officer | | | | |
| 11th Floor | | Administrative | | | | of certain mutual funds | | | | |
| New York, NY 10004 | | Officer | | | | associated with Legg Mason; | | | | |
| Birth Year: 1956 | | | | | | Formerly, Head of International | | |
| | | | | | | Funds Administration of Legg | | | | |
| | | | | | | Mason or its predecessors | | | | |
| | | | | | | (from 2001 to 2003) | | | | |
| |
| Robert J. Brault | | Chief Financial | | Since | | Director of Legg Mason; | | N/A | | N/A |
| Legg Mason | | Officer and | | 2004 | | Chief Financial Officer and | | | | |
| 125 Broad Street | | Treasurer | | | | Treasurer of certain mutual | | | | |
| 11th Floor | | | | | | funds associated with | | | | |
| New York, NY 10004 | | | | | | Legg Mason; Director of | | | | |
| Birth Year: 1965 | | | | | | Internal Control for | | | | |
| | | | | | | CAM U.S. Mutual Fund | | | | |
| | | | | | | Administration (from | | | | |
| | | | | | | 2002 to 2004); | | | | |
| | | | | | | Director of Project | | | | |
| | | | | | | Management & | | | | |
| | | | | | | Information Systems | | | | |
| | | | | | | for CAM U.S. Mutual | | | | |
| | | | | | | Fund Administration | | | | |
| | | | | | | (from 2000 to 2002) | | | | |
Legg Mason Partners Florida Municipals Fund 37
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | |
| | | | | Term of | | | | Portfolios | | |
| | | | | Office* and | | Principal | | In Fund | | Other Board |
| | | Position(s) | | Length | | Occupation(s) | | Complex | | Memberships |
| Name, Address | | Held with | | of Time | | During Past | | Overseen | | Held by |
| and Birth Year | | Fund | | Served | | Five Years | | by Trustee | | Trustee |
|
| Joseph P. Deane | | Vice | | Since | | Managing Director of | | N/A | | N/A |
| Legg Mason | | President | | 1999 | | Legg Mason; Investment | | | | |
| 399 Park Avenue | | and | | | | Officer of SBFM | | | | |
| 4th Floor | | Investment | | | | | | | | |
| New York, NY 10022 | | Officer | | | | | | | | |
| Birth Year: 1949 | | | | | | | | | | |
| |
| David T. Fare | | Vice | | Since | | Managing Director of | | N/A | | N/A |
| Legg Mason | | President | | 2004 | | Legg Mason; Investment | | | | |
| 399 Park Avenue | | and | | | | Officer of SBFM | | | | |
| 4th Floor | | Investment | | | | | | | | |
| New York, NY 10022 | | Officer | | | | | | | | |
| Birth Year: 1962 | | | | | | | | | | |
| |
| Ted P. Becker | | Chief | | Since | | Managing Director of | | N/A | | N/A |
| Legg Mason | | Compliance | | 2006 | | Compliance at Legg Mason | | | | |
| 399 Park Avenue | | Officer | | | | & Co., LLC (2005-Present); | | | | |
| 4th Floor | | | | | | Chief Compliance Officer | | | | |
| New York, NY 10022 | | | | | | with certain mutual funds | | | | |
| Birth Year: 1951 | | | | | | associated with Legg Mason | | | | |
| | | | | | | (since 2006); Managing | | | | |
| | | | | | | Director of Compliance at | | | | |
| | | | | | | CAM (2002-2005). Prior to | | | | |
| | | | | | | 2002, Managing Director- | | | | |
| | | | | | | Internal Audit & Risk Review | | | | |
| | | | | | | at Citigroup Inc. | | | | |
| |
| John Chiota | | Chief | | Since | | Vice President of Legg Mason | | N/A | | N/A |
| Legg Mason | | Anti-Money | | 2006 | | (since 2004); Chief Anti-Money | | | | |
| 300 First Stamford Place | | Laundering | | | | Laundering Compliance | | | | |
| 4th Floor | | Compliance | | | | Officer with certain mutual | | | | |
| Stamford, CT 06902 | | Officer | | | | funds associated with Legg | | | | |
| Birth Year: 1968 | | | | | | Mason (since 2006); prior | | | | |
| | | | | | | to August 2004, Chief AML | | | | |
| | | | | | | Compliance Officer with | | | | |
| | | | | | | TD Waterhouse | | | | |
| |
| Robert I. Frenkel | | Secretary | | Since | | Managing Director and | | N/A | | N/A |
| Legg Mason | | and Chief | | 2003 | | General Counsel of Global | | | | |
| 300 First Stamford Place | | Legal | | | | Mutual Funds for Legg Mason | | | | |
| 4th Floor | | Officer | | | | and its predecessors; | | | | |
| Stamford, CT 06902 | | | | | | Secretary and Chief Legal | | | | |
| Birth Year: 1954 | | | | | | Officer of certain mutual | | | | |
| | | | | | | funds associated with | | | | |
| | | | | | | Legg Mason (since 2003); | | | | |
| | | | | | | Formerly, Secretary of CFM | | | | |
| | | | | | | (from 2001 to 2004) | | | | |
| * | Each Trustee and Officer serves until his or her successor has been duly elected and qualified. |
| |
| ** | Mr. Gerken is an “interested person” of the Trust as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of Legg Mason and certain of its affiliates. |
| |
38 Legg Mason Partners Florida Municipals Fund
Additional Shareholder Information (unaudited)
Results of a Special Meeting of Shareholders
On November 29, 2005, a Special Meeting of Shareholders was held for the following purposes: 1) to approve a new management agreement and 2) to elect Trustees of Legg Mason Partners Municipal Funds. The following tables provide the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter voted on at the Special Meeting of Shareholders.
1. Approval of New Management Agreement
| | | | | | | | | Broker Non- |
| Item Voted On | | Votes For | | Votes Against | | Abstentions | | Votes |
|
| New Management | | | | | | | | |
| Agreement | | 8,713,555.069 | | 188,796.484 | | 602,656.337 | | 707,158.000 |
|
| | | | | | | | | |
| 2. Election of Trustees† |
| | | | | | | | | |
| Nominees: | | | | Votes For | | Authority Withheld | | Abstentions |
|
| Lee Abraham | | | | 2,329,588,005.613 | | 149,321,576.243 | | 0.000 |
| Jane F. Dasher | | | | 2,332,650,753.697 | | 146,258,828.159 | | 0.000 |
| Donald R. Foley | | | | 2,329,893,384.968 | | 149,016,196.888 | | 0.000 |
| Richard E. Hanson, Jr. | | | | 2,331,776,035.764 | | 147,133,546.092 | | 0.000 |
| Paul Hardin | | | | 2,329,386,986.327 | | 149,522,595.529 | | 0.000 |
| Roderick C. Rasmussen | | | | 2,330,770,995.850 | | 148,138,586.006 | | 0.000 |
| John P. Toolan | | | | 2,328,703,793.287 | | 150,205,788.569 | | 0.000 |
| R. Jay Gerken | | | | 2,327,542,856.282 | | 151,366,725.574 | | 0.000 |
|
† Trustees are elected by the shareholders of all of the series of the Trust of which the Fund is a series.Legg Mason Partners Florida Municipals Fund 39
Important Tax Information (unaudited)
All of the net investment income distributions paid monthly by the Fund during the taxable year ended March 31, 2006 qualify as tax-exempt interest dividends for federal income tax purposes.
Please retain this information for your records.
40 Legg Mason Partners Florida Municipals Fund
| | Legg Mason
Partners Municipal Funds
Legg Mason Partners Florida
Municipals Fund
|
| | | | |
| | TRUSTEES | | INVESTMENT MANAGER |
| | Lee Abraham | | Smith Barney Fund |
| | Jane F. Dasher | | Management LLC |
| | Donald R. Foley | | |
| | R. Jay Gerken, CFA | | DISTRIBUTORS |
| | Chairman | | Citigroup Global Markets Inc. |
| | Richard E. Hanson, Jr. | | Legg Mason Investor Services, LLC |
| | Paul Hardin | | |
| | Roderick C. Rasmussen | | CUSTODIAN |
| | John P. Toolan | | State Street Bank and |
| �� | | | Trust Company |
| | OFFICERS | | |
| | R. Jay Gerken, CFA | | TRANSFER AGENT |
| | President and | | PFPC Inc. |
| | Chief Executive Officer | | 4400 Computer Drive |
| | | | Westborough, Massachusetts |
| | Andrew B. Shoup | | 01581 |
| | Senior Vice President and | | |
| | Chief Administrative Officer | | INDEPENDENT REGISTERED |
| | | | PUBLIC ACCOUNTING FIRM |
| | Robert J. Brault | | KPMG LLP |
| | Chief Financial Officer | | 345 Park Avenue |
| | and Treasurer | | New York, New York 10154 |
| | | | |
| | Joseph P. Deane | | |
| | Vice President and | | |
| | Investment Officer | | |
| | | | |
| | David T. Fare | | |
| | Vice President and | | |
| | Investment Officer | | |
| |
| | Ted P. Becker | | |
| | Chief Compliance Officer | | |
| |
| | John Chiota | | |
| | Chief Anti-Money Laundering | | |
| | Compliance Officer | | |
| |
| | Robert I. Frenkel | | |
| | Secretary and | | |
| | Chief Legal Officer | | |
| | | | |
This report is submitted for
the general information of
the shareholders of Legg
Mason Partners Municipal
Funds — Legg Mason Partners
Florida Municipals Fund, but it
may also be used as sales
literature when preceded or
accompanied by the current
prospectus.
This report must be preceded
or accompanied by a free
prospectus. Investors should
consider the Fund’s
investment objectives, risks,
charges and expenses
carefully before investing.
The prospectus contains this
and other important
information about the Fund.
Please read the prospectus
carefully before investing.
www.leggmason.com/InvestorServices
©2006 Legg Mason
Investor Services, LLC
Member NASD, SIPC
FD2298 05/06 SR 06-38 
| | Legg Mason
Partners Municipal Funds
Legg Mason Partners Florida
Municipals Fund The Fund is a separate investment fund of the Legg Mason Partners
Municipal Funds, a Massachusetts business trust. LEGG MASON PARTNERS MUNICIPAL 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 for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’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 1-800-451-2010. Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year, and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating 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. Proxy voting reports for the period ending June 30, 2005 will continue to be listed under the Fund’s former Smith Barney Muni Funds—Florida Portfolio name. | |
ITEM 2.
| CODE OF ETHICS. | |
| | | |
| | 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 Directors of the registrant has determined that Jane F. Dasher, the Chairperson 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 Ms. Dasher as the Audit Committee’s financial expert. Ms. Dasher is an “independent” Director 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 March 31, 2005 and March 31, 2006 (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 $170,500 in 2005 and $182,500 in 2006. 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 Municipal Funds (“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 $38,600 in 2005 and $0 in 2006. 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 Municipal Funds. 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 Municipal Funds 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 Municipal Funds, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2005 and 2006; Tax Fees were 100% and 0% for 2005 and 2006; and Other Fees were 100% and 0% for 2005 and 2006. (f) N/A (g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Municipal Funds and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Legg Mason Partners Municipal Funds during the reporting period were $0 in 2006 for fees related to the transfer agent matter as fully described in the notes the financial statements titled “additional information” and $75,000 for 2005. (h) Yes. The Legg Mason Partners Municipal Funds’ 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 Municipal Funds 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. |
| ITEM 12. | EXHIBITS. | |
| | | |
| | (a) | Code of Ethics attached hereto. |
| | | |
| | Exhibit 99.CODE ETH |
| | | |
| | (b) | Attached hereto. |
| |
| | Exhibit 99.CERT | Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|
| | Exhibit 99.906CERT | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
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 Municipal Funds
|
| By: | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | Chief Executive Officer of |
| | Legg Mason Partners Municipal Funds |
| |
| Date: | June 8, 2006 |
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 Municipal Funds |
| |
| Date: | June 8, 2006 |
| |
| |
| By: | /s/ Robert J. Brault |
| | Robert J. Brault |
| | Chief Financial Officer of |
| | Legg Mason Partners Municipal Funds |
| |
| Date: | June 8, 2006 |
