UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4395
SMITH BARNEY MUNI FUNDS
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: MARCH 31
Date of reporting period: MARCH 31, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
The ANNUAL Report to Stockholders is filed herewith.
SMITH BARNEY
MUNI FUNDS
GEORGIA PORTFOLIO
PENNSYLVANIA PORTFOLIO
CLASSIC SERIES | ANNUAL REPORT | MARCH 31, 2004
Logo: Smith Barney Mutual Funds
Your Serious Money. Professionally Managed.(R)
YOUR SERIOUS MONEY. PROFESSIONALLY MANAGED.(R)
IS A REGISTERED MARK OF CITIGROUP GLOBAL MARKETS INC.
NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
WHAT'S INSIDE
LETTER FROM THE CHAIRMAN ............................................... 1
GEORGIA PORTFOLIO
MANAGER OVERVIEW ..................................................... 3
FUND PERFORMANCE ..................................................... 9
HISTORICAL PERFORMANCE ............................................... 10
PENNSYLVANIA PORTFOLIO
MANAGER OVERVIEW ..................................................... 11
FUND PERFORMANCE ..................................................... 17
HISTORICAL PERFORMANCE ............................................... 18
SCHEDULES OF INVESTMENTS ............................................... 19
STATEMENTS OF ASSETS AND LIABILITIES ................................... 32
STATEMENTS OF OPERATIONS ............................................... 33
STATEMENTS OF CHANGES IN NET ASSETS .................................... 34
NOTES TO FINANCIAL STATEMENTS .......................................... 36
FINANCIAL HIGHLIGHTS ................................................... 46
INDEPENDENT AUDITORS' REPORT ........................................... 52
ADDITIONAL INFORMATION ................................................. 53
TAX INFORMATION ........................................................ 56
LETTER FROM THE CHAIRMAN
PHOTO OF: R. JAY GERKEN, CFA
R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
DEAR SHAREHOLDER,
The U.S. economy's quarterly pace of growth picked up considerably during the
year ending March 31, 2004.1 Stronger-than-expected economic growth exacerbated
bond investors' concerns that inflation might pick up and lead to rising
interest rates sooner than previously anticipated, which caused bond prices to
decline over the summer. However, as the period advanced, many of these concerns
were tempered somewhat by tepid employment results and comments from the Fed,
which maintained its interest rate targets at four-decade lows. Municipal bonds
collectively returned 5.86% over the past year.2
The State of Pennsylvania's economy has been challenged by a lackluster job
market, although Georgia's coffers have benefited from strong sales tax growth,
and national job growth for March significantly exceeded estimates.3 Given that
the fund's manager had anticipated that the economies on a national and state
level could begin to pick up, the manager maintained a defensive posture in
managing the portfolio's exposure to inflation and interest rate risk. Although
this strategy detracted from the fund's performance during times when bond
prices rose, it diminished the negative impact on the portfolio when bond prices
declined.
Please read on for a more detailed look at prevailing economic and market
conditions during the fund's fiscal year and to learn how those conditions and
changes made to the portfolio during this time may have affected fund
performance.
1 Source: Based upon gross domestic product data from the Bureau of Economic
Analysis (January 30, 2004). Gross domestic product is a market value of goods
and services produced by labor and property in a given country.
2 Source: Lehman Brothers. Based upon the performance of the Lehman Brothers
Municipal Bond Index, which is a broad measure of the municipal bond market
with maturities of at least one year, over the 12-month period ending March
31, 2004.
3 Based upon data released on April 1, 2004 from the U.S. Department of Labor.
1 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
INFORMATION ABOUT YOUR FUND
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser and some of its
affiliates have received requests for information from various government
regulators regarding market timing, late trading, fees and other mutual fund
issues in connection with various investigations. The regulators appear to be
examining, among other things, the fund's response to market timing and
shareholder exchange activity, including compliance with prospectus disclosure
related to these subjects. The fund has been informed that the Adviser and its
affiliates are responding to those information requests, but are not in a
position to predict the outcome of these requests and investigations.
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to meet your financial goals.
Sincerely,
/s/ R. Jay Gerken, CFA
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
April 12, 2004
2 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
MANAGER OVERVIEW
PHOTO OF: PETER M. COFFEY
PETER M. COFFEY
Vice President and
Investment Officer
GEORGIA PORTFOLIO
SPECIAL SHAREHOLDER NOTICE
Effective April 29, 2004, Smith Barney Class L shares were renamed Class C
shares. The current expenses, management fees, and sales charges have not
changed.
PERFORMANCE REVIEW
For the 12 months ended March 31, 2004, Class A shares of the Smith Barney Muni
Funds -- Georgia Portfolio, excluding sales charges, returned 3.92%. In
comparison, the Lehman Brothers Municipal Bond Indexi returned 5.86% and its
Georgia municipal bond component sub-index returned 5.62% for the same period.ii
The fund's Lipper Georgia municipal debt funds category average returned 4.91%
for the 12-month period.1
Certain investors may be subject to the federal Alternative Minimum Tax, and
state and local taxes may apply. Capital gains, if any, are fully taxable.
Please consult your personal tax adviser.
Given our concerns early in the period that U.S. economic growth could pick up
and that interest rates could potentially rise sooner than anticipated, we
structured both portfolios defensively to help mitigate the effects of a
possible rise in interest rates.iii Our strategy entailed focusing on bonds with
higher coupons, maintaining a lower average life than in recent years, and
maintaining a short position in U.S. Treasury futures. Although this
conservative strategy at times limited the fund's full participation in market
rallies, it helped reduce the impact on the fund during times when bond prices
declined, particularly early in the summer and after the reporting period ended.
The portfolio's performance benefited from its exposure to the pollution control
sector, while its low-income housing securities holdings in the multi-family
housing sector detracted from its performance.
1 Lipper, Inc. is a major independent mutual-fund tracking organization. Returns
are based on the 12-month period ended March 31, 2004, calculated among the 29
funds in the fund's Lipper category including the reinvestment of dividends
and capital gains, if any, and excluding sales charges.
3 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
- --------------------------------------------------------------------------------
PERFORMANCE SNAPSHOT
AS OF MARCH 31, 2004
(EXCLUDING SALES CHARGES)
6 MONTHS 12 MONTHS
Class A shares 1.23% 3.92%
Lehman Brothers Municipal Bond Index 3.12% 5.86%
Lipper Georgia Municipal Debt Funds
Category Average 2.33% 4.91%
THE PERFORMANCE SHOWN REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN
THE PERFORMANCE SHOWN ABOVE. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL
FLUCTUATE AND INVESTORS' SHARES, WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE VISIT OUR WEBSITE AT WWW.SMITHBARNEYMUTUALFUNDS.COM.
CLASS A SHARES RETURNS ASSUME THE REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL
GAINS DISTRIBUTIONS AT NET ASSET VALUE AND THE DEDUCTION OF ALL FUND EXPENSES.
RETURNS HAVE NOT BEEN ADJUSTED TO INCLUDE SALES CHARGES THAT MAY APPLY WHEN
SHARES ARE PURCHASED OR THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON
FUND DISTRIBUTIONS. EXCLUDING SALES CHARGES, CLASS B SHARES RETURNED 1.03% AND
CLASS L SHARES RETURNED 0.92% OVER THE SIX MONTHS ENDED MARCH 31, 2004.
EXCLUDING SALES CHARGES, CLASS B SHARES RETURNED 3.36% AND CLASS L SHARES
RETURNED 3.31% OVER THE 12 MONTHS ENDED MARCH 31, 2004.
Effective February 2, 2004, initial sales charges on Smith Barney Class L shares
were suspended.
All index performance reflects no deduction for fees, expenses or taxes. Please
note than an investor cannot invest directly in an index. The Lehman Brothers
Municipal Bond Index is a broad measure of the municipal bond market with
maturities of at least one year.
Lipper, Inc. is a major independent mutual-fund tracking organization. Returns
are based on the period ended March 31, 2004, calculated among the 29 funds for
the six-month period and among the 29 funds for the 12-month period, in the
fund's Lipper category including the reinvestment of dividends and capital
gains, if any, and excluding sales charges.
Certain investors may be subject to the federal Alternative Minimum Tax, and
state and local taxes may apply. Capital gains, if any, are fully taxable.
Please consult your personal tax adviser.
- --------------------------------------------------------------------------------
BOND MARKET REVIEW
In order to help boost a relatively sluggish economy, last June the Fed reduced
its target for the federal funds rate,iv which dropped to four-decade lows in
June. However, the prices of U.S. Treasury bonds plunged through the early
summer as stronger-than-expected economic growth data for the second calendar
quarter generated concerns that inflation could become more pronounced and
interest rates rise, as bond prices move inversely to the direction of interest
rate movements. During this tumultuous time, however, municipal bonds
collectively held up better than U.S. Treasury bonds. As the summer came to a
close, the broader bond markets stabilized in response to the Fed's concerns
about the lack of growth in employment and lingering disinflation.
4 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
Stronger-than-anticipated economic growth consensus estimates for the third
calendar quarter rekindled concerns about interest rates and inflation. Despite
the 8.2% annual growth in gross domestic product ("GDP")v over the third quarter
of 2003, investors' concerns about the prospects of inflation and rising rates
were contained because some of this growth was attributable to one-time factors,
such as the tax cuts and the end of major combat operations in Iraq.
Furthermore, many investors felt the Fed appeared to be in a holding pattern
from adjusting its rate targets.
INVESTORS QUESTION THE FED'S PATIENCE
Bond investors spent the first quarter dissecting language from the Fed, which
stated in late January that it "believes that it can be patient in removing its
policy accommodation."vi However, the fact that the Fed did not include the
phrase "considerable period" in this statement as it had before led many
investors to question when the Fed's patience would run out.
Estimates of fourth calendar-quarter 2003 GDP annual growth released during the
period registered at 4.1%.v This rate was below third-quarter 2003 results but
exceeded levels early last year. Furthermore, in recent testimony to Congress,
Fed Chairman, Alan Greenspan revealed that the Fed raised its expectations for
economic growth. Despite the momentum behind the U.S. economy, over the first
calendar quarter of this year, the Lehman Brothers Municipal Bond Index returned
1.73% amid lackluster employment data.
Although the economy has shown significant signs of improvement since early last
year, the job market has remained the weak link to a sustainable recovery.
Employment datavii released after the first quarter of 2004 ended showed that
the unemployment rose to 5.7% in March, versus 5.6% in February. However, the
U.S. economy added 308,000 non-farm payroll jobs in March,vii marking the
largest number since April 2000.viii This result raised expectations that the
strength of the economy may be improving, raising concerns that inflation could
pick up and interest rates rise sooner than previously anticipated.
STATE ECONOMIES IX
On a state level, revenues in general have continued to rise amid the
improvement in the national economy. Tax revenues for the fourth quarter of last
year on average increased 7.2% at the state level over results for the final
quarter of 2002.viii
5 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
According to Moody's, as is the case with many other states, Georgia experienced
revenue underperformance over the last two years due to the slowdown of the
national economy. The fiscal 2003 period marked the second consecutive year the
state generated an overall decline in tax revenue receipts. Standard & Poor's
further indicated that, although the state ended fiscal 2003 with the weakest
financial reserves and cushion in more than a decade, through the first two
quarters of fiscal 2004, revenue collections were higher than the same period in
fiscal 2003 due to strong sales tax growth. The state has aggressively cut
spending since 2001 to restore budget balance and will need to continue to do
this if revenues are below forecasts for the current year. The governor has
asked for a 5% reduction in spending for fiscal 2005. Moody's Investors Service
maintained a stable outlook on the state's long-term general obligations.
Standard & Poor's,x rating on Georgia's general obligation bonds was AAA with a
stable outlook.
GEORGIA PORTFOLIO COMPOSITION
The fund continued to concentrate its assets in higher-yielding revenue bonds,
which are backed by the revenue streams of specific public works. The
portfolio's heaviest revenue bond exposure in terms of sectors was education,
water and sewer, multi-family housing, pollution control revenue and
hospitals.xi Over the period, the hospitals sector in particular was among the
leading performers returning 7.80%, while housing was the worst performer
returning 4.36%.xii The fund had more exposure to these sectors not because we
targeted specific industries but, rather, because we felt many of these issues
had more appealing yields and offered better relative values on a risk/reward
basis when we invested in them.
WHY HIGHER-COUPON CALLABLE BONDS?
In rising-rate environments, the prices of shorter-term fixed-income obligations
have typically held up better than those on longer-term bonds. Rather than
commit a substantial portion of both portfolios' assets to low-yielding,
short-term instruments, the funds maintained an emphasis on longer-term,
premium-priced higher-coupon callable bonds for their favorable income streams
and the reduced market sensitivity provided by their above-market level coupons
and shorter effective maturities. The fund also continued to hold a short
position in U.S. Treasury bond futures to help hedge the portfolio against
interest rate risk. The average maturity of the Georgia Portfolio on March 31st
6 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
was approximately 17.16 years, while its average life/call-adjusted effective
maturity was 8.26 years.xiii
While no one can say for sure where interest rates will head, given the recent
economic picture, as of the end of March 2004, we continued to maintain a
defensive posture with regard to interest rate risk in both portfolios.
Thank you for your investment in the Smith Barney Muni Funds -- Georgia
Portfolio. We appreciate that you have entrusted us to manage your money and
value our relationship with you.
Sincerely,
/s/ Peter M. Coffey
Peter M. Coffey
Vice President and Investment Officer
April 12, 2004
7 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of March 31, 2004 and are subject to
change. Please refer to pages 19 through 23 for a list and percentage breakdown
of the fund's holdings.
The mention of sector breakdowns is for informational purposes only and should
not be construed as a recommendation to purchase or sell any securities. The
information provided regarding such sectors is not a sufficient basis upon which
to make an investment decision. Investors seeking financial advice regarding the
appropriateness of investing in any securities or investment strategies
discussed should consult their financial professional. Portfolio holdings are
subject to change at any time and may not be representative of the portfolio
manager's current or future investments. The fund's top five sector holdings as
of March 31, 2004 were: Education (16.9%); Water & Sewer (16.0%); Hospital
(13.6%); Housing: Multi-Family (12.6%); Pollution Control (11.8%). The fund's
portfolio composition is subject to change at any time.
RISKS: Keep in mind that the fund's investments are subject to interest rate and
credit risks. As a non-diversified fund, it can invest a larger percentage of
its assets in fewer issues than a diversified fund. This may magnify the fund's
losses from event s affecting a particular issuer. The fund may use derivatives,
such as options and futures, which can be illiquid, may disproportionately
increase losses, and have a potentially large impact on fund performance.
All index performance reflects no deduction for fees, expenses or taxes. Please
note that an investor cannot invest directly in an index.
i The Lehman Brothers Municipal Bond Index is a broad measure of the
municipal bond market with maturities of at least one year.
ii Source: Lehman Brothers. This sub-index is a broad measure of the market
for Georgia municipal bonds with maturities of at least one year.
iii Derivatives, such as options and futures, can be illiquid and harder to
value, especially in declining markets. A small investment in certain
derivatives may have a potentially large impact on the fund's performance.
Derivatives can disproportionately increase losses as stated in the
prospectus.
iv The federal funds rate is the interest rate that banks with excess reserves
at a Federal Reserve district bank charge other banks that need overnight
loans.
v Source for GDP (gross domestic product) growth: Bureau of Labor Statistics.
Gross domestic product is a market value of goods and services produced by
labor and property in a given country.
vi Source: Federal Reserve (January 28, 2004).
vii Source: U.S. Department of Labor (April 1, 2004).
viii Source: Lehman Brothers.
ix Source: Moody's Investors Service Global Credit Research. The Georgia
commentary update is as of February 24, 2004.
x Source: Standard & Poor's (Public Finance Report Card, April 2004).
xi Percentages are based on net asset values as a percentage of fund assets on
March 31, 2004.
xii Based upon the performance of sub-indices of the Lehman Brothers Municipal
Bond Index reflective of the performance of municipal bonds in each
respective sector category over 12-month reporting period.
xiii There are no assurances that callable bonds will be called/redeemed on
their call dates prior to maturity.
8 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
GEORGIA PORTFOLIO
AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
WITHOUT SALES CHARGES(1)
--------------------------------
CLASS A CLASS B CLASS L
================================================================================
Twelve Months Ended 3/31/04 3.92% 3.36% 3.31%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/04 4.54 3.98 3.91
- --------------------------------------------------------------------------------
Inception* through 3/31/04 6.38 5.63 5.71
================================================================================
WITH SALES CHARGES(2)
--------------------------------
CLASS A CLASS B CLASS L
================================================================================
Twelve Months Ended 3/31/04 (0.23)% (1.10)% 2.32%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/04 3.69 3.81 3.91
- --------------------------------------------------------------------------------
Inception* through 3/31/04 5.94 5.63 5.71
================================================================================
CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
WITHOUT SALES CHARGES(1)
================================================================================
Class A (Inception* through 3/31/04) 85.44%
- --------------------------------------------------------------------------------
Class B (Inception* through 3/31/04) 71.02
- --------------------------------------------------------------------------------
Class L (Inception* through 3/31/04) 73.94
================================================================================
+ All figures represent past performance and are not a guarantee of future
results. The performance data represents past performance. Investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The returns shown do not reflect the deduction of taxes that
a shareholder would pay on fund distributions or the redemption of fund
shares.
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflects the deduction
of the maximum initial sales charge of 4.00%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from purchase payment. This CDSC declines by 0.50% the first year
after purchase payment and thereafter by 1.00% per year until no CDSC is
incurred. Class L shares also reflect the deduction of a 1.00% CDSC, which
applies if shares are redeemed within one year from purchase payment. As of
February 2, 2004, the 1.00% initial sales charge on Class L shares was no
longer imposed.
* Inception dates for Class A, B and L shares are April 4, 1994, June 15,
1994 and April 14, 1994, respectively.
9 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
HISTORICAL PERFORMANCE (UNAUDITED)
VALUE OF $10,000 INVESTED IN CLASS A SHARES OF THE
GEORGIA PORTFOLIO VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX
AND LIPPER GEORGIA MUNICIPAL DEBT FUNDS AVERAGE+
- --------------------------------------------------------------------------------
Line Chart:
April 1994 -- March 2004
Georgia
Lipper Georgia Municipal Lehman Brothers Municipal, Portfolio -
Date Debt Funds Average Bond Index Class A Shares
4/4/94 10000 10000 9600
3/95 10580 10744 10204
3/96 11372 11645 11191
3/97 11934 12278 11857
3/98 13226 13594 13500
3/99 13897 14437 14257
3/00 13600 14424 13835
3/01 15003 16000 15358
3/02 15413 16612 15783
3/03 16731 18253 17131
3/31/04 $17553 $19323 $17802
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on April 4, 1994, assuming a deduction of the maximum 4.00% sales charge at
the time of investment and reinvestment of dividends and capital gains, if
any, at net asset value through March 31, 2004. The Lehman Brothers Municipal
Bond Index is a broad measure of the municipal bond market with maturities of
at least one year. The Index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund. Please note that an investor
cannot invest directly in an index. The Lipper Georgia Municipal Debt Funds
Average is composed of the Fund's peer group of mutual funds (29 funds as of
March 31, 2004). The performance of the Fund's other classes may be greater or
less than the Class A shares' performance indicated on this chart, depending
on whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. The performance data represents past performance. Investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. The
returns shown do not reflect the deduction of taxes that a shareholder would
pay on fund distributions or the redemption of shares.
10 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
MANAGER OVERVIEW
Photo of: PETER M. COFFEY
PETER M. COFFEY
Vice President and
Investment Officer
PENNSYLVANIA PORTFOLIO
SPECIAL SHAREHOLDER NOTICE
Effective April 29, 2004, Smith Barney Class L shares were renamed Class C
shares. The current expenses, management fees, and sales charges have not
changed.
PERFORMANCE REVIEW
For the 12 months ended March 31, 2004, Class A shares of the Smith Barney Muni
Funds -- Pennsylvania Portfolio, excluding sales charges, returned 3.90%. In
comparison, the Lehman Brothers Municipal Bond Indexi returned 5.86% and its
Pennsylvania municipal bond component sub index returned 5.70% for the same
period.ii The fund's Lipper Pennsylvania municipal debt funds category average
returned 5.24% during the same time frame.1
Certain investors may be subject to the federal Alternative Minimum Tax, and
state and local taxes may apply. Capital gains, if any, are fully taxable.
Please consult your personal tax adviser.
Given our concerns early in the period that U.S. economic growth could pick up
and that interest rates could potentially rise sooner than anticipated, we
structured both portfolios defensively to help mitigate the effects of a
possible rise in interest rates. Our strategy entailed focusing on bonds with
higher coupons, maintaining a lower average life than in recent years, and
maintaining a short position in U.S. Treasury futures.iii Although this
conservative strategy at times limited the fund's full participation in market
rallies, it helped reduce the impact on the fund during times when bond prices
declined, particularly early in the summer and after the reporting period ended.
The fund's performance benefited from its exposure to the industrial development
sector, while its holdings in the hospitals and miscellaneous sectors detracted
from its performance.
1 Lipper, Inc. is a major independent mutual-fund tracking organization. Returns
are based on the 12-month period ended March 31, 2004, calculated among the 62
funds in the fund's Lipper category including the reinvestment of dividends
and capital gains, if any, and excluding sales charges.
11 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
PERFORMANCE SNAPSHOT
AS OF MARCH 31, 2004
(EXCLUDING SALES CHARGES)
6 MONTHS 12 MONTHS
Class A shares 1.54% 3.90%
Lehman Brothers Municipal Bond Index 3.12% 5.86%
Lipper Pennsylvania Municipal Debt Funds
Category Average 2.83% 5.24%
THE PERFORMANCE SHOWN REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN
THE PERFORMANCE SHOWN ABOVE. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL
FLUCTUATE AND INVESTORS' SHARES, WHEN REDEEMED MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE VISIT OUR WEBSITE AT WWW.SMITHBARNEYMUTUALFUNDS.COM.
CLASS A SHARES RETURNS ASSUME THE REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL
GAINS DISTRIBUTIONS AT NET ASSET VALUE AND THE DEDUCTION OF ALL FUND EXPENSES.
RETURNS HAVE NOT BEEN ADJUSTED TO INCLUDE SALES CHARGES THAT MAY APPLY WHEN
SHARES ARE PURCHASED OR THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON
FUND DISTRIBUTIONS. EXCLUDING SALES CHARGES, CLASS B SHARES RETURNED 1.28% AND
CLASS L SHARES RETURNED 1.26% OVER THE SIX MONTHS ENDED MARCH 31, 2004.
EXCLUDING SALES CHARGES, CLASS B SHARES RETURNED 3.37% AND CLASS L SHARES
RETURNED 3.32% OVER THE 12 MONTHS ENDED MARCH 31, 2004.
Effective February 2, 2004, initial sales charges on Smith Barney Class L shares
were suspended.
All index performance reflects no deduction for fees, expenses or taxes. Please
note than an investor cannot invest directly in an index. The Lehman Brothers
Municipal Bond Index is a broad measure of the municipal bond market with
maturities of at least one year.
Lipper, Inc. is a major independent mutual-fund tracking organization. Returns
are based on the period ended March 31, 2004, calculated among the 62 funds for
the six-month period and among the 62 funds for the 12-month period, in the
fund's Lipper category including the reinvestment of dividends and capital
gains, if any, and excluding sales charges.
Certain investors may be subject to the federal Alternative Minimum Tax, and
state and local taxes may apply. Capital gains, if any, are fully taxable.
Please consult your personal tax adviser.
BOND MARKET REVIEW
In order to help boost a relatively sluggish economy, last June the Fed reduced
its target for the federal funds rate,iv which dropped to four-decade lows in
June. However, the prices of U.S. Treasury bonds plunged through the early
summer as stronger-than-expected economic growth data for the second calendar
quarter generated concerns that inflation could become more pronounced and
interest rates rise, as bond prices move inversely to the direction of interest
rate movements. During this tumultuous time, however, municipal bonds
collectively held up better than U.S. Treasury bonds.
As the summer came to a close, the broader bond markets stabilized in response
to the Fed's concerns about the lack of growth in employment and lingering
disinflation.
12 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
Stronger-than-anticipated economic growth consensus estimates for the third
calendar quarter rekindled concerns about interest rates and inflation. Despite
the 8.2% annual growth in gross domestic product ("GDP")v over the third quarter
of 2003, investors' concerns about the prospects of inflation and rising rates
were contained because some of this growth was attributable to one-time factors,
such as the tax cuts and the end of major combat operations in Iraq.
Furthermore, many investors felt the Fed appeared to be in a holding pattern
from adjusting its rate targets.
INVESTORS QUESTION THE FED'S PATIENCE
Bond investors spent the first quarter dissecting language from the Fed, which
stated in late January that it "believes that it can be patient in removing its
policy accommodation."vi However, the fact that the Fed did not include the
phrase "considerable period" in this statement as it had before led many
investors to question when the Fed's patience would run out.
Estimates of fourth calendar-quarter 2003 GDP annual growth released during the
period registered at 4.1%.v This rate was below third-quarter 2003 results but
exceeded levels early last year. Furthermore, in recent testimony to Congress,
Fed Chairman, Alan Greenspan revealed that the Fed raised its expectations for
economic growth. Despite the momentum behind the U.S. economy, over the first
calendar quarter of this year, the Lehman Brothers Municipal Bond Index returned
1.73% amid lackluster employment data.
Although the economy has shown significant signs of improvement since early last
year, the job market has remained the weak link to a sustainable recovery.
Employment datavii released after the first quarter of 2004 ended showed that
the unemployment rose to 5.7% in March, versus 5.6% in February. However, the
U.S. economy added 308,000 non-farm payroll jobs in March,vii marking the
largest number since April 2000.viii This result raised expectations that the
strength of the economy may be improving, raising concerns that inflation could
pick up and interest rates rise sooner than previously anticipated.
STATE ECONOMIESIX
On a state level, revenues in general have continued to rise amid the
improvement in the national economy. Tax revenues for the fourth quarter of last
year on average increased 7.2% at the state level over results for the final
quarter of 2002.viii
13 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
According to Moody's Investors Service, the Commonwealth of Pennsylvania's
economy has experienced a moderate slowdown over the past two years, caused, in
part, by mounting job losses in the manufacturing sector. Moody's Investor
Service assigned a Aa2 rating and stable outlook on the Commonwealth's general
obligation bonds, which reflects the Commonwealth's "continued focus on sound
management of its financial position, even as it protects core services and
implements new funding programs in the education area." Moody's notes, however,
that Pennsylvania's budget reserves are very narrow, while other measures of
liquidity have remained very strong. The rating on Pennsylvania's general
obligation bonds by Standard & Poor's was AA with a stable outlook. The ratings
service recently noted the governor's fiscal 2005 budget totaled $22.7 billion
and incorporates 4.1% revenue growth.x
PENNSYLVANIA PORTFOLIO COMPOSITION
The Pennsylvania portfolio held only a modest percentage of general obligation
bonds backed by the state of Pennsylvania during the past year given the recent
yields on these issues and accounting for their relative credit risk. However,
the fund did hold a significant quantity of revenue bonds, which are backed by
the generally stable revenue streams of specific public works. The portfolio's
heaviest revenue bond exposure in terms of sectors was education, hospital,
miscellaneous, general obligation, and transportation.xi Over the period, the
hospitals sector in particular was among the leading performers returning 7.80%,
while housing was the worst performer returning 4.36%.xii The fund had more
exposure to these sectors not because we targeted specific industries. Rather,
we felt many of these issues had more appealing yields and offered better
relative values on a risk/reward basis when we invested in them.
WHY HIGHER-COUPON CALLABLE BONDS?
In rising-rate environments, the prices of shorter-term fixed-income obligations
have typically held up better than those on longer-term bonds. Rather than
commit a substantial portion of both portfolios' assets to low-yielding,
short-term instruments, the funds maintained an emphasis on longer-term,
premium-priced higher-coupon callable bonds for their favorable income streams
and the reduced market sensitivity provided by their above-market level coupons
and shorter effective maturities. The fund also continued to hold a short
position in U.S. Treasury bond futures to help hedge the portfolio against
interest rate risk.
14 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
As of the period's close, the average maturity of the Pennsylvania Portfolio
was approximately 18.06 years, while its average life/call-adjusted effective
maturity, which is adjusted to account for the shorter call dates on our premium
bonds (rather than the longer final maturity dates on these callable issues),
was 7.94 years.xiii
While no one can say for sure where interest rates will head, given the recent
economic picture, as of the end of the period we continued to maintain a
defensive posture with regard to interest rate risk in both portfolios.
Thank you for your investment in the Smith Barney Muni Funds -- Pennsylvania
Portfolio. We appreciate that you have entrusted us to manage your money and
value our relationship with you.
Sincerely,
/s/ Peter M. Coffey
Peter M. Coffey
Vice President and Investment Officer
April 12, 2004
15 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of March 31, 2004 and are subject to
change. Please refer to pages 24 through 28 for a list and percentage breakdown
of the fund's holdings.
The mention of sector breakdowns is for informational purposes only and should
not be construed as a recommendation to purchase or sell any securities. The
information provided regarding such sectors is not a sufficient basis upon which
to make an investment decision. Investors seeking financial advice regarding the
appropriateness of investing in any securities or investment strategies
discussed should consult their financial professional. Portfolio holdings are
subject to change at any time and may not be representative of the portfolio
manager's current or future investments. The fund's top five sector holdings as
of March 31, 2004 were: Education (22.6%); Hospital (13.2%); Miscellaneous
(11.4%); General Obligation (10.1%); Transportation (10.1%). The fund's
portfolio composition is subject to change at any time.
RISKS: Keep in mind that the fund's investments are subject to interest rate and
credit risks. As a non-diversified fund, it can invest a larger percentage of
its assets in fewer issues than a diversified fund. This may magnify the fund's
losses from event s affecting a particular issuer. The fund may use derivatives,
such as options and futures, which can be illiquid, may disproportionately
increase losses, and have a potentially large impact on fund performance.
All index performance reflects no deduction for fees, expenses or taxes. Please
note that an investor cannot invest directly in an index.
i The Lehman Brothers Municipal Bond Index is a broad measure of the
municipal bond market with maturities of at least one year.
ii Source: Lehman Brothers. This sub-index is a broad measure of the market
for Pennsylvania municipal bonds with maturities of at least one year.
iii Derivatives, such as options and futures, can be illiquid and harder to
value, especially in declining markets. A small investment in certain
derivatives may have a potentially large impact on the fund's performance.
Derivatives can disproportionately increase losses as stated in the
prospectus.
iv The federal funds rate is the interest rate that banks with excess reserves
at a Federal Reserve district bank charge other banks that need overnight
loans.
v Source for GDP (gross domestic product) growth: Bureau of Labor Statistics.
Gross domestic product is a market value of goods and services produced by
labor and property in a given country.
vi Source: Federal Reserve (January 28, 2004).
vii Source: U.S. Department of Labor (April 1, 2004).
viii Source: Lehman Brothers.
ix Source: Moody's Investors Service Global Credit Research. The Pennsylvania
commentary update is as of February 24, 2004.
x Source: Standard & Poor's (Public Finance Report Card, April 2004).
xi Percentages are based on net asset values as a percentage of fund assets on
March 31, 2004.
xii Based upon the performance of sub-indices of the Lehman Brothers Municipal
Bond Index reflective of the performance of municipal bonds in each
respective sector category over 12-month reporting period.
xiii There are no assurances that callable bonds will be called/redeemed on
their call dates prior to maturity.
16 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
PENNSYLVANIA PORTFOLIO
AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
WITHOUT SALES CHARGES(1)
--------------------------------
CLASS A CLASS B CLASS L
================================================================================
Twelve Months Ended 3/31/04 3.90% 3.37% 3.32%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/04 4.78 4.23 4.17
- --------------------------------------------------------------------------------
Inception* through 3/31/04 6.58 5.78 5.97
================================================================================
WITH SALES CHARGES(2)
--------------------------------
CLASS A CLASS B CLASS L
================================================================================
Twelve Months Ended 3/31/04 (0.26)% (1.09)% 2.33%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/04 3.93 4.06 4.17
- --------------------------------------------------------------------------------
Inception* through 3/31/04 6.14 5.78 5.97
================================================================================
CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
WITHOUT SALES CHARGES(1)
================================================================================
Class A (Inception* through 3/31/04) 88.97%
- --------------------------------------------------------------------------------
Class B (Inception* through 3/31/04) 73.28
- --------------------------------------------------------------------------------
Class L (Inception* through 3/31/04) 78.40
================================================================================
+ All figures represent past performance and are not a guarantee of future
results. The performance data represents past performance. Investment
return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The returns shown do not reflect the deduction of taxes that
a shareholder would pay on fund distributions or the redemption of fund
shares.
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflects the deduction
of the maximum initial sales charge of 4.00%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from purchase payment. This CDSC declines by 0.50% the first year
after purchase payment and thereafter by 1.00% per year until no CDSC is
incurred. Class L shares also reflect the deduction of a 1.00% CDSC, which
applies if shares are redeemed within one year from purchase payment. As of
February 2, 2004, the 1.00% initial sales charge on Class L shares was no
longer imposed.
* Inception dates for Class A, B and L shares are April 4, 1994, June 20,
1994 and April 5, 1994, respectively.
17 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
HISTORICAL PERFORMANCE (UNAUDITED)
VALUE OF $10,000 INVESTED IN CLASS A SHARES OF THE
PENNSYLVANIA PORTFOLIO VS. LEHMAN BROTHERS MUNICIPAL BOND INDEX
AND LIPPER PENNSYLVANIA MUNICIPAL DEBT FUNDS AVERAGE+
- --------------------------------------------------------------------------------
Line Chart:
April 1994 -- March 2004
LIPPER PENNSYLVANIA LEHMAN BROTHERS PENNSYLVANIA
MUNICIPAL MUNICIPAL PORTFOLIO -
Date DEBT FUNDS AVERAGE BOND INDEX CLASS A SHARES
4/4/94 10000 10000 9600
3/95 10586 10744 10447
3/96 11368 11645 11290
3/97 11938 12278 11981
3/98 13169 13594 13601
3/99 13778 14437 14364
3/00 13409 14424 13745
3/01 14683 16000 15373
3/02 15184 16612 16095
3/03 16484 18253 17461
3/31/04 $17348 $19323 $18141
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on April 4, 1994, assuming a deduction of the maximum 4.00% sales charge at
the time of investment and reinvestment of dividends and capital gains, if
any, at net asset value through March 31, 2004. The Lehman Brothers Municipal
Bond Index is a broad measure of the municipal bond market with maturities of
at least one year. The Index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund. Please note that an investor
cannot invest directly in an index. The Lipper Pennsylvania Municipal Debt
Funds Average is composed of the Fund's peer group of mutual funds (62 funds
as of March 31, 2004). The performance of the Fund's other classes may be
greater or less than the Class A shares' performance indicated on this chart,
depending on whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. The performance data represents past performance. Investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. The
returns shown do not reflect the deduction of taxes that a shareholder would
pay on fund distributions or the redemption of fund shares.
18 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS MARCH 31, 2004
GEORGIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
EDUCATION -- 17.1%
Private Colleges & Universities Authority Revenue:
Emory University Project, Series A:
$ 1,000,000 AA 5.500% due 11/1/24 (b) $ 1,106,440
2,000,000 AA 5.500% due 11/1/31 (b) 2,199,200
2,000,000 BBB Mercer Housing Corp. Project, Series A, 6.000% due 6/1/31 (b) 2,071,900
Mercer University Project:
500,000 Baa1* 5.750% due 10/1/21 (b) 539,025
1,000,000 Baa1* 5.750% due 10/1/31 (b) 1,051,480
Savannah EDA:
1,000,000 NR College of Art & Design Inc. Project, (Call 10/1/09 @ 102),
6.800% due 10/1/19 (c) 1,122,780
1,000,000 A Student Housing Revenue, (University Funding Foundation
Project), Series A, ACA-Insured, 6.750% due 11/15/20 1,116,050
1,000,000 A University of the Virgin Islands, Refunding & Improvement,
Series A, ACA-Insured, 6.000% due 12/1/24 1,100,730
- ---------------------------------------------------------------------------------------------------------
10,307,605
- ---------------------------------------------------------------------------------------------------------
FINANCE -- 0.9%
500,000 NR Virgin Islands Public Finance Authority Revenue, Series E,
6.000% due 10/1/22 516,555
- ---------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION -- 8.5%
1,500,000 NR Georgia State, RITES, Series B, 10.008% due 4/1/09 (b)(d) 1,996,620
1,000,000 AAA Georgia State, Series B, 5.750% due 8/1/17 1,209,330
500,000 AA Jefferson, 5.900% due 2/1/25 (b) 571,600
1,000,000 AAA Puerto Rico Commonwealth, RITES, XLCA-Insured,
9.566% due 7/1/17 (b)(d) 1,335,120
- ---------------------------------------------------------------------------------------------------------
5,112,670
- ---------------------------------------------------------------------------------------------------------
HOSPITALS -- 13.8%
1,000,000 A- Chatham County Hospital Authority Revenue, Memorial Health
Medical Center, Series A, 6.125% due 1/1/24 1,067,460
515,000 AAA Clarke County Hospital Authority Revenue, MBIA-Insured,
9.875% due 1/1/06 (e) 566,598
Cobb County Kennestone Hospital Authority Revenue:
275,000 Aaa* 9.500% due 2/1/08 (e) 322,231
700,000 AAA Series 86A, MBIA-Insured, 7.750% due 2/1/07 (e) 767,571
1,100,000 AAA Columbus Medical Center Hospital Authority Revenue,
Certificate of Anticipation, 7.750% due 7/1/10 (e)(f) 1,290,190
1,000,000 Aaa* Newton County Hospital Authority Revenue, (Newton Health
System Project), AMBAC-Insured, 6.100% due 2/1/24 (b) 1,151,410
See Notes to Financial Statements.
19 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
GEORGIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
HOSPITALS -- 13.8% (CONTINUED)
Puerto Rico Industrial, Tourist, Educational, Medical &
Environmental Control Facilities, Series A:
$ 1,000,000 BBB- Ryder Memorial Hospital Project, 6.700% due 5/1/24 (b) $ 1,014,750
300,000 B+ San Lucas & Cristo Project, 5.750% due 6/1/19 (b) 260,982
495,000 AAA Tri-City Hospital Authority Revenue, Certificate of Anticipation,
South Fulton Hospital, FGIC-Insured, 10.250% due 7/1/06 (e)(f) 546,643
1,175,000 Aaa* Ware County Hospital Authority Revenue, Certificate of
Anticipation, MBIA-Insured, 5.500% due 3/1/21 1,301,277
- ---------------------------------------------------------------------------------------------------------
8,289,112
- ---------------------------------------------------------------------------------------------------------
HOUSING: MULTI-FAMILY -- 12.8%
500,000 AAA Acworth Housing Authority Revenue, (Wingate Falls Apartments
Project), FSA-Insured, 6.125% due 3/1/17 (g) 527,015
1,045,000 NR Atlanta Urban Residential Finance Authority, MFH Revenue,
Park Place Apartments, Series A, 6.750% due 3/1/31 837,055
Clayton County Hospital Authority MFH Revenue, Series A:
1,260,000 Aaa* Southlake Cove Project, GNMA-Collateralized,
5.600% due 12/20/24 1,362,841
1,480,000 Aaa* Vineyard Pointe Apartments Project, GNMA-Collateralized,
5.500% due 10/20/32 1,553,645
1,000,000 Aa2* De Kalb County Housing Authority, MFH Revenue, Friendly Hills
Apartments, Series A, FHA-Insured, 7.050% due 1/1/39 (g) 1,099,770
1,000,000 AAA Fulton County Housing Authority, MFH Revenue, (Concorde
Place Apartment Project), Series A, (Call 7/1/08 @ 100),
6.300% due 7/1/16 (c)(g) 1,164,590
1,000,000 AAA Lawrenceville Housing Authority, MFH Revenue, (Knollwood
Park Apartments Project), FNMA-Collateralized,
6.250% mandatory tender 12/1/29 (b)(g) 1,151,340
- ---------------------------------------------------------------------------------------------------------
7,696,256
- ---------------------------------------------------------------------------------------------------------
HOUSING: SINGLE-FAMILY -- 0.8%
20,000 AAA Fulton County Housing Authority, Single-Family Mortgage Revenue,
Series A, GNMA-Collateralized, 6.600% due 3/1/28 (g) 20,586
300,000 AAA Puerto Rico Housing, Bank & Finance Agency, Single-Family
Mortgage Revenue, Affordable Housing Mortgage, Portfolio I,
FHLMC/FNMA/GNMA-Collateralized, 6.250% due 4/1/29 (b)(g) 309,846
160,000 AAA Virgin Islands HFA Authority, Single-Family Mortgage Revenue,
Series A, GNMA-Collateralized, 6.450% due 3/1/16 (g) 165,066
- ---------------------------------------------------------------------------------------------------------
495,498
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
20 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
GEORGIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
LIFE CARE -- 1.2%
$ 660,000 BBB+ Fulton County Residential Care Facilities,
(Canterbury Court Project), 6.300% due 10/1/24 $ 692,459
- ---------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- 6.6%
1,000,000 Aaa* Albany-Dougherty Inner City Authority, COP, (Public Purpose
Project), AMBAC-Insured, 5.625% due 1/1/16 1,135,810
1,000,000 AAA Association County Commissioners of Georgia Leasing Program,
COP, (Rockdale County Public Purpose Project),
AMBAC-Insured, 5.625% due 7/1/20 1,131,580
1,000,000 AAA Fulton County Facilities Corp., COP, (Fulton County Public
Purpose Project), AMBAC-Insured, 5.500% due 11/1/18 1,138,980
500,000 BBB+ Puerto Rico Housing Bank & Finance Agency,
7.500% due 12/1/06 (b) 541,525
- ---------------------------------------------------------------------------------------------------------
3,947,895
- ---------------------------------------------------------------------------------------------------------
POLLUTION CONTROL -- 11.9%
800,000 A-1+ Burke County Development Authority, PCR, (Oglethorpe Power
Co. Project), Series C, MBIA-Insured, 1.100% due 1/1/18 (h) 800,000
1,000,000 BBB De Kalb County Development Authority, PCR, (General Motors
Corp. Project), 6.000% due 3/15/21 1,053,060
1,000,000 Ba3* Effingham County IDA, PCR, (Georgia-Pacific Project),
6.500% due 6/1/31 1,016,950
500,000 A Monroe County Development Authority, PCR, (Oglethorpe Power
Co. Scherer Project), Series A, 6.800% due 1/1/12 (b) 613,260
2,000,000 BBB Richmond County Development Authority, Environmental
Improvement Revenue, (International Paper Co. Project),
Series A, 6.250% due 2/1/25 (b)(g) 2,133,240
1,000,000 NR Rockdale County Development Authority, Solid Waste Disposal
Revenue, (Visy Paper Inc. Project), 7.500% due 1/1/26 (g) 1,014,570
500,000 Baa2* Savannah EDA, PCR, (Union Camp Corp. Project),
6.150% due 3/1/17 556,190
- ---------------------------------------------------------------------------------------------------------
7,187,270
- ---------------------------------------------------------------------------------------------------------
PUBLIC FACILITIES -- 3.7%
250,000 AAA Butts County COP, MBIA-Insured, (Pre-Refunded-- Escrowed with
state and local government securities to 12/1/04 Call @ 102),
6.750% due 12/1/14 264,505
1,000,000 AAA Cobb-Marietta Counties Coliseum & Exhibit Hall Authority
Revenue, MBIA-Insured, 5.625% due 10/1/26 1,130,010
2,000,000 AAA East Point Building Authority Revenue, FSA-Insured,
zero coupon due 2/1/20 855,960
- ---------------------------------------------------------------------------------------------------------
2,250,475
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
21 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
GEORGIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
TRANSPORTATION -- 4.4%
$ 1,000,000 AAA Atlanta Airport Revenue, Series A, FGIC-Insured,
(Call 1/1/10 @ 101), 5.500% due 1/1/26 (c) $1,158,200
1,000,000 AAA Georgia State Road & Tollway Authority Revenue,
5.000% due 10/1/23 (b) 1,059,660
250,000 AAA Metropolitan Atlanta Rapid Transit Authority, Sale Tax Revenue,
Series P, AMBAC-Insured, 6.250% due 7/1/20 311,557
200,000 CCC Puerto Rico Port Authority Revenue, Special Facilities
American Airlines, Series A, 6.250% due 6/1/26 (b)(g) 146,814
- ---------------------------------------------------------------------------------------------------------
2,676,231
- ---------------------------------------------------------------------------------------------------------
UTILITIES -- 2.0%
500,000 AAA Georgia Municipal Electric Authority, Power Revenue,
Series EE, AMBAC-Insured, 7.250% due 1/1/24 (b) 680,975
500,000 A Georgia Municipal Gas Authority Revenue, (Southern Storage
Gas Project), 6.300% due 7/1/09 515,675
- ---------------------------------------------------------------------------------------------------------
1,196,650
- ---------------------------------------------------------------------------------------------------------
WATER & SEWER -- 16.3%
Atlanta Water & Wastewater Revenue, Series A:
1,000,000 AAA FGIC-Insured, 5.500% due 11/1/19 1,163,710
1,000,000 AAA MBIA-Insured, 5.500% due 11/1/27 1,145,930
500,000 A+ Cartersville Development Authority Revenue, Sewer
Facilities, Anheuser Busch, 6.125% due 5/1/27 (g) 523,745
140,000 AAA Cherokee County Water & Sewer Authority Revenue,
MBIA-Insured, 9.625% due 8/1/04 (e) 143,871
500,000 AA Clayton County Water & Sewer Revenue, 5.625% due 5/1/20 561,925
2,135,000 AAA Cobb County & Marietta Water Authority Revenue,
5.250% due 11/1/21 2,360,691
Columbia County Water & Sewer Revenue:
1,000,000 AAA FGIC-Insured, 5.500% due 6/1/25 1,103,440
185,000 AAA MBIA-Insured, 9.750% due 12/1/08 (e) 220,324
Fulton County Water & Sewer Revenue, FGIC-Insured:
10,000 AAA 6.375% due 1/1/14 12,075
290,000 AAA 6.375% due 1/1/14 (e)(f) 348,841
500,000 AAA Milledgeville Water & Sewer Revenue, FSA-Insured,
6.000% due 12/1/21 611,385
405,000 AAA Puerto Rico Commonwealth Aqueduct & Sewer Authority
Revenue, 10.250% due 7/1/09 (b)(e) 502,974
See Notes to Financial Statements.
22 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
GEORGIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
WATER & SEWER -- 16.3% (CONTINUED)
$ 1,000,000 AAA Rockdale County Water & Sewer Authority Revenue, Series A,
MBIA-Insured, 5.500% due 7/1/25 $ 1,101,440
- ---------------------------------------------------------------------------------------------------------
9,800,351
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(Cost-- $55,001,380**) $60,169,027
=========================================================================================================
(a) All ratings are by Standard & Poor's Ratings Service, except for those
which are identified by an asterisk (*), are rated by Moody's Investors
Service.
(b) All or a portion of this security is segregated for open futures contracts
(See Note 6).
(c) Pre-Refunded bonds are escrowed with U.S. government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings.
(d) Variable interest rate - subject to periodic change.
(e) Bonds are escrowed to maturity with U.S. government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings.
(f) All or a portion of this security is held as collateral for open futures
contracts (See Note 6).
(g) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(h) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
** Aggregate cost for Federal income tax purposes is $54,992,535.
See pages 29 through 31 for definitions of ratings and certain
abbreviations.
See Notes to Financial Statements.
23 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
PENNSYLVANIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
EDUCATION -- 23.0%
$ 1,000,000 AA- Allegheny County Higher Education Building Authority, University
Revenue, Carnegie Mellon University, 5.250% due 3/1/32 $1,052,780
990,000 AAA Conneaut School District, AMBAC-Insured,
9.500% due 5/1/12 (b)(c) 1,248,370
1,000,000 BBB- Delaware County Authority, College Revenue, Neumann College,
6.000% due 10/1/31 1,052,890
1,000,000 AAA Greater Johnstown School District, Series B, MBIA-Insured,
5.500% due 8/1/18 (d) 1,109,760
1,655,000 AAA Greensburg Salem School District, FGIC-Insured,
5.375% due 9/15/18 (d) 1,834,187
Lycoming County Authority, College Revenue, Pennsylvania
College of Technology, AMBAC-Insured:
1,000,000 Aaa* 5.125% due 5/1/22 (d) 1,058,530
1,000,000 Aaa* 5.375% due 7/1/30 (d) 1,053,870
1,000,000 Aaa* 5.250% due 5/1/32 (d) 1,056,500
295,000 NR Pennsylvania Housing Finance Agency, 7.750% due 12/1/07 (b) 331,312
Pennsylvania State Higher Education Facilities Authority Revenue:
1,000,000 AAA Clarion University Foundation Inc., Series A, XLCA-Insured,
5.250% due 7/1/18 (d) 1,098,940
1,000,000 A Drexel University, 6.000% due 5/1/29 (d) 1,086,660
1,000,000 AA Pennsylvania State University, 5.250% due 3/1/17 1,113,440
450,000 NR Philadelphia Hospitals & Higher Education Facilities Authority
Revenue, Chestnut Hill College, 6.000% due 10/1/29 450,265
1,000,000 AAA Philadelphia School District, Series A, FSA-Insured,
5.500% due 2/1/31 1,082,380
1,000,000 AAA Plum Boro School District, FGIC-Insured, 5.250% due 9/15/30 1,050,840
1,000,000 AAA State Public School Building Authority, School Revenue,
(Daniel Bonne School District Project), MBIA-Insured,
5.000% due 4/1/22 1,054,780
2,210,000 AA+ Swarthmore Boro Authority, College Revenue, 5.250% due 9/15/20 2,402,955
- ---------------------------------------------------------------------------------------------------------
19,138,459
- ---------------------------------------------------------------------------------------------------------
FINANCE -- 1.4%
1,000,000 BBB Virgin Islands Public Finance Authority Revenue, Gross Receipts
Taxes, Series A, 6.500% due 10/1/24 1,135,260
- ---------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION -- 10.3%
1,000,000 AAA Allegheny County GO, Series C-52, FGIC-Insured,
5.250% due 11/1/21 1,068,050
1,000,000 AAA Armstrong County GO, MBIA-Insured, 5.400% due 6/1/31 1,060,760
1,210,000 Aaa* Bensalem Township School District, GO, FGIC-Insured,
5.000% due 8/15/19 1,291,663
See Notes to Financial Statements.
24 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
PENNSYLVANIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
GENERAL OBLIGATION -- 10.3% (CONTINUED)
$ 1,000,000 AAA Dauphin County GO, Second Series, AMBAC-Insured,
5.125% due 11/15/22 $1,052,540
1,000,000 Aaa* Luzerne County, Series A, MBIA-Insured, 5.250% due 11/15/18 (d) 1,097,820
1,000,000 AA Pennsylvania State GO, First Series, 5.250% due 2/1/19 1,095,850
1,660,000 AAA Pittsburgh County GO, Series A, AMBAC-Insured,
5.250% due 9/1/22 1,757,824
140,000 AAA York GO, AMBAC-Insured, 8.875% due 6/1/06 (b) 151,603
- ---------------------------------------------------------------------------------------------------------
8,576,110
- ---------------------------------------------------------------------------------------------------------
HOSPITAL -- 13.4%
Allegheny County Hospital Development Authority Revenue:
500,000 AAA General Hospital Project, Series A, MBIA-Insured,
(Call 9/1/07 @ 100), 6.250% due 9/1/20 (c)(e) 573,885
325,000 NR Montefiore Hospital Association, Western Pennsylvania,
6.875% due 7/1/09 (b) 362,368
165,000 AAA Berks County Municipal Authority, Hospital Revenue, Community
General Hospital, AMBAC-Insured, 9.500% due 7/1/05 (b) 174,357
1,545,000 AAA Cambria County Hospital Development Authority, Hospital Revenue,
Conemaugh Valley Memorial Hospital, 7.625% due 9/1/11 (b) 1,837,453
1,255,000 AAA Grove City Area Hospital Authority Revenue, (Woodland Place
Project), FGIC-Insured, 5.500% due 3/1/25 (d) 1,352,363
1,000,000 BBB Hazleton Health Services Authority, Hospital Revenue,
St. Joseph's Medical Center, 6.200% due 7/1/26 903,060
1,000,000 A Horizon Hospital System Authority, Hospital Revenue,
Horizon Hospital Systems Inc., 6.350% due 5/15/26 (d) 1,067,990
1,000,000 A Lehigh County General Purpose Authority Revenue,
Lehigh Valley Health Network, Series A, 5.000% due 7/1/33 989,310
1,000,000 AA Mifflin County Hospital Authority Revenue,
Radian-Insured, 6.200% due 7/1/30 1,128,200
1,000,000 A Pennsylvania State Higher Education Facilities Authority Revenue,
UPMC Health Systems, Series A, 6.000% due 1/15/31 (d) 1,071,100
75,000 Aaa* Philadelphia Hospital Authority Revenue, (United Hospital Inc.
Project), (Call 7/1/05 @ 100), 10.875% due 7/1/08 (e) 82,000
525,000 AA Potter County Hospital Authority Revenue, Charles Cole
Memorial Hospital, Radian-Insured, 6.050% due 8/1/24 565,246
1,075,000 BBB- Puerto Rico Industrial, Tourist, Educational, Medical &
Environmental Control Facilities, (Ryder Memorial Hospital
Project), Series A, 6.700% due 5/1/24 1,090,856
- ---------------------------------------------------------------------------------------------------------
11,198,188
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
25 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
PENNSYLVANIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
HOUSING: SINGLE-FAMILY -- 4.0%
Allegheny County, Residential Finance Authority, Mortgage Revenue,
Single-Family Mortgage, GNMA-Collateralized:
$ 760,000 Aaa* Series FF-2, 6.000% due 11/1/31 (f) $ 790,871
815,000 Aaa Series II-2, 5.900% due 11/1/32 (f) 845,000
Series Z:
885,000 Aaa* 6.875% due 5/1/26 (f) 911,559
685,000 Aaa* Zero coupon due 5/1/27 (f) 124,458
610,000 AAA Puerto Rico Housing, Bank & Finance Agency, Single-Family
Mortgage Revenue, Affordable Housing Mortgage, Portfolio I,
FHLMC/FNMA/GNMA-Collateralized, 6.250% due 4/1/29 (f) 630,020
- ---------------------------------------------------------------------------------------------------------
3,301,908
- ---------------------------------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT -- 6.9%
1,000,000 BBB+ Allegheny County IDA Revenue, Environmental
Improvement, USX Corp., Series A, 6.700% due 12/1/20 1,026,180
1,000,000 BBB Bradford County IDA, Solid Waste Disposal Revenue,
(International Paper Co. Project), Series A, 6.600% due 3/1/19 (f) 1,044,250
1,000,000 BBB Erie County IDA, Environmental Improvement Revenue,
(International Paper Co. Project), Series A,
7.625% due 11/1/18 (d)(f) 1,050,350
1,000,000 NR Pennsylvania Economic Development Financing Authority,
Exempt Facilities Revenue, National Gypsum Co.,
6.250% due 11/1/27 (f) 1,019,800
500,000 AAA Philadelphia Authority for IDR, Series B, AMBAC-Insured,
5.250% due 7/1/31 528,125
1,000,000 AAA Philadelphia Authority for Industrial Development Lease Revenue,
Series B, FSA-Insured, 5.500% due 10/1/19 1,124,390
- ---------------------------------------------------------------------------------------------------------
5,793,095
- ---------------------------------------------------------------------------------------------------------
LIFE CARE -- 6.7%
1,260,000 AA Erie County Hospital Authority Health Facilities Revenue,
(St. Mary's Home Project), Radian-Insured,
6.000% due 8/15/23 (d) 1,397,101
1,100,000 A- Lancaster County Hospital Authority Revenue,
(Willow Valley Retirement Project), 5.875% due 6/1/31 (d) 1,141,393
1,650,000 NR Lancaster IDA Revenue, (Garden Spot Village Project),
Series A, 7.625% due 5/1/31 (d) 1,758,108
500,000 NR Montgomery County Higher Education & Health Authority
Revenue, Temple Continuing Care Center,
6.750% due 7/1/29 (g) 190,000
1,000,000 AA Northampton County IDA Revenue, (Moravian Hall Square Project),
Radian-Insured, 5.500% due 7/1/19 1,083,190
- ---------------------------------------------------------------------------------------------------------
5,569,792
- ---------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
26 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
PENNSYLVANIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
MISCELLANEOUS -- 11.6%
$ 500,000 A-+ Allegheny County Redevelopment Authority, Tax Increment Revenue,
(Waterfront Project), Series A, 6.300% due 12/15/18 $ 556,730
Dauphin County General Authority:
1,180,000 NR Hotel & Conference Center, Hyatt Regency, 6.200% due 1/1/29 838,331
1,500,000 NR Office & Package, Riverfront Office, 6.000% due 1/1/25 1,443,105
1,000,000 AAA Delaware Valley Regional Finance Authority, Local Government
Revenue, Series A, AMBAC-Insured, 5.500% due 8/1/28 (d) 1,151,730
1,300,000 NR Harrisburg Redevelopment Authority, First Mortgage-Office
Building, 6.750% due 5/15/25 (d) 1,330,927
1,560,000 NR New Morgan Municipal Authority Office Revenue,
(Commonwealth Office Project), Series A, 6.500% due 6/1/25 1,611,418
2,000,000 AAA Philadelphia Municipal Authority Revenue, Series B, FSA-Insured,
5.250% due 11/15/17 2,207,860
600,000 B+ Puerto Rico Industrial, Tourist, Educational, Medical &
Environmental Control Facilities, (San Lucas & Cristo Project),
Series A, 5.750% due 6/1/19 521,964
- ---------------------------------------------------------------------------------------------------------
9,662,065
- ---------------------------------------------------------------------------------------------------------
POLLUTION CONTROL -- 5.6%
1,000,000 BBB Delaware County IDA, Resource Recovery
Facility Revenue, Series A, 6.200% due 7/1/19 1,043,430
1,000,000 AAA Harrisburg Authority, Resource Recovery Facility Revenue,
Series A, FSA-Insured, 5.500% due 9/1/25 (d) 1,162,390
1,000,000 BB- New Morgan IDA, Solid Waste Disposal Revenue, (New Morgan
Landfill Co., Inc. Project), 6.500% due 4/1/19 (f) 962,990
500,000 BBB- Pennsylvania Economic Development Financing Authority,
Resource Recovery Revenue, (Colver Project), Series D,
7.150% due 12/1/18 (f) 519,365
1,000,000 A-1+ Schuylkill County IDA, Resource Recovery Revenue, (Northeastern
Power Co. Project), Series A, 1.080% due 12/1/22 (h) 1,000,000
- ---------------------------------------------------------------------------------------------------------
4,688,175
- ---------------------------------------------------------------------------------------------------------
SPECIAL OBLIGATION -- 1.2%
235,000 Aaa Hopewell Township, Special Obligation, 10.600% due 5/1/13 (b) 290,998
640,000 AAA Westmoreland County Municipal Authority, Special Obligation,
9.125% due 7/1/10 (b) 726,093
- ---------------------------------------------------------------------------------------------------------
1,017,091
- ---------------------------------------------------------------------------------------------------------
TRANSPORTATION -- 10.2%
1,000,000 A- Delaware River Joint Toll Bridge Commission, Bridge Revenue,
5.250% due 7/1/18 1,087,640
3,375,000 AAA Delaware River Port Authority Pennsylvania & New Jersey, RITES,
FSA-Insured, 9.676% due 1/1/10 (d)(i) 4,202,520
See Notes to Financial Statements.
27 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SCHEDULES OF INVESTMENTS (CONTINUED) MARCH 31, 2004
PENNSYLVANIA PORTFOLIO
FACE
AMOUNT RATING(a) SECURITY VALUE
=========================================================================================================
TRANSPORTATION -- 10.2% (CONTINUED)
Pennsylvania State Turnpike Commission, AMBAC-Insured:
$ 1,500,000 AAA 5.000% due 7/15/21 (d) $ 1,587,510
1,500,000 AAA 5.500% due 7/15/32 (d) 1,666,050
- ---------------------------------------------------------------------------------------------------------
8,543,720
- ---------------------------------------------------------------------------------------------------------
UTILITIES -- 5.7%
1,750,000 AAA Allegheny County Sanitation Authority, Sewer Revenue,
MBIA-Insured, 5.375% due 12/1/17 1,952,038
420,000 AAA Bristol Township Authority, Sewer Revenue, MBIA-Insured,
10.125% due 4/1/09 (b) 504,395
125,000 AAA Coatesville Water Guaranteed Revenue,
6.250% due 10/15/13 (b) 146,231
1,000,000 Aaa* Erie Sewer Authority, Sewer Revenue, MBIA-Insured,
(Call 6/1/10 @ 100), 6.000% due 6/1/21 (d)(e) 1,184,710
400,000 AAA Guam Power Authority Revenue, Series A, (Call 10/1/04 @ 102),
6.750% due 10/1/24 419,352
260,000 AAA West Chester Sewer Revenue, 9.750% due 5/1/07 (b) 293,790
Westmoreland County Municipal Authority, Water Revenue:
45,000 Aaa* 8.500% due 7/1/04 (e) 45,808
135,000 Aaa* 8.625% due 7/1/10 (e) 165,376
- ---------------------------------------------------------------------------------------------------------
4,711,700
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $79,331,124**) $83,335,563
=========================================================================================================
(a) All ratings are by Standard & Poor's Ratings Service, except for those
which are identified by an asterisk (*), are rated by Moody's Investors
Service and those identified by a dagger (+), are rated by Fitch Ratings.
(b) Bonds are escrowed to maturity with U.S. government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings.
(c) All or a portion of this security is held as collateral for open futures
contracts (See Note 6).
(d) A portion of this security is segregated for open futures contracts (See
Note 6).
(e) Pre-Refunded bonds are escrowed with U.S. government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings.
(f) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(g) Non-income producing security. Security is currently in default.
(h) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(i) Variable interest rate - subject to periodic change.
** Aggregate cost for Federal income tax purposes is $79,325,134.
See pages 29 through 31 for definitions of ratings and certain
abbreviations.
See Notes to Financial Statements.
28 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's")-- Ratings from "AA" to
"CCC" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than in higher rated categories.
BB, B -- Bonds rated "BB," "B" and "CCC" are regarded, on balance, as
and CCC predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
than "B," and "CCC" the highest degree of speculation. While such
bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Moody's Investors Service ("Moody's") -- Numerical modifiers 1, 2, and 3 may be
applied to each generic rating from "Aa" to "B", where 1 is the highest and 3
the lowest rating within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa -- Bonds rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes in this class.
B -- Bonds rates "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payment or of
maintenance of other terms of the contract over any long period of
time may be small.
29 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
BOND RATINGS (UNAUDITED) (CONTINUED)
Fitch Ratings ("Fitch") -- Rating may be modified by the addition of a plus (+)
sign or minus (-) sign to show relative standings within the major ratings
categories.
A -- Bonds rated "A" are considered to be investment-grade and of
high credit quality. The obligor's ability to pay interest and/or
dividends and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and
circumstances than debt or preferred securities with higher
ratings.
NR -- Indicates that the bond is not rated by Standard & Poor's, Moody's
or Fitch.
SHORT-TERM SECURITY RATINGS (UNAUDITED)
SP-1 -- Standard & Poor's highest rating indicating very strong or strong
capacity to pay principal and interest; those issues determined to
possess overwhelming safety characteristics are denoted with a plus
(+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable rate
demand obligation (VRDO) rating indicating that the degree of safely
regarding timely payment is either overwhelming or very strong;
those issues determined to possess overwhelming safety
characteristics are denoted with a (+) sign.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to
the advent of the VMIG 1 rating.
VMIG 1 -- Moody's highest rating for issues having demand feature -- VRDO.
30 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
ABBREVIATIONS* (UNAUDITED)
ABAG -- Association of Bay Area Governments
ACA -- American Capital Assurance
AIG -- American International Guaranty
AMBAC -- Ambac Assurance Corporation
AMT -- Alternative Minimum Tax
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CDA -- Community Development Authority
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility
Construction Loan Insurance
CONNIE -- College Construction Loan
LEE Insurance Association
COP -- Certificate of Participation
CSD -- Central School District
CTFS -- Certificates
DFA -- Development Finance Agency
EDA -- Economic Development Authority
EFA -- Educational Facilities Authority
ETM -- Escrowed to Maturity
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FLAIRS -- Floating Adjustable Interest Rate Securities
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Financial Security Assurance
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HEFA -- Health &Educational Facilities Authority
HFA -- Housing Finance Authority
IBC -- Insured Bond Certificates
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
IFA -- Infastructure Finance Agency
INFLOS -- Inverse Floaters
ISD -- Independent School District
ISO -- Independent System Operator
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MERLOT -- Municipal Bond Investors Assurance Corporation
MFH -- Multi-Family Housing
MSTC -- Municipal Securities Trust Certificates
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PART -- Partnership Structure
PCFA -- Pollution Control Finance Authority
PCR -- Pollution Control Revenue
PFA -- Public Finance Authority
PSFG -- Permanent School Fund Guaranty
Q-SBLF -- Qualified School Bond Loan Fund
Radian -- Radian Asset Assurance
RAN -- Revenue Anticipation Notes
RAW -- Revenue Anticipation Warrants
RDA -- Redevelopment Agency
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
SPA -- Standby Bond Purchase Agreement
SFH -- Single Family Housing
SWAP -- Swap Structure
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TCRS -- Transferrable Custodial Receipts
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
UFSD -- Unified Free School District
UHSD -- Unified High School District
USD -- Unified School District
VA -- Veterans Administration
VRDD -- Variable Rate Daily Demand
VRDO -- Variable Rate Demand Obligation
VRWE -- Variable Rate Wednesday Demand
XLCA -- XLCapital Assurance
- ------------
* Abbreviations may or may not appear in the schedule of investments.
31 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
STATEMENTS OF ASSETS AND LIABILITIES MARCH 31, 2004
GEORGIA PENNSYLVANIA
PORTFOLIO PORTFOLIO
================================================================================
ASSETS:
Investments, at value (Cost -- $55,001,380 and
$79,331,124, respectively) $ 60,169,027 $ 83,335,563
Cash 87,427 99,842
Interest receivable 1,073,366 1,334,891
Receivable for securities sold -- 60,000
Receivable for Fund shares sold -- 59,283
Prepaid expenses 4,167 2,011
- --------------------------------------------------------------------------------
TOTAL ASSETS 61,333,987 84,891,590
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to broker-- variation margin 116,875 171,875
Management fees payable 23,525 32,688
Payable for Fund shares reacquired 16,196 5,450
Distribution plan fees payable 6,978 13,093
Deferred compensation payable 4,816 4,560
Accrued expenses 37,509 42,661
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 205,899 270,327
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $61,128,088 $84,621,263
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 4,670 $ 6,495
Capital paid in excess of par value 59,912,018 84,540,053
Undistributed net investment income 31,063 9,577
Accumulated net realized loss from
investment transactions
and futures contracts (3,536,060) (3,276,801)
Net unrealized appreciation of investments
and futures contracts 4,716,397 3,341,939
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $61,128,088 $84,621,263
================================================================================
SHARES OUTSTANDING:
Class A 3,153,398 2,920,462
------------------------------------------------------------------------------
Class B 784,239 2,566,124
------------------------------------------------------------------------------
Class L 732,228 1,008,294
------------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $13.10 $13.05
------------------------------------------------------------------------------
Class B * $13.07 $13.01
------------------------------------------------------------------------------
Class L * $13.05 $13.00
------------------------------------------------------------------------------
MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 4.17% of
net asset value) $13.65 $13.59
================================================================================
* Redemption price is NAV of Class B and L shares reduced by a 4.50% and
1.00% CDSC, respectively, if shares are redeemed within one year from
purchase payment (See Note 4).
See Notes to Financial Statements.
32 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2004
GEORGIA PENNSYLVANIA
PORTFOLIO PORTFOLIO
================================================================================
INVESTMENT INCOME:
Interest $3,441,790 $4,743,667
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 4) 283,812 390,972
Distribution plan fees (Note 7) 201,766 383,728
Audit and legal 19,651 23,085
Shareholder communications (Note 7) 19,390 32,414
Custody 16,286 22,432
Transfer agency services (Note 7) 14,930 31,775
Registration fees 5,906 2,402
Trustees' fees 1,510 1,957
Other 5,823 7,502
- --------------------------------------------------------------------------------
TOTAL EXPENSES 569,074 896,267
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,872,716 3,847,400
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 5 AND 6):
Realized Loss From:
Investment transactions (569,646) (314,438)
Futures contracts (572,473) (656,913)
- --------------------------------------------------------------------------------
NET REALIZED LOSS (1,142,119) (971,351)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of year 4,086,277 3,152,436
End of year 4,716,397 3,341,939
- --------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 630,120 189,503
- --------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS AND FUTURES CONTRACTS (511,999) (781,848)
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $2,360,717 $3,065,552
================================================================================
See Notes to Financial Statements.
33 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MARCH 31,
GEORGIA PORTFOLIO 2004 2003
================================================================================
OPERATIONS:
Net investment income $ 2,872,716 $ 3,107,431
Net realized loss (1,142,119) (680,856)
Increase in net unrealized appreciation 630,120 2,701,663
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 2,360,717 5,128,238
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTES 3 AND 8):
Net investment income (2,879,111) (3,059,371)
- --------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (2,879,111) (3,059,371)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 9,352,338 10,562,344
Net asset value of shares issued for
reinvestment of dividends 1,145,305 1,133,646
Cost of shares reacquired (11,730,255) (13,551,520)
- --------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (1,232,612) (1,855,530)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (1,751,006) 213,337
NET ASSETS:
Beginning of year 62,879,094 62,665,757
- --------------------------------------------------------------------------------
END OF YEAR* $61,128,088 $62,879,094
================================================================================
* Includes undistributed net investment income of: $31,063 $37,922
================================================================================
See Notes to Financial Statements.
34 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS ENDED MARCH 31,
PENNSYLVANIA PORTFOLIO 2004 2003
================================================================================
OPERATIONS:
Net investment income $ 3,847,400 $ 4,136,756
Net realized loss (971,351) (468,545)
Increase in net unrealized appreciation 189,503 3,002,322
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 3,065,552 6,670,533
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTES 3 AND 8):
Net investment income (3,843,880) (4,135,340)
In excess of net investment income (86,608) (82,307)
- --------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (3,930,488) (4,217,647)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 20,326,781 17,626,290
Net asset value of shares issued for
reinvestment of dividends 2,124,868 2,340,148
Cost of shares reacquired (23,303,128) (20,031,287)
- --------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (851,479) (64,849)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (1,716,415) 2,388,037
NET ASSETS:
Beginning of year 86,337,678 83,949,641
- --------------------------------------------------------------------------------
END OF YEAR* $84,621,263 $86,337,678
================================================================================
* Includes undistributed net investment income of: $9,577 $6,433
================================================================================
See Notes to Financial Statements.
35 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Georgia and Pennsylvania Portfolios ("Funds") are separate investment funds
of the Smith Barney Muni Funds ("Trust"), a Massachusetts business trust, which
is registered under the Investment Company Act of 1940, as amended, as an
open-end non-diversified management investment company. The Trust consists of
these Funds and seven other separate investment funds: Florida, National, New
York, Limited Term, California Money Market, Massachusetts Money Market and New
York Money Market Portfolios. The financial statements and financial highlights
for the other funds are presented in separate shareholder reports.
The following are significant accounting policies consistently followed by the
Funds are in conformity with generally accepted accounting principles ("GAAP"):
(a) security transactions are accounted for on trade date; (b) 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 relationships between securities; (c) securities for
which market quotations are not available will be valued in good faith at fair
value by or under the direction of the Board of Trustees; (d) securities
maturing within 60 days are valued at cost plus accreted discount or minus
amortized premium, which approximates value; (e) gains or losses on the sale of
securities are calculated by using the specific identification method; (f)
interest income, adjusted for amortization of premium and accretion of discount,
is recorded on an accrual basis; (g) dividends and distributions to shareholders
are recorded on the ex-dividend date; (h) class specific expenses are charged to
each Fund and each class; management fees and general fund expenses are
allocated on the basis of relative net assets of each Fund and each class or on
another reasonable basis; (i) the character of income and gains to be
distributed is determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the United States of
America. At March 31, 2004, reclassifications were made to the Funds capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly for the
Pennsylvania Portfolio, a portion of overdistributed net investment income
amounting to $86,608 was reclassified to paid-in capital. Net investment income,
net realized gains and net assets were not affected by these changes; (j) each
Fund intends to comply with the applicable provisions of the
36 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (k) 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.
2. Portfolio Concentration
Since the Georgia and Pennsylvania Portfolios invest primarily in obligations of
issuers within Georgia and Pennsylvania, respectively, each Fund is subject to
possible concentration risks associated with economic, political, or legal
developments or industrial or regional matters specifically affecting the
respective state in which it invests.
3. Exempt-Interest Dividends and Other Distributions
Each Fund intends to satisfy conditions that will enable interest from municipal
securities, which is exempt from regular Federal income tax and from designated
state income taxes, to retain such tax-exempt status when distributed to the
shareholders of the Fund.
It is the Funds' policy to distribute dividends monthly. Capital gain
distributions, if any, are taxable to shareholders, and are declared and paid at
least annually.
4. Management Agreement and Other Transactions
Smith Barney Fund Management LLC ("SBFM"), an indirect wholly-owned subsidiary
of Citigroup Inc. ("Citigroup"), acts as investment manager to the Funds. The
Funds pay SBFM a management fee calculated at an annual rate of 0.45% of each
Fund's respective average daily net assets. This fee is calculated daily and
paid monthly.
Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as the
Funds' transfer agent and PFPC Inc. ("PFPC") acts as the Funds' sub-transfer
agent. CTB receives account fees and asset-based fees that vary according to the
size and type of account. PFPC is responsible for shareholder recordkeeping and
37 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
financial processing for all shareholder accounts and is paid by CTB. For the
year ended March 31, 2004, the Funds paid transfer agent fees totaling $36,694
to CTB.
The totals for each Fund were as follows:
TRANSFER AGENT FEES
================================================================================
Georgia Portfolio $12,664
- --------------------------------------------------------------------------------
Pennsylvania Portfolio 24,030
================================================================================
Citigroup Global Markets Inc. ("CGM"), another indirect wholly-owned subsidiary
of Citigroup, acts as the Funds' distributor.
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 by 0.50% the first year after purchase payment and thereafter by 1.00%
per year until no CDSC is incurred. Class L 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 March 31, 2004, CDSCs paid to CGM and sales charges received
by CGM were approximately:
CDSCs SALES CHARGES
------- -------------------
CLASS B CLASS A CLASS L
================================================================================
Georgia Portfolio $ 8,000 $52,000 $11,000
- --------------------------------------------------------------------------------
Pennsylvania Portfolio 40,000 86,000 10,000
================================================================================
All officers and one Trustee of the Trust are employees of Citigroup or its
affiliates.
38 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Investments
During the year ended March 31, 2004, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
GEORGIA PENNSYLVANIA
PORTFOLIO PORTFOLIO
================================================================================
Purchases $13,798,291 $19,284,281
- --------------------------------------------------------------------------------
Sales 17,007,176 22,146,013
================================================================================
At March 31, 2004, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were as follows:
GEORGIA PENNSYLVANIA
PORTFOLIO PORTFOLIO
================================================================================
Gross unrealized appreciation $5,428,431 $4,786,006
Gross unrealized depreciation (251,939) (775,577)
- --------------------------------------------------------------------------------
Net unrealized appreciation $5,176,492 $4,010,429
================================================================================
6. Futures Contracts
Securities or cash equal to the initial margin amount are either deposited with
the broker or segregated by the custodian upon entering into the futures
contract. Additional securities are also segregated up to the current market
value of the futures contracts. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts typically
to hedge a portion of its portfolio. The Fund bears the market risk that arises
from changes in the value of the financial instruments and securities indices.
39 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At March 31, 2004, the Funds had the following open futures contracts:
NUMBER OF BASIS MARKET UNREALIZED
GEORGIA PORTFOLIO CONTRACTS EXPIRATION VALUE VALUE LOSS
================================================================================
TO SELL:
20-year U.S.
Treasury Bond 170 6/04 $18,939,375 $19,390,625 $(451,250)
================================================================================
PENNSYLVANIA NUMBER OF BASIS MARKET UNREALIZED
PORTFOLIO CONTRACTS EXPIRATION VALUE VALUE LOSS
================================================================================
TO SELL:
20-year U.S.
Treasury Bond 250 6/04 $27,853,125 $28,515,625 $(662,500)
================================================================================
7. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, each Fund pays a service fee with
respect to Class A, B and L shares, calculated at an annual rate of 0.15% of the
average daily net assets of each respective class. In addition, each Fund pays a
distribution fee with respect to its Class B and L shares calculated at the
annual rate of 0.50% and 0.55% of the average daily net assets of each class,
respectively. For the year ended March 31, 2004, total Rule 12b-1 Distribution
Plan fees, which are accrued daily and paid monthly, were as follows:
CLASS A CLASS B CLASS L
================================================================================
Georgia Portfolio $63,856 $ 72,553 $65,357
- --------------------------------------------------------------------------------
Pennsylvania Portfolio 56,257 236,292 91,179
================================================================================
For the year ended March 31, 2004, total Transfer Agency Service expenses were
as follows:
CLASS A CLASS B CLASS L
================================================================================
Georgia Portfolio $6,438 $ 4,620 $3,872
- --------------------------------------------------------------------------------
Pennsylvania Portfolio 9,140 16,519 6,116
================================================================================
For the year ended March 31, 2004, total Shareholder Communication expenses were
as follows:
CLASS A CLASS B CLASS L
================================================================================
Georgia Portfolio $ 8,771 $ 5,770 $4,849
- --------------------------------------------------------------------------------
Pennsylvania Portfolio 10,004 16,103 6,307
================================================================================
40 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Distributions Paid to Shareholders by Class
YEAR ENDED YEAR ENDED
GEORGIA PORTFOLIO MARCH 31, 2004 MARCH 31, 2003
================================================================================
NET INVESTMENT INCOME
Class A $2,021,225 $2,147,792
Class B 468,304 542,486
Class L 389,582 369,093
- --------------------------------------------------------------------------------
Total $2,879,111 $3,059,371
================================================================================
YEAR ENDED YEAR ENDED
PENNSYLVANIA PORTFOLIO MARCH 31, 2004 MARCH 31, 2003
================================================================================
CLASS A
Net investment income $1,774,966 $1,781,120
In excess of net investment income 37,119 33,526
- --------------------------------------------------------------------------------
Total $1,812,085 $1,814,646
================================================================================
CLASS B
Net investment income $1,526,834 $1,765,591
In excess of net investment income 36,469 36,467
- --------------------------------------------------------------------------------
Total $1,563,303 $1,802,058
================================================================================
CLASS L
Net investment income $ 542,080 $ 588,629
In excess of net investment income 13,020 12,314
- --------------------------------------------------------------------------------
Total $ 555,100 $ 600,943
================================================================================
9. Shares of Beneficial Interest
At March 31, 2004, the Trust had an unlimited amount of shares of beneficial
interest authorized with a par value of $0.001 per share. The Funds have the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest in its respective Fund and has the same rights, except that
each class bears certain expenses specifically related to the distribution of
its shares.
41 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions in shares of each class were as follows:
YEAR ENDED YEAR ENDED
MARCH 31, 2004 MARCH 31, 2003
----------------------- ------------------------
GEORGIA PORTFOLIO SHARES AMOUNT SHARES AMOUNT
================================================================================
CLASS A
Shares sold 500,118 $ 6,600,431 475,111 $ 6,268,581
Shares issued
on reinvestment 48,832 645,452 45,392 597,537
Shares reacquired (552,207) (7,328,648) (719,314) (9,441,536)
- --------------------------------------------------------------------------------
Net Decrease (3,257) $ (82,765) (198,811) $ (2,575,418)
================================================================================
CLASS B
Shares sold 95,060 $ 1,255,701 185,294 $ 2,420,856
Shares issued
on reinvestment 16,609 218,948 20,927 274,732
Shares reacquired (257,541) (3,398,718) (180,670) (2,376,952)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (145,872) $(1,924,069) 25,551 $ 318,636
================================================================================
CLASS L
Shares sold 113,112 $ 1,496,206 142,156 $ 1,872,907
Shares issued
on reinvestment 21,337 280,905 19,920 261,377
Shares reacquired (75,970) (1,002,889) (131,780) (1,733,032)
- --------------------------------------------------------------------------------
Net Increase 58,479 $ 774,222 30,296 $ 401,252
================================================================================
PENNSYLVANIA PORTFOLIO
================================================================================
CLASS A
Shares sold 1,160,913 $ 15,341,833 559,298 $ 7,372,675
Shares issued
on reinvestment 77,337 1,019,400 82,813 1,089,471
Shares reacquired (905,771) (11,912,851) (819,137) (10,782,637)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 332,479 $ 4,448,382 (177,026) $ (2,320,491)
================================================================================
CLASS B
Shares sold 237,971 $ 3,140,149 580,378 $ 7,640,541
Shares issued
on reinvestment 60,216 791,144 70,314 922,538
Shares reacquired (715,094) (9,408,774) (497,549) (6,527,297)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (416,907) $ (5,477,481) 153,143 $ 2,035,782
================================================================================
CLASS L
Shares sold 140,394 $ 1,844,799 198,570 $ 2,613,074
Shares issued
on reinvestment 23,948 314,324 25,026 328,139
Shares reacquired (150,659) (1,981,503) (207,219) (2,721,353)
- --------------------------------------------------------------------------------
Net Increase 13,683 $ 177,620 16,377 $ 219,860
================================================================================
42 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. Capital Loss Carryforwards
At March 31, 2004, the Georgia and Pennsylvania Portfolios had, for Federal
income tax purposes, approximately $1,923,000 and $1,931,000, respectively, of
unused capital loss carryforwards available to offset future capital gains. To
the extent that these capital carryforward losses are used to offset capital
gains, it is probable that the gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below. Expiration
occurs on March 31 of the year indicated:
FUND 2008 2009 2010 2012
================================================================================
Georgia $732,000 $947,000 -- $244,000
- --------------------------------------------------------------------------------
Pennsylvania 649,000 857,000 $159,000 266,000
================================================================================
In addition, the Georgia and Pennsylvania Portfolios had $2,055,441 and
$2,000,321 of capital losses realized after October 31, 2003, which were
deferred for tax purposes to the first day of the following year.
11. Income Tax Information and Distributions to
Shareholders
At March 31, 2004, the tax basis components of distributable earnings were:
GEORGIA PENNSYLVANIA
FUND PORTFOLIO PORTFOLIO
================================================================================
Undistributed tax-exempt income $ 18,022 --
- --------------------------------------------------------------------------------
Accumulated capital losses (1,923,325) $(1,931,277)
- --------------------------------------------------------------------------------
Unrealized appreciation 5,176,492 4,010,429
================================================================================
At March 31, 2004, the difference between book basis and tax basis unrealized
appreciation and depreciation is attributable primarily to wash sale loss
deferrals, mark to market of derivative contracts and the treatment of accretion
of discounts and amortization of premiums.
The tax character of distributions paid during the year ended March 31, 2004
was:
GEORGIA PENNSYLVANIA
FUND PORTFOLIO PORTFOLIO
================================================================================
Ordinary income $ 7,811 --
Tax-exempt income 2,871,300 $3,843,880
Taxable overdistribution -- 86,608
- --------------------------------------------------------------------------------
Total $2,879,111 $3,930,488
================================================================================
43 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tax character of distributions paid during the year ended March 31, 2003
was:
GEORGIA PENNSYLVANIA
FUND PORTFOLIO PORTFOLIO
================================================================================
Tax-exempt income $3,059,371 $4,121,176
Ordinary income -- 96,471
- --------------------------------------------------------------------------------
Total $3,059,371 $4,217,647
================================================================================
12. Additional Information
The Funds have received the following information from Citigroup Asset
Management ("CAM"), the Citigroup business unit which includes the Funds'
Investment Manager and other investment advisory companies, all of which are
indirect, wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry,
through an affiliate, into the transfer agent business in the period 1997-1999.
As CAM currently understands the facts, at the time CAM decided to enter the
transfer agent business, CAM sub-contracted for a period of five years certain
of the transfer agency services to a third party and also concluded a revenue
guarantee agreement with this sub-contractor providing that the sub-contractor
would guarantee certain benefits to CAM or its affiliates (the "Revenue
Guarantee Agreement"). In connection with the subsequent purchase of the
sub-contractor's business by an affiliate of the current sub-transfer agent
(PFPC Inc.) used by CAM on many of the funds it manages, this Revenue Guarantee
Agreement was amended eliminating those benefits in exchange for arrangements
that included a one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards informed of
the subsequent amendment to the Revenue Guarantee Agreement when that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
approximately $17 million (plus interest) that CAM and its affiliates received
from the Revenue Guarantee Agreement and its amendment. CAM also plans an
independent review to verify that the transfer agency fees charged by CAM were
fairly priced as compared to competitive alternatives. CAM is instituting new
proce-
44 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
dures and making changes designed to ensure no similar arrangements are entered
into in the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
13. Subsequent Event
Effective April 29, 2004, Class L shares were renamed as Class C shares.
45 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
FINANCIAL HIGHLIGHTS
For a share of each class of beneficial interest outstanding throughout each
year ended March 31, unless otherwise noted:
CLASS A SHARES
-------------------------------------------------------
GEORGIA PORTFOLIO 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
==============================================================================================
NET ASSET VALUE,
BEGINNING OF YEAR $13.22 $12.79 $13.08 $12.40 $13.43
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2) 0.63 0.66 0.65 0.64 0.65
Net realized and unrealized
gain (loss)(2) (0.12) 0.42 (0.29) 0.69 (1.06)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.51 1.08 0.36 1.33 (0.41)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.63) (0.65) (0.65) (0.65) (0.62)
In excess of net investment income -- -- (0.00)* -- --
- ----------------------------------------------------------------------------------------------
Total Distributions (0.63) (0.65) (0.65) (0.65) (0.62)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.10 $13.22 $12.79 $13.08 $12.40
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(3) 3.92% 8.54% 2.76% 11.02% (2.97)%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $41,325 $41,740 $42,917 $45,594 $43,100
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) 0.71% 0.72% 0.75% 0.75% 0.68%
Net investment income(2) 4.74 4.98 4.97 5.08 4.74
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 19% 43% 35% 98%
==============================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective April 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended March 31, 2002, the
ratio of net investment income to average net assets would have been 4.95%.
In addition, the impact of this change to net investment income and net
realized and unrealized loss per share was less than $0.01. Per share
information, ratios and supplemental data for the periods prior to April 1,
2001 have not been restated to reflect this change in presentation.
(3) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
(4) As a result of voluntary expense limitations, expense ratios will not
exceed 0.80%.
* Amount represents less than $0.01 per share.
46 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of beneficial interest outstanding throughout each
year ended March 31, unless otherwise noted:
CLASS B SHARES
-------------------------------------------------------
GEORGIA PORTFOLIO 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
==============================================================================================
NET ASSET VALUE,
BEGINNING OF YEAR $13.19 $12.76 $13.07 $12.40 $13.42
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2) 0.55 0.58 0.58 0.58 0.56
Net realized and unrealized
gain (loss)(2) (0.11) 0.43 (0.30) 0.68 (1.03)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.44 1.01 0.28 1.26 (0.47)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.56) (0.58) (0.59) (0.59) (0.55)
In excess of net investment income -- -- (0.00)* -- --
- ----------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.58) (0.59) (0.59) (0.55)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.07 $13.19 $12.76 $13.07 $12.40
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(3) 3.36% 8.03% 2.12% 10.39% (3.45)%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $10,246 $12,265 $11,544 $11,154 $11,503
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) 1.27% 1.26% 1.29% 1.30% 1.30%
Net investment income(2) 4.19 4.45 4.42 4.56 4.47
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 19% 43% 35% 98%
==============================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective April 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended March 31, 2002, the
ratio of net investment income to average net assets would have been 4.41%.
In addition, the impact of this change to net investment income and net
realized and unrealized loss per share was less than $0.01. Per share
information, ratios and supplemental data for the periods prior to April 1,
2001 have not been restated to reflect this change in presentation.
(3) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
(4) As a result of voluntary expense limitations, expense ratios will not
exceed 1.30%.
* Amount represents less than $0.01 per share.
47 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of beneficial interest outstanding throughout each
year ended March 31, unless otherwise noted:
CLASS L SHARES
-------------------------------------------------------
GEORGIA PORTFOLIO 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
==============================================================================================
NET ASSET VALUE,
BEGINNING OF YEAR $13.17 $12.75 $13.05 $12.39 $13.41
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2) 0.55 0.57 0.57 0.57 0.56
Net realized and unrealized
gain (loss)(2) (0.12) 0.42 (0.29) 0.67 (1.04)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.43 0.99 0.28 1.24 (0.48)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.55) (0.57) (0.58) (0.58) (0.54)
In excess of net investment income -- -- (0.00)* -- --
- ----------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.57) (0.58) (0.58) (0.54)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.05 $13.17 $12.75 $13.05 $12.39
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(3) 3.31% 7.90% 2.15% 10.26% (3.51)%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $9,557 $8,874 $8,205 $7,460 $5,893
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) 1.32% 1.33% 1.34% 1.35% 1.33%
Net investment income(2) 4.14 4.38 4.39 4.48 4.44
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 19% 43% 35% 98%
==============================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective April 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended March 31, 2002, the
ratio of net investment income to average net assets would have been 4.37%.
In addition, the impact of this change to net investment income and net
realized and unrealized loss per share was less than $0.01. Per share
information, ratios and supplemental data for the periods prior to April 1,
2001 have not been restated to reflect this change in presentation.
(3) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
(4) As a result of voluntary expense limitations, expense ratios will not
exceed 1.35%.
* Amount represents less than $0.01 per share.
48 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of beneficial interest outstanding throughout each
year ended March 31, unless otherwise noted:
CLASS A SHARES
--------------------------------------------------------
PENNSYLVANIA PORTFOLIO 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
==============================================================================================
NET ASSET VALUE,
BEGINNING OF YEAR $13.18 $12.79 $12.89 $12.18 $13.44
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2)(3) 0.63 0.67 0.69 0.69 0.67
Net realized and unrealized
gain (loss)(3) (0.12) 0.40 (0.09) 0.71 (1.25)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.51 1.07 0.60 1.40 (0.58)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.63) (0.67) (0.69) (0.69) (0.66)
In excess of net investment income (0.01) (0.01) (0.01) -- --
Net realized gains -- -- -- -- (0.02)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.68) (0.70) (0.69) (0.68)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.05 $13.18 $12.79 $12.89 $12.18
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(4) 3.90% 8.49% 4.69% 11.84% (4.31)%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $38,126 $34,099 $35,370 $31,203 $27,978
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(5) 0.72% 0.66% 0.50% 0.54% 0.63%
Net investment income(3) 4.74 5.07 5.34 5.55 5.29
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 33% 49% 34% 54%
==============================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The Manager has waived all or part of its fees for the years ended March
31, 2003, 2002, 2001 and 2000. If such fees were not waived and expenses
not reimbursed, the effect on net investment income and expense ratios
would have been as follows:
Expense Ratios
Net Investment Income Without Fee Waivers and/or
Per Share Decreases Expense Reimbursements
-------------------------- --------------------------
2003 2002 2001 2000 2003 2002 2001 2000
----- ----- ----- ----- ----- ----- ----- -----
Class A $0.01 $0.03 $0.02 $0.01 0.72% 0.70% 0.74% 0.75%
(3) Effective April 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended March 31, 2002, the
ratio of net investment income to average net assets would have been 5.33%.
In addition, the impact of this change to net investment income and net
realized and unrealized loss per share was less than $0.01. Per share
information, ratios and supplemental data for the periods prior to April 1,
2001 have not been restated to reflect this change in presentation.
(4) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
(5) As a result of voluntary expense limitations, expense ratios will not
exceed 0.80%.
49 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of beneficial interest outstanding throughout each
year ended March 31, unless otherwise noted:
CLASS B SHARES
--------------------------------------------------------
PENNSYLVANIA PORTFOLIO 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
==============================================================================================
NET ASSET VALUE,
BEGINNING OF YEAR $13.14 $12.76 $12.86 $12.17 $13.42
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2)(3) 0.55 0.59 0.62 0.62 0.60
Net realized and unrealized
gain (loss)(3) (0.11) 0.40 (0.08) 0.70 (1.24)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.44 0.99 0.54 1.32 (0.64)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.56) (0.60) (0.63) (0.63) (0.59)
In excess of net investment income (0.01) (0.01) (0.01) -- --
Net realized gains -- -- -- -- (0.02)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.57) (0.61) (0.64) (0.63) (0.61)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.01 $13.14 $12.76 $12.86 $12.17
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(4) 3.37% 7.89% 4.22% 11.15% (4.78)%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $33,388 $39,184 $36,108 $29,894 $26,296
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(5) 1.26% 1.20% 1.03% 1.08% 1.15%
Net investment income(3) 4.21 4.54 4.80 5.01 4.79
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 33% 49% 34% 54%
==============================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The Manager has waived all or part of its fees for the years ended March
31, 2003, 2002, 2001 and 2000. If such fees were not waived and expenses
not reimbursed, the effect on net investment income and expense ratios
would have been as follows:
Expense Ratios
Net Investment Income Without Fee Waivers and/or
Per Share Decreases Expense Reimbursements
-------------------------- --------------------------
2003 2002 2001 2000 2003 2002 2001 2000
----- ----- ----- ----- ----- ----- ----- -----
Class B $0.01 $0.03 $0.02 $0.01 1.25% 1.24% 1.28% 1.26%
(3) Effective April 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended March 31, 2002, the
change to net investment income and net realized and unrealized loss and
the ratio of net investment income to average net assets was less than
$0.01, $0.01 and 0.01%, respectively. Per share information, ratios and
supplemental data for the periods prior to April 1, 2001 have not been
restated to reflect this change in presentation.
(4) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
(5) As a result of voluntary expense limitations, expense ratios will not
exceed 1.30%.
50 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of beneficial interest outstanding throughout each
year ended March 31, unless otherwise noted:
CLASS L SHARES
-------------------------------------------------------
PENNSYLVANIA PORTFOLIO 2004(1) 2003(1) 2002(1) 2001(1) 2000(1)
==============================================================================================
NET ASSET VALUE,
BEGINNING OF YEAR $13.13 $12.75 $12.85 $12.16 $13.41
- ----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2)(3) 0.54 0.59 0.62 0.61 0.59
Net realized and unrealized
gain (loss)(3) (0.11) 0.40 (0.09) 0.70 (1.24)
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.43 0.99 0.53 1.31 (0.65)
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.55) (0.60) (0.62) (0.62) (0.58)
In excess of net investment income (0.01) (0.01) (0.01) -- --
Net realized gains -- -- -- -- (0.02)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.61) (0.63) (0.62) (0.60)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.00 $13.13 $12.75 $12.85 $12.16
- ----------------------------------------------------------------------------------------------
TOTAL RETURN(4) 3.32% 7.84% 4.16% 11.08% (4.83)%
- ----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $13,107 $13,055 $12,472 $10,381 $8,635
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2)(5) 1.31% 1.25% 1.08% 1.16% 1.20%
Net investment income(3) 4.15 4.48 4.77 4.94 4.70
- ----------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 33% 49% 34% 54%
==============================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The Manager has waived all or part of its fees for the years ended March
31, 2003, 2002, 2001 and 2000. If such fees were not waived and expenses
not reimbursed, the effect on net investment income and expense ratios
would have been as follows:
Expense Ratios
Net Investment Income Without Fee Waivers and/or
Per Share Decreases Expense Reimbursements
-------------------------- --------------------------
2003 2002 2001 2000 2003 2002 2001 2000
----- ----- ----- ----- ----- ----- ----- -----
Class L $0.01 $0.03 $0.02 $0.01 1.31% 1.28% 1.36% 1.32%
(3) Effective April 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change, for the year ended March 31, 2002, the
ratio of net investment income to average net assets would have been 4.76%.
In addition, the impact of this change to net investment income and net
realized and unrealized loss per share was less than $0.01. Per share
information, ratios and supplemental data for the periods prior to April 1,
2001 have not been restated to reflect this change in presentation.
(4) Performance figures may reflect fee waivers and/or expense reimbursements.
Past performance is no guarantee of future results. In the absence of fee
waivers and/or expense reimbursements, the total return would be reduced.
(5) As a result of voluntary expense limitations, expense ratios will not
exceed 1.35%.
51 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF SMITH BARNEY MUNI FUNDS:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Georgia Portfolio and Pennsylvania
Portfolio ("Funds") of Smith Barney Muni Funds ("Trust") as of March 31, 2004,
and the related statements 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 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 Funds' 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 auditing standards generally accepted
in the United States of America. 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 March 31, 2004, by correspondence with the custodian and
broker. As to securities sold but not yet delivered, we performed 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 the
Funds as of March 31, 2004, and the results of their operations for the year
then ended, the changes in their net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
New York, New York
May 12, 2004
52 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
ADDITIONAL INFORMATION (UNAUDITED)
INFORMATION ABOUT TRUSTEES AND OFFICERS
The business and affairs of the Smith Barney Muni Funds ("Trust") -- Georgia and
Pennsylvania Portfolios ("Funds") are managed under the direction of the 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 Trustees and is available, without charge, upon request by
calling the Trust's transfer agent (Citicorp Trust Bank, fsb.
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 AGE 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
Age 76
Allan J. Bloostein Trustee Since President of Allan 34 Taubman Realty
27 West 67th Street 1999 Bloostein Associates, a Corp.
New York, NY 10023 consulting firm; Former
Age 74 Director of CVS Corp.
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
Age 54
Donald R. Foley Trustee Since Retired 19 None
3668 Freshwater Drive 1985
Jupiter, FL 33477
Age 81
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
Age 62
Paul Hardin Trustee Since Professor of Law & 34 None
12083 Morehead Drive 1994 Chancellor Emeritus
Chapel Hill, NC at the University of
27514-8426 North Carolina
Age 72
Roderick C. Rasmussen Trustee Since Investment Counselor 27 None
9 Cadence Court 1991
Morristown, NJ 07960
Age 77
53 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
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 AGE FUND SERVED FIVE YEARS BY TRUSTEE TRUSTEE
========================================================================================================================
John P. Toolan Trustee Since Retired 27 John Hancock
13 Chadwell Place 1992 Funds
Morristown, NJ 07960
Age 73
INTERESTED TRUSTEE:
R. Jay Gerken, CFA** Chairman, Since Managing Director of 221 None
Citigroup Asset President 2002 Citigroup Global Markets
Management ("CAM") and Chief Inc. ("CGM"); Chairman,
399 Park Avenue Executive President and Chief
4th Floor Officer Executive Officer of Smith
New York, NY 10022 Barney Fund Management
Age 52 LLC ("SBFM"), Travelers
Investment Adviser, Inc.
("TIA") and Citi Fund
Management Inc. ("CFM");
President and Chief
Executive Officer of certain
mutual funds associated
with Citigroup Inc.
("Citigroup"); Formerly,
Portfolio Manager of Smith
Barney Allocation Series
Inc. (from 1996 to 2001)
and Smith Barney Growth
and Income Fund (from
1996 to 2000)
OFFICERS:
Andrew B. Shoup Senior Vice Since Director of CAM; Senior N/A N/A
CAM President 2003 Vice President and Chief
125 Broad Street and Chief Administrative Officer of
11th Floor Administrative mutual funds associated
New York, NY 10004 Officer with Citigroup; Treasurer of
Age 47 certain mutual funds
associated with Citigroup;
Head of International Funds
Administration of CAM
(from 2001 to 2003); Director
of Global Funds Administration
of CAM (from 2000 to 2001);
Head of U.S. Citibank Funds
Administration of CAM (from
1998 to 2000)
54 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
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 AGE FUND SERVED FIVE YEARS BY TRUSTEE TRUSTEE
========================================================================================================================
Richard L. Peteka Chief Since Director of CGM; Chief N/A N/A
CAM Financial 2002 Financial Officer and
125 Broad Street Officer Treasurer of certain
11th Floor and mutual funds associated
New York, NY 10004 Treasurer with Citigroup; Director
Age 42 and Head of Internal
Control for CAM U.S.
Mutual Fund Administration
(from 1999 to 2002); Vice
President, Head of Mutual
Fund Administration and
Treasurer at Oppenheimer
Capital (from 1996 to 1999)
Peter M. Coffey Vice Since Managing Director of CGM; N/A N/A
CAM President 1987 Investment Officer of SBFM
399 Park Avenue and
4th Floor Investment
New York, NY 10022 Officer
Age 58
Andrew Beagley Chief Since Director of CGM(since N/A N/A
CAM Anti-Money 2002 2000); Director of
399 Park Avenue Laundering Compliance, North America,
4th Floor Compliance CAM (since 2000); Chief
New York, NY 10022 Officer Anti-Money Laundering
Age 40 Compliance Officer and
Vice President of certain
mutual funds associated
with Citigroup; Director of
Compliance, Europe, the
Middle East and Africa,
CAM (from 1999 to 2000);
Compliance Officer,
Salomon Brothers Asset
Management Limited,
Smith Barney Global
Capital Management Inc.,
Salomon Brothers Asset
Management Asia Pacific
Limited (from 1997 to 1999)
55 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
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 AGE FUND SERVED FIVE YEARS BY TRUSTEE TRUSTEE
========================================================================================================================
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain
125 Broad Street mutual funds associated
11th Floor with Citigroup
New York, NY 10004
Age 38
Robert I. Frenkel Secretary Since Managing Director and N/A N/A
CAM and Chief 2003 General Counsel of
300 First Stamford Place Legal Global Mutual Funds
4th Floor Officer for CAM and its
Stamford, CT 06902 predecessor (since 1994);
Age 48 Secretary of CFM (from
2001 to 2004); Secretary
and Chief Legal Officer
of mutual funds
associated with Citigroup
- ------------
* Each Trustee and Officer serves until his or her successor has been duly
elected and qualified.
** 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 SBFM and certain of its affiliates.
TAX INFORMATION (UNAUDITED)
For the year ended March 31, 2004, 99.73% and 97.80% of the dividends paid by
the Funds from net investment income were tax-exempt for regular Federal income
tax and Georgia and Pennsylvania state income tax purposes, respectively.
56 SMITH BARNEY MUNI FUNDS | 2004 Annual Report
SMITH BARNEY
MUNI FUNDS
TRUSTEES
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
R. Jay Gerken, CFA
Chairman
Richard E. Hanson, Jr.
Paul Hardin
Roderick C. Rasmussen
John P. Toolan
OFFICERS
R. Jay Gerken, CFA
President and
Chief Executive Officer
Andrew B. Shoup
Senior Vice President and
Chief Administrative Officer
Richard L. Peteka
Chief Financial Officer
and Treasurer
Peter M. Coffey
Vice President and
Investment Officer
Andrew Beagley
Chief Anti-Money Laundering
Compliance Officer
Kaprel Ozsolak
Controller
Robert I. Frenkel
Secretary and
Chief Legal Officer
INVESTMENT MANAGER
Smith Barney Fund
Management LLC
DISTRIBUTOR
Citigroup Global Markets Inc.
CUSTODIAN
State Street Bank and
Trust Company
TRANSFER AGENT
Citicorp Trust Bank, fsb.
125 Broad Street, 11th Floor
New York, New York 10004
SUB-TRANSFER AGENT
PFPC Inc.
P.O. Box 9699
Providence, Rhode Island
02940-9699
SMITH BARNEY MUNI FUNDS
- --------------------------------------------------------------------------------
GEORGIA PORTFOLIO
PENNSYLVANIA PORTFOLIO
The Funds are separate investment funds of the Smith Barney Muni Funds, a
Massachusetts business trust.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by telephoning the Fund (toll-free) at 1-800-451-2010 and by
visiting the SEC's website at www.sec.gov.
This report is submitted for the general information of the shareholders of
Smith Barney Muni Funds -- Georgia and Pennsylvania Portfolios, but it may also
be used as sales literature when preceded or accompanied by the current
Prospectus.
SMITH BARNEY MUNI FUNDS
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
THIS DOCUMENT 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 YOU
INVEST OR SEND MONEY.
WWW.SMITHBARNEYMUTUALFUNDS.COM
(C)2004 Citigroup Global Markets Inc.
Member NASD, SIPC
FD0789 5/04 04-6650
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 Trustees of the registrant has determined that 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 Ms. Dasher as the Audit Committee's financial expert. Ms.
Dasher is an "independent" Trustee pursuant to paragraph (a)(2) of
Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for Smith Barney Muni Funds were $170,500 and $162,500
for the years ended 3/31/04 and 3/31/03.
(b) Audit-Related Fees for Smith Barney Muni Funds were $0 and $0 for
the years ended 3/31/04 and 3/31/03.
(c) Tax Fees for Smith Barney Muni Funds were $18,500 and $18,400 for
the years ended 3/31/04 and 3/31/03. These amounts represent
aggregate fees paid for tax compliance, tax advice and tax
planning services, which include (the filing and amendment of
federal, state and local income tax returns, timely RIC
qualification review and tax distribution and analysis planning)
rendered by the Accountant to Smith Barney Muni Funds.
(d) There were no all other fees for Smith Barney Muni Funds for the
years ended 3/31/04 and 3/31/03.
(e) (1) Audit Committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
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.
(f) N/A
(g) Non-audit fees billed - $100,000 and $1.2 million for the years
ended 12/31/2003 and 12/31/2002.
(h) Yes. The Smith Barney Muni 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 Accountant to the
Smith Barney Muni 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. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. 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 10. 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
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.
SMITH BARNEY MUNI FUNDS
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
SMITH BARNEY MUNI FUNDS
Date: June 7, 2004
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
SMITH BARNEY MUNI FUNDS
Date: June 7, 2004
By: /s/ Richard L. Peteka
Richard L. Peteka
Chief Financial Officer of
SMITH BARNEY MUNI FUNDS
Date: June 7, 2004