As filed with the Securities and Exchange Commission on June 18,
1999
Registration Nos. 002-99861
811-04395
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 42
to the
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
and
POST-EFFECTIVE AMENDMENT NO. 43
to the
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
SMITH BARNEY MUNI FUNDS
(Formerly, Smith Barney Muni Bond Funds)
(Exact name of Registrant as specified in the Declaration of
Trust)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices)
(212) 816-6474
(Registrant's telephone number)
Christina T. Sydor
388 Greenwich Street New York, New York 10013 (22nd floor)
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ X ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective
amendment.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and
documents:
Front Cover
Contents Page
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
PART A
<PAGE>
DRAFT 6/15/99
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[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
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Prospectus Smith Barney
Mutual Funds
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July 29, 1999 Massachusetts Money Market Portfolio
Class A and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
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Contents
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Investments, risks and expenses......... 4
More on the fund's investments.......... 8
Management.............................. 9
Choosing a class of shares to buy....... 10
Salomon Smith Barney Brokerage
Accounts.............................. 11
Deferred sales charges.................. 12
Buying shares........................... 13
Exchanging shares....................... 14
Redeeming shares........................ 16
Other things to know about
share transactions..................... 18
Dividends, distributions and taxes...... 20
Share price............................. 22
You should know:
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency. There is no assurance that the fund
will be able to maintain a stable net asset value of $1.00 per share.
Massachusetts Money Market Portfolio
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Investments, risks and expenses
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Principal investment strategies
Investment objective The fund seeks to provide income exempt from both federal
income taxes and Massachusetts personal income taxes.
Key investments The fund invests at least 80% of its assets in short-term high
quality Massachsuetts municipal securities. These include securities issued by
the Commonwealth of Massachusetts and certain other municipal issuers, political
subdivisions, agencies and public authorities that pay interest which is exempt
from Massachusetts state personal income taxes. All of the securities in which
the fund invests are rated in one of the two highest short-term rating
categories, or if unrated, of equivalent quality. All of these securities have
remaining maturities of 397 days or less. The fund maintains a dollar-weighted
average portfolio maturity of 90 days or less.
Selection process The manager selects securities primarily by identifying
undervalued sectors and individual securities. The manager only selects
securities of issuers which it believes present minimal credit risk. In
selecting individual securities, the manager:
. Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors
. May trade between general obligation and revenue bonds and among various
revenue bond sectors, such as housing, hospital and industrial development,
based on their apparent relative values
. Measures the potential impact of supply/demand imbalances for fixed versus
variable rate securities
. Considers the yields available for securities with different maturities and a
security's maturity in light of the outlook for interest rates to identify
individual securities that offer return advantages at similar risk levels
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Principal risks of investing in the fund
Although the fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in the fund, or the fund could
underperform other municipal short-term debt instruments or money market funds,
if:
. Interest rates rise, causing the value of the fund's portfolio to decline
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or the security's credit rating is downgraded
. Massachusetts municipal securities fall out of favor with investors. The fund
will suffer more than a national municipal fund from adverse events affecting
Massachusetts municipal issuers
. Unfavorable legislation affects the tax-exempt status of municipal securities
. The manager's judgment about the attractiveness, value, income potential or
credit quality of a particular security proves to be incorrect
It is possible that some of the fund's income distributions may be, and
distributions of the fund's gains generally will be, subject to federal and
Massachusetts state personal taxation. The fund may realize taxable gains on
the sale of its securities. Some of the fund's income may be subject to the
federal alternative minimum tax. In addition, distributions of the fund's
income and gains will be taxable to investors in states other than
Massachusetts.
Who may want to invest The fund may be an appropriate investment if you:
. Are a Massachusetts taxpayer in a high federal tax bracket seeking current
income exempt from Massachusetts and federal taxation
. Seeking exposure to short-term municipal securities at a minimum level of
additional risk
. Are looking to allocate a portion of your assets to money market securities
Massachusetts Money Market Portfolio
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Because this fund has not yet commenced operations, the fund does not have the
historical performance information in bar chart and table form which appears in
this location in the other Smith Barney Muni Funds prospectuses.
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Fee table
This table sets forth the estimated fees and expenses you will pay if you invest
in fund shares.
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Shareholder fees
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(fees paid directly from your investment) Class A Class Y
Maximum sales charge (load) imposed on purchases None None
Maximum deferred sales charge (load) None* None
Annual fund operating expenses
(expenses deducted from fund assets)
Management fees .50% .50%
Distribution and service (12b-1) fees .10% None
Other expenses .10% .10%
--- ---
Total annual fund operating expenses .70% .60%
=== ===
* Class A Shares acquired through an exchange for shares of another Smith Barney
Mutual Fund which were originally acquired at net asset value subject to a
contingent deferred sales charge ("CDSC") remain subject to the original fund's
CDSC.
Example
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
. You invest $10,000 in the fund for the period shown
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
. Redemption at the end of the period
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Number of years you own your shares
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1 year 3 years
Class A $ $
Class Y $ $
Massachusetts Money Market Portfolio
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More on the fund's investments
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Massachusetts municipal securities Massachusetts municipal securities include
debt obligations issued by certain non-Massachusetts governmental issuers such
as Puerto Rico, the Virgin Islands and Guam. The interest on Massachusetts
municipal securities is exempt from federal income tax and Massachusetts
personal income tax. As a result, the interest rate on these securities
normally is lower than it would be if the securities were subject to taxation.
The municipal securities in which the fund invests include general obligation
and revenue bonds and notes and tax-exempt commercial paper. The fund may
invest in floating or variable rate municipal securities. Some of these
securities may have stated final maturities of more than 397 days but have
demand features that entitle the fund to receive the principal amount of the
securities either at any time or at specified intervals.
Structured securities The fund may invest up to 20% of its assets in three
types of structured securities: tender option bonds, partnership interests and
swap-based securities. These securities represent participation interests in a
special purpose trust or partnership holding one or more municipal bonds and/or
municipal bond interest rate swaps. A typical swap enables the trust or
partnership to exchange a municipal bond interest rate for a floating or
variable, short-term municipal interest rate.
These structured securities are a type of derivative instrument. Unlike some
derivatives, these securities are not designed to leverage the fund's portfolio
or increase its exposure to interest rate risk.
Investments in structured securities raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. These issues could be resolved in a manner that could hurt the
performance of the fund.
Defensive investing The fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of taxable money market and
short-term debt securities. If the fund takes a temporary defensive position, it
may be unable to achieve its investment goal.
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Management
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Manager The fund's investment manager is SSBC Fund Management Inc., an affiliate
of Salomon Smith Barney Inc. The manager's address is 388 Greenwich Street, New
York, New York 10013. The manager selects the fund's investments and oversees
its operations. The manager and Salomon Smith Barney are subsidiaries of
Citigroup Inc. Citigroup businesses produce a broad range of financial services
- -- asset management, banking and consumer finance, credit and charge cards,
insurance, investments, investment banking and trading -- and use diverse
channels to make them available to consumer and corporate customers around the
world.
Management fees The manager will receive an advisory fee equal to 0.50% of the
fund's average daily net assets.
Distributor The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. A selling group consisting of Salomon Smith
Barney and other broker-dealers sells fund shares to the public.
Distribution plan The fund has adopted a Rule 12b-1 distribution plan for its
Class A shares. Under the plan, Class A shares pay a service fee.
Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are
addressing the Year 2000 issue for their systems. The fund has been informed by
other service providers that they are taking similar measures. Although the fund
does not expect the Year 2000 issue to adversely affect it, the fund cannot
guarantee that the efforts of the fund, which are limited to requesting and
receiving reports from its service providers, or the efforts of its service
providers to correct the problem will be successful.
Massachusetts Money Market Portfolio
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Choosing a class of shares to buy
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You may purchase Class A shares which are sold at net asset value with no
initial or deferred sales charge. Class A shares are subject to ongoing
distribution and service fees.
You may purchase Class Y shares only if you are making an initial investment of
at least $15,000,000. Class Y shares are sold at net asset value
You may buy shares from:
. A Salomon Smith Barney Financial Consultant
. An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
. The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
Investment minimums Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
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Initial Additional
-----------------------------------------
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Class A Class Y All Classes
<S> <C> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $ 25 n/a $25
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Quarterly Systematic Investment Plans $ 50 n/a $50
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Uniform Gift to Minors Accounts $ 250 $15 million $50
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</TABLE>
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Salomon Smith Barney Brokerage Accounts
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If you maintain certain types of securities brokerage accounts with Salomon
Smith Barney, you may request that your free credit balances (i.e., immediately
available funds) be invested automatically in Class A shares of a designated
money market fund either daily or weekly. A complete record of fund dividends,
purchases and redemptions will be included on your regular Salomon Smith Barney
brokerage statement. In addition to this sweep service, shareholders of Salomon
Smith Barney FMA PLUS/SM/ accounts may also take advantage of: a free IRA, free
dividend reinvestment, unlimited checking, 100 free ATM withdrawals each year,
gain/loss analysis and online computer access to account information. Contact
your Salomon Smith Barney Financial Consultant for more complete information.
Massachusetts Money Market Portfolio
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Deferred sales charges
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If Class A shares of the fund are acquired by exchange from another Smith Barney
fund subject to a deferred sales charge the original deferred sales charge will
apply to these shares. If you redeem these shares within 12 months of the date
you purchased shares of the original fund, the fund's shares may be subject to a
deferred sales charge of 1.00%.
The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
You do not pay a deferred sales charge on:
. Shares exchanged for shares of another Smith Barney fund
. Shares that represent reinvested distributions and dividends
. Shares that are no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
Deferred sales charge waivers
The deferred sales charge for Class A shares will generally be waived:
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn about additional waivers of deferred sales charges, contact
your Salomon Smith Barney Financial Consultant or dealer representative or
consult the Statement of Additional Information ("SAI").
- -12-
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Buying shares
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<TABLE>
<S> <C>
Through a You should contact your Salomon Smith Barney Financial Consultant or
Salomon Smith dealer representative to open a brokerage account and make arrangements to
Barney buy shares.
Financial
Consultant or If you do not provide the following information, your order will be rejected:
dealer
representative . Class of shares being bought
. Dollar amount or number of shares being bought
You should pay for your shares through your brokerage account no later than
the third business day after you place your order. Salomon Smith Barney or
your dealer representative may charge an annual account maintenance fee.
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Through the Certain investors who are clients of the selling group are eligible to buy
fund's shares
transfer directly from the fund.
agent
. Write the transfer agent at the following address:
Smith Barney Massachusetts Money Market Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
. Enclose a check to pay for the shares. For initial purchases, complete and
send an account application.
. For more information, call the transfer agent at 1-800-451-2010.
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Through a You may authorize Salomon Smith Barney, your dealer representative or the
systematic transfer agent to transfer funds automatically from a regular bank account to
investment buy shares on a regular basis.
plan
. Amounts transferred should be at least: $25 monthly or $50 quarterly
. If you do not have sufficient funds in your account on a transfer date,
Salomon Smith Barney, your dealer representative or the transfer agent may
charge you a fee
For more information, contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent or consult the SAI.
</TABLE>
Massachusetts Money Market Portfolio
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Exchanging shares
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<TABLE>
<S> <C>
Smith You should contact your Salomon Smith Barney Financial Consultant or
Barney dealer representative to exchange into other Smith Barney funds. Be sure to
offers a read the prospectus of the Smith Barney fund you are exchanging into.
distinctive
family of . You may exchange shares only for shares of the same class of another
funds Smith Barney fund. Not all Smith Barney funds offer all classes.
tailored to
help meet . Not all Smith Barney funds may be offered in your state of residence.
the varying Contact your Salomon Smith Barney Financial Consultant, dealer
needs of representative or the transfer agent.
both large
and small . You must meet the minimum investment amount for each fund
investors
. If you hold share certificates, the transfer agent must receive the
certificates endorsed for transfer or with signed stock powers (documents
transferring ownership of certificates) before the exchange is effective.
. The fund may suspend or terminate your exchange privilege if you engage
in an excessive pattern of exchanges.
- -------------------------------------------------------------------------------------------------
Sales Your shares may be subject to an initial sales charge at the time of the
charges exchange. For more information, contact your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer agent.
Your deferred sales charge (if any) will continue to be measured from the date
of your original purchase of another fund's shares subject to a deferred sales
charge.
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By If you do not have a brokerage account, you may be eligible to exchange
telephone shares through the transfer agent. You must complete an authorization form to
authorize telephone transfers. If eligible, you may make telephone exchanges
on any day the New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time). Requests
received after the close of regular trading on the Exchange are priced at the net
asset value next determined.
You can make telephone exchanges only between accounts that have identical
registrations.
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</TABLE>
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<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account, contact your
dealer representative or write to the transfer agent at the address on the
opposite page.
</TABLE>
Massachusetts Money Market Portfolio
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Redeeming shares
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Generally Contact your Salomon Smith Barney Financial Consultant or dealer
representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must receive
the certificates endorsed for transfer or with signed stock
powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business days
after your request is received in good order. However, if you
recently purchased your shares by check, your redemption
proceeds will not be sent to you until your original check
clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
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By mail For accounts held directly at the fund, send written requests to
the transfer agent at the following address:
Smith Barney Massachusetts Money Market Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
. Your account number
. The class of shares and the dollar amount or number of shares
to be redeemed
. Signatures of each owner exactly as the account is registered
- -16-
<PAGE>
<TABLE>
<S> <C>
By If you do not have a brokerage account, you may be eligible to redeem
telephone shares in amounts up to $10,000 per day through the transfer agent.
You must complete an authorization form to authorize telephone
redemptions. If eligible, you may request redemptions by telephone on
any day the New York Stock Exchange is open. Call the transfer agent
at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern time).
Requests received after the close of regular trading on the Exchange
are priced at the net asset value next determined.
Your redemption proceeds can be sent by check to your address of
record or by wire transfer to a bank account designated on your
authorization form. You must submit a new authorization form to
change the bank account designated to receive wire transfers and you
may be asked to provide certain other documents.
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Automatic You can arrange for the automatic redemption of a portion of your
cash shares on a monthly or quarterly basis. To qualify you must own
withdrawal shares of the fund with a value of at least $10,000 and each automatic
plans redemption must be at least $50. If your shares are subject to a
deferred sales charge, the sales charge will be waived if your automatic
payments do not exceed 1% per month of the value of your shares
subject to a deferred sales charge.
The following conditions apply:
. Your shares must not be represented by certificates
. All dividends and distributions must be reinvested
For more information, contact your Salomon Smith Barney Financial
Consultant or dealer representative or consult the SAI.
</TABLE>
Massachusetts Money Market Portfolio
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Other things to know about share transactions
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When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:
. Name of the fund
. Account number
. Class of shares being bought, exchanged or redeemed
. Dollar amount or number of shares being bought, exchanged or
redeemed
. Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
Signature guarantees To be in good order, your redemption request must include
a signature guarantee if you:
. Are redeeming over $10,000 of shares
. Are sending signed share certificates or stock powers to the transfer agent
. Instruct the transfer agent to mail the check to an address different from
the one on your account
. Changed your account registration
. Want the check paid to someone other than the account owner(s)
. Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
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<PAGE>
The fund has the right to:
. Suspend the offering of shares
. Waive or change minimum and additional investment amounts
. Reject any purchase or exchange order
. Change, revoke or suspend the exchange privilege
. Suspend telephone transactions
. Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securities
and Exchange Commission
. Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities.
Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Excessive exchange transactions The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges
by the shareholder.
Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.
Massachusetts Money Market Portfolio
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Dividends, distributions and taxes
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Dividends The fund declares a dividend of substantially all of its net
investment income on each day the New York Stock Exchange (NYSE) is open.
Income dividends are paid monthly. The fund generally makes capital gain
distributions, if any, once a year, typically in December. The fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Capital gain distributions and dividends are reinvested
in additional fund shares of the same class you hold. The fund expects
distributions to be primarily from income. You do not pay a sales charge on
reinvested distributions or dividends. Alternatively, you can instruct your
Salomon Smith Barney Financial Consultant, dealer representative or the transfer
agent to have your distributions and/or dividends paid in cash. You can change
your choice at any time to be effective as of the next distribution or dividend,
except that any change given to the transfer agent less than five days before
the payment date will not be effective until the next distribution or dividend
is paid.
Taxes In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Transaction Federal tax status Massachusetts tax
status
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Redemption or exchange of shares Usually no gain or loss; loss Usually no gain or loss;
may result to extent of any loss may result to extent
deferred sales charge of any deferred sales
charge
Long-term capital gain Taxable gain Taxable gain
distributions
Short-term capital gain Ordinary income Ordinary income
distributions
Dividends Exempt if from interest on Exempt if from interest
tax- on Massachu-
exempt securities, otherwise setts municipal
ordinary income securities, otherwise
ordinary income
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</TABLE>
The fund anticipates that it will normally not earn or distribute any long-term
capital gains.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification
- -20-
<PAGE>
number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax rules may apply, you should consult your tax adviser about your investment
in the fund.
Massachusetts Money Market Portfolio
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Share price
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You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
The fund uses the amortized cost method to value its portfolio securities.
Using this method, the fund constantly amortizes over the remaining life of a
security the difference between the principal amount due at maturity and the
cost of the security to the fund.
<TABLE>
<CAPTION>
Purchase is Effective
Form of Purchase Payment and Dividends Begin
- -------------------------------------------------------------------------------------
<S> <C> <C>
. Payment in federal funds If received before At the close of regular
. Having a sufficient cash the close of regular trading on the Exchange
balance in your account with trading on the on that day
Salomon Smith Barney or a Exchange:
selling group member
- -------------------------------------------------------------------------------------
If received after At the close of regular
the close of regular trading on the Exchange
trading on the on the next business day
Exchange:
- -------------------------------------------------------------------------------------
. Other forms of payment, with At the close of regular trading on the Exchange
conversion into, or advance of, on the next business day
federal funds by Salomon Smith
Barney or a selling group member
. Other forms of payment
received by the transfer agent
- -------------------------------------------------------------------------------------
</TABLE>
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
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<PAGE>
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Salomon Smith Barney(SM)
a member of citigroup [Symbol]
Massachusetts Money Market Portfolio
- -- an investment portfolio of Smith Barney Muni Funds
Shareholder reports Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site. Our web site is located at www.smithbarney.com
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get copies of these materials
for a duplicating fee by writing to the Public Reference Section of the
Commission, Washington, D.C. 20549-6009. Information about the public reference
room may be obtained by calling 1-800-SEC-0330. You can get the same
information free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(SM) Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-04395)
[FD00000 7/99]
PART B
Smith Barney Massachusetts Money Market Portfolio
Smith Barney Muni Funds
388 Greenwich Street
New York, NY 10013
Statement of Additional
Information
July 29,1999
This Statement of Additional Information (the "SAI")
expands upon and supplements the information contained in the
current prospectus of the Smith Barney Massachusetts Money Market
Portfolio (the "fund") dated July 29, 1999, as amended or
supplemented from time to time, and should be read in conjunction
with the prospectus. Shares of the Smith Barney Muni Funds (the
"trust") are offered currently with a choice of nine portfolios:
the National Portfolio, the Limited Term Portfolio, the Florida
Portfolio, the Georgia Portfolio, the New York Portfolio, the
Pennsylvania Portfolio, the California Money Market Portfolio,
the Massachusetts Money Market Portfolio and the New York Money
Market Portfolio (collectively referred to as "funds"). All of
the funds (except for the Massachusetts Money Market Portfolio)
are contained in a combined SAI dated July 29, 1999. Additional
information about the fund's investments is available in the
fund's annual and semi-annual reports to shareholders. The
fund's prospectus may be obtained free of charge from your
Salomon Smith Barney Financial Consultant or by writing or
calling the fund at the address or telephone number set forth
above. This SAI, although not in itself a prospectus, is
incorporated by reference into the prospectus in its entirety.
TABLE OF CONTENTS Page
Investment Objective and Management Policies 2
Trustees and Officers 7
Distribution 10
Purchase of Shares 11
Redemption of Shares 12
Valuation of Shares 14
Exchange Privilege 14
Performance Data 15
The Fund 16
Voting Rights 17
Taxes 17
Additional Information 19
Appendix A - Ratings Definitions A-1
Appendix B - Special Considerations Relating to Massachusetts
Municipal
Obligations B-1
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the fund's investment objective
and policies. The following discussion supplements the
description of the fund's investment policies in its prospectus.
SSBC Fund Management, Inc. ("SSBC" or the "Manager") serves as
investment manager and administrator to the fund.
Massachusetts Money Market Portfolio seeks to provide
income exempt from federal income taxes and from Massachusetts
personal income taxes from a portfolio of high quality short-term
municipal obligations selected for liquidity and stability. The
Massachusetts Money Market Portfolio has a fundamental policy
that, under normal market conditions, at least 80% of its total
assets will be invested in securities that produce income that is
exempt from federal income taxes (other than the alternative
minimum tax) and from Massachusetts personal income taxes in the
opinion of bond counsel for the various issuers.
Municipal Obligations. In general, municipal obligations
are debt obligations (bonds or notes) issued by or on behalf of
states, territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities the
interest on which is exempt from Federal income tax in the
opinion of bond counsel to the issuer. Municipal obligations are
issued to obtain funds for various public purposes, many of which
may enhance the quality of life, including the construction of a
wide range of public facilities, such as airports, bridges,
highways, housing, hospitals, mass transportation, schools,
streets, water and sewer works, gas, and electric utilities.
They may also be issued to refund outstanding obligations, to
obtain funds for general operating expenses, or to obtain funds
to loan to other public institutions and facilities and in
anticipation of the receipt of revenue or the issuance of other
obligations. In addition, the term "municipal obligations"
includes certain types of industrial development bonds ("IDBs")
issued by public authorities to obtain funds to provide various
privately-operated facilities for business and manufacturing,
housing, sports, convention or trade show facilities, airport,
mass transit, port and parking facilities, air or water pollution
control facilities, and certain facilities for water supply, gas,
electricity or sewerage or solid waste disposal.
The two principal classifications of municipal obligations
are "general obligation" and "revenue." General obligations are
secured by a municipal issuer's pledge of its full faith, credit,
and taxing power for the payment of principal and interest.
Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other
specific revenue source. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived
from payments of the industrial user. The payment of the
principal and interest on IDBs is dependent solely on the ability
of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
Currently, the majority of the fund's municipal obligations are
revenue bonds.
For purposes of diversification and concentration under the
Investment Company Act of 1940, as amended (the "1940 Act"), the
identification of the issuer of municipal obligations depends on
the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government
creating the subdivision and the obligation is backed only by the
assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer. Similarly, in the case of an IDB or
a pollution control revenue bond, if the bond is backed only by
the assets and revenues of the non-governmental user, the non-
governmental user is regarded as the sole issuer. If in either
case the creating government or another entity guarantees an
obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor. Similar criteria apply
for purposes of the diversification requirements under Subchapter
M of the Internal Revenue Code (the "Code").
The yields on municipal obligations are dependent on a
variety of factors, including general market conditions, supply
and demand, general conditions of the municipal market, size of a
particular offering, the maturity of the obligation and the
rating of the issue. The ratings of Nationally Recognized
Statistical Ratings Organizations ("NRSROs") such as Moody's
Investment Service, Inc. ("Moody's") and Standard & Poor's
Ratings Group ("S&P") represent their opinions as to the quality
to the municipal obligations that they undertake to rate. It
should be emphasized, however, that such ratings are general and
are not absolute standards of quality. Consequently, municipal
obligations with the same maturity, coupon and rating may have
different yields when purchased in the open market, while
municipal obligations of the same maturity and coupon with
different ratings may have the same yield.
The fund may invest in securities the disposition of which
is subject to legal or contractual restrictions. The sale of
restricted securities often requires more time and results in
higher dealer discounts or other selling expenses than does the
sale of securities that are not subject to restrictions on
resale. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on
resale.
Securities may be sold in anticipation of a market decline
(a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates). In addition, a
security may be sold and another purchased at approximately the
same time to take advantage of what the manager believes to be a
temporary disparity in the normal yield relationship between the
two securities. The fund believes that, in general, the
secondary market for tax-exempt securities in the fund's
portfolios may be less liquid than that for taxable fixed-income
securities. Accordingly, the ability of the fund to make
purchases and sales of securities in the foregoing manner may be
limited. Yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the
general movement of interest rates, but instead due to such
factors as changes in the overall demand for or supply of various
types of tax-exempt securities or changes in the investment
objectives of investors.
Municipal obligations also are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code, and
laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy
taxes. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of any one
or more issuers to pay, when due, the principal of and interest
on its or their Municipal Bonds may be materially affected.
Money Market Instruments. The fund operates as a money
market fund, and utilizes certain investment policies so that, to
the extent reasonably possible, its price per share will not
change from $1.00, although no assurance can be given that this
goal will be achieved on a continuous basis. For example, the
fund will not purchase a security which, after giving effect to
any demand features, has a remaining maturity of greater than 13
months, or maintain a dollar-weighted average fund maturity in
excess of 90 days.
The fund's investments are limited to United States dollar-
denominated instruments that, at the time of acquisition
(including any related credit enhancement features) have received
a rating in one of the two highest categories for short-term debt
obligations from the "Requisite NRSROs," securities of issuers
that have received such a rating with respect to other comparable
securities, and comparable unrated securities. "Requisite
NRSROs" means (a) any two nationally recognized statistical
rating organizations NRSROs) that have issued a rating with
respect to a security or class of debt obligations of an issuer,
or (b) one NRSRO, if only one NRSRO has issued such rating at the
time that the fund acquires the security. The NRSROs currently
designated as such by the SEC are S&P, Moody's, Duff and Phelps
Inc., Fitch IBCA, Inc. ("Fitch") and Thomson BankWatch.
The fund may invest up to 20% of the value of its assets in
one or more of the three principal types of derivative product
structures described below. Derivative products are typically
structured by a bank, broker-dealer or other financial
institution. A derivative product generally consists of a trust
or partnership through which the fund holds an interest in one or
more underlying bonds coupled with a conditional right to sell
("put") the fund's interest in the underlying bonds at par plus
accrued interest to a financial institution (a "Liquidity
Provider"). Typically, a derivative product is structured as a
trust or partnership which provides for pass-through tax-exempt
income. There a are currently three principal types of
derivative structures: (1) "Tender Option Bonds", which are
instruments which grant the holder thereof the right to put an
underlying bond at par plus accrued interest at specified
intervals to a Liquidity Provider; (2) "Swap Products", in which
the trust or partnership swaps the payments due on an underlying
bond with a swap counterpart who agrees to pay a floating
municipal money market interest rate:; and (3) "Partnerships",
which allocate to the partners income, expenses, capital gains
and losses in accordance with a governing partnership agreement.
Investments in derivative products raise certain tax,
legal, regulatory and accounting issues which may not be
presented by investments in other municipal bonds. There is some
risk that certain issues could be resolved in a manner that could
adversely impact the performance of the fund. For example, the
tax-exempt treatment of the interest paid to holders of
derivative products is premised on the legal conclusion that the
holders of such derivative products have an ownership interest in
the underlying bonds. While the fund receives an opinion of legal
counsel to the effect that the income from each derivative
product is tax-exempt to the same extent as the underlying bond,
the Internal Revenue Service (the "IRS") has not issued a ruling
on this subject. Were the IRS to issue an adverse ruling, there
is a risk that the interest paid on such derivative products
would be deemed taxable. To the extent that certain of the
fund's investments in these derivative products are deemed to be
illiquid, such investments will be subject to the fund's 10%
limitation on investments in illiquid securities.
The fund intends to limit the risk of derivative products
by purchasing only those derivative products that are consistent
with the fund's investment objective and policies. The fund will
not use such instruments to leverage securities. Hence,
derivative products' contributions to the overall market risk
characteristics of the fund will not materially alter its risk
profile and will be fully compliant with the fund's maturity
guidelines.
Stand-By Commitments. The fund may acquire "stand-by
commitments" with respect to municipal obligations held in its
funds. Under a stand-by commitment a dealer agrees to purchase,
at the fund's option, specified municipal obligations at a
specified price. The fund intends to enter into stand-by
commitments only with dealers, banks and broker-dealers that, in
the opinion of the manager, present minimal credit risks. In
evaluating the creditworthiness of the issuer of a stand-by
commitment, the manager will review periodically the issuer's
assets, liabilities, contingent claims and other relevant
financial information. Because the fund invests in securities
backed by banks and other financial institutions, change in the
credit quality of these institutions could cause losses to the
fund and effect its share price. The fund will acquire stand-by
commitments solely to facilitate fund liquidity and do not intend
to exercise their rights thereunder for trading purposes.
Other Factors to be Considered. The fund anticipates being
as fully invested as practicable in tax-exempt securities. The
fund may invest in taxable investments due to market conditions
or pending investment of proceeds from sales of shares or
proceeds from the sale of fund securities or in anticipation of
redemptions. However, the fund generally expects to invest the
proceeds received from the sale of shares in municipal
obligations as soon as reasonably possible, which is generally
within one day. At no time will more than 20% of the fund's net
assets be invested in taxable investments except when the manager
has determined that market conditions warrant the fund adopting a
temporary defensive investment posture. To the extent the fund's
assets are invested for temporary defensive purposes, such assets
will not be invested in a manner designed to achieve the fund's
investment objective.
From time to time, proposals have been introduced before
Congress for the purpose of restricting or eliminating the
federal income tax exemption for interest on municipal
obligations, and similar proposals may be introduced in the
future. If one of these proposals were enacted, the availability
of tax exempt obligations for investment by the funds and the
value of the fund's would be affected. The fund's Board of
Directors would then reevaluate the portfolio's investment
objective and policies.
Special Considerations Relating to Massachusetts Municipal
Securities. See Appendix B for a discussion of the
considerations relating to Massachusetts Municipal Securities.
Private Activity Bonds. The fund may invest without limits
in private activity bonds. Interest income on certain types of
private activity bonds issued after August 7, 1986 to finance
non-governmental activities is a specific tax preference item for
purposes of the federal individual and corporate alternative
minimum taxes. Individual and corporate shareholders may be
subject to a federal alternative minimum tax to the extent that
the fund's dividends are derived from interest on those bonds.
When-Issued Securities. The fund may purchase municipal
bonds on a "when-issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). The payment
obligation and the interest rate that will be received on the
municipal bonds purchased on a when-issued basis are each fixed
at the time the buyer enters into the commitment. Although the
fund will purchase municipal bonds on a when-issued basis only
with the intention of actually acquiring the securities, the fund
may sell these securities before the settlement date if it is
deemed advisable as a matter of investment strategy.
Municipal bonds are subject to changes in value based upon
the public's perception of the creditworthiness of the issuers
and changes, real or anticipated, in the level of interest rates.
In general, municipal bonds tend to appreciate when interest
rates decline and depreciate when interest rates rise. Purchasing
municipal bonds on a when-issued basis, therefore, can involve
the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained
in the transaction itself. To account for this risk, a separate
account of the fund consisting of cash or liquid debt securities
equal to the amount of the when-issued commitments will be
established at the fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If
the market or fair value of such securities declines, additional
cash or securities will be placed in the account on a daily basis
so the value of the account will equal the amount of such
commitments by the fund. Placing securities rather than cash in
the segregated account may have a leveraging effect on the fund's
net assets. That is, to the extent the fund remains
substantially fully invested in securities at the same time it
has committed to purchase securities on a when-issued basis,
there will be greater fluctuations in its net assets than if it
had set aside cash to satisfy its purchase commitments. Upon the
settlement date of the when-issued securities, the fund will meet
obligations from then-available cash flow, sale of securities
held in the segregated account, sale of other securities or,
although it normally would not expect to do so, from the sale of
the when-issued securities themselves (which may have a value
greater or less than the fund's payment obligations). Sales of
securities to meet such obligations may involve the realization
of capital gains, which are not exempt from federal income taxes
or individual state personal income tax.
When the fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the
seller to do so may result in the fund's incurring a loss or
missing an opportunity to obtain a price considered to be
advantageous.
Short-Term Trading. Fund transactions will be undertaken
principally to accomplish the fund's objective in relation to
anticipated movements in the general level of interest rates, but
the fund may also engage in short-term trading consistent with
its objective.
Short-term Borrowing. The fund may borrow on a short-term
basis in amounts of up to 5% of its assets in order to facilitate
the settlement of fund securities transactions.
Illiquid Securities. The fund will not invest more than
10% of the value of its total assets in illiquid securities,
which may include certain derivative products and will include
any repurchase transactions that do not mature within seven days.
Portfolio Turnover. The fund's portfolio turnover rate
(the lesser of purchases or sales of fund securities during the
year, excluding purchases or sales of short-term securities,
divided by the monthly average value of fund securities)
generally is not expected to exceed 100%, but the fund turnover
rate will not be a limiting factor whenever the fund deems it
desirable to sell or purchase securities. Securities may be sold
in anticipation of a rise in interest rates (market decline) or
purchased in anticipation of a decline in interest rates (market
rise) and later sold. In addition, a security may be sold and
another security of comparable quality may be purchased at
approximately the same time in order to take advantage of what
the fund believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of
various types of tax-exempt securities.
Investment Restrictions
The fund is subject to certain restrictions and policies
that are "fundamental," which means that they may not be changed
without a "vote of a majority of the outstanding voting
securities" of the fund, as defined under the 1940 Act and Rule
18f-2 thereunder (see "Voting"). The fund is subject to other
restrictions and policies that are "non-fundamental" and which
may be changed by the fund's Board of Trustees without
shareholder approval, subject to any applicable disclosure
requirements.
Fundamental Policies Without the approval of a majority of its
outstanding voting securities, the fund may not:
1. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
2. Invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities in
the same industry. For purposes of this limitation, securities of
the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered
to be issued by members of any industry.
3. Borrow money, except that (a) the fund may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and (b)
the fund may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the fund will be limited so that no more than 33 1/3% of the
value of its total assets (including the amount borrowed), valued
at the lesser of cost or market, less liabilities (not including
the amount borrowed) valued at the time the borrowing is made, is
derived from such transactions.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its fund securities, to
the fullest extent permitted under the 1940 Act.
5. Engage in the business of underwriting securities issued by
other persons, except to the extent that the fund may technically
be deemed to be an underwriter under the Securities Act of 1933,
as amended, in disposing of fund securities.
6. Purchase or sell real estate, real estate mortgages, real
estate investment trust securities, commodities or commodity
contracts, but this restriction shall not prevent the fund from
(a) investing in securities of issuers engaged in the real estate
business or the business of investing in real estate (including
interests in limited partnerships owning or otherwise engaging in
the real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate received
in connection with securities it holds or held; or (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the fund's
investment objective and policies).
Nonfundamental Policies. As a nonfundamental policy, the fund
may not:
1. Purchase any securities on margin (except for such short-
term credits as are necessary for the clearance of purchases and
sales of fund securities) or sell any securities short (except
"against the box"). For purposes of this restriction, the
deposit or payment by the fund of underlying securities and other
assets in escrow and collateral agreements with respect to
initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Purchase or otherwise acquire any security if, as a result,
more than 10% of its net assets would be invested in securities
that are illiquid.
3. Write or purchase put, call, straddle or spread options.
All of the foregoing restrictions stated in terms of
percentages will apply at the time an investment is made; a
subsequent increase or decrease in the percentage that may result
from changes in values or net assets will not result in a
violation of the restriction.
TRUSTEES AND OFFICERS
Set forth below is a list of each Trustee and executive
officer of the fund, including a description of principal
occupation during the last 5 years, age and address of each such
person. All officers of the Trust have their business address at
388 Greenwich Street, New York, NY 10013.
LEE ABRAHAM, Trustee (Age 71).
Retired; formerly Chairman and Chief Executive Officer of
Associated Merchandising Corporation, a major retail
merchandising and sourcing organization; His address is 106
Barnes Road, Stamford, Connecticut 06902.
ALLAN J. BLOOSTEIN, Trustee (Age 69).
President of Allan J. Bloostein Associates, a consulting firm;
Director of CVS Corporation, a drug store chain, and Taubman
Centers Inc., a real estate development company; Retired Vice
Chairman and Director of The May Department Stores Company; His
address is 27 West 67th Street, New York, New York 10023.
JANE DASHER, Trustee (Age 49).
Investment Officer of Korsant Partners, a family investment
company; Prior to 1997, an Independent Financial Consultant; From
1975 to 1987 held various positions with Philip Morris Companies,
Inc. including Director of Financial Services, Treasurers
Department.
DONALD R. FOLEY, Trustee (Age 76).
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Formerly
Vice President of Edwin Bird Wilson, Incorporated (advertising).
RICHARD E. HANSON, Jr., Trustee (Age 57).
Head of School, New Atlanta Jewish Community High School,
Atlanta, Georgia, since September 1996; formerly Headmaster, The
Peck School, Morristown, New Jersey; prior to July 1, 1994,
Headmaster, Lawrence County Day School-Woodmere Academy,
Woodmere, New York; His address is 58 Ivy Chase, Atlanta, GA
30342.
PAUL HARDIN, Trustee (Age 68).
Professor of Law at University of North Carolina at Chapel Hill,
12083 Morehead, Chapel Hill, North Carolina 27514. Director of
The Summit Bancorporation. Formerly, Chancellor of the
University of North Carolina at Chapel Hill.
*HEATH B. McLENDON, Chairman of the Board, President and Chief
Executive Officer (Age 66). Managing Director of Salomon Smith
Barney; Trustee or Director of 64 investment companies affiliated
with Salomon Smith Barney; President of SSBC and Travelers
Investment Advisors ("TIA"); former Chairman of Smith Barney
Strategy Advisors Inc.
RODERICK C. RASMUSSEN, Trustee (Age 73).
Investment Counselor, 9 Cadence Court, Morristown, NJ 07960.
Formerly, Vice President of Dresdner and Company Inc. (investment
counselors).
JOHN P. TOOLAN, Trustee (Age 68).
Retired, 13 Chadwell Place, Morristown, New Jersey, 07960.
Trustee or director of ten investment companies associated with
Smith Barney. Formerly, Director and Chairman of Smith Barney
Trust Company, Director of Smith Barney Holdings Inc. and the
Manager and Senior Executive Vice President, Director and Member
of the Executive Committee of Smith Barney.
LEWIS E. DAIDONE, Senior Vice President and Treasurer (Age 41).
Managing Director of Salomon Smith Barney; Senior Vice President
and Treasurer of 59 investment companies affiliated with
Citigroup, and Director and Senior Vice President of the manager
and TIA.
PETER M. COFFEY, Vice President and Investment Officer (Age 55).
Managing Director of Salomon Smith Barney; Vice President of the
Manager and of five investment companies associated with Salomon
Smith Barney.
JOSEPH DEANE, Vice President and Investment Officer (Age 50).
Managing Director of Salomon Smith Barney and Investment Officer
of SSBC; prior to July 1993, Senior Vice President and Managing
Director of Shearson Lehman Advisors.
JOSEPH BENEVENTO, Vice President and Investment Officer (Age 30).
Vice President of Smith Barney and Vice President of the fund and
four investment companies associated with Salomon Smith Barney.
PAUL A. BROOK, Controller (Age 45).
Director of Salomon Smith Barney; Controller or Assistant
Treasurer of 43 investment companies affiliated with Citigroup
since 1998; Prior to 1998 Managing Director of AMT Capital
Services Inc.; Prior to 1997, Partner with Ernst & Young LLP.
IRVING DAVID, Controller (California and New York Money Market
portfolios) (Age 37).
Director of Salomon Smith Barney. Controller or Assistant
Treasurer of 43 investment companies affiliated with Citigroup.
Prior to March, 1994, Assistant Treasurer of First Investment
Management Company.
CHRISTINA T. SYDOR, Secretary (Age 48).
Managing Director of Salomon Smith Barney and Secretary of 59
investment companies affiliated with Salomon Smith Barney;
Secretary and General Counsel of the Manager and TIA.
*Designates a Trustee that is an "interested person" as defined
in the 1940 Act as amended. (Such persons are compensated by
Salomon Smith Barney and are not separately compensated by the
fund for serving as a fund officer or Trustee.
The following table shows the compensation estimated to be
paid by the fund to each person who will be a Trustee during the
fund's current fiscal year. None of the officers of the trust
received any compensation from the fund for such period.
Officers and interested Trustees of the trust are compensated by
Salomon Smith Barney.
COMPENSATION TABLE
Name of Person
Estimated
Aggregate
Compensation
from Fund
For Fiscal
Year
Ending
03/31/99
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensation
from Fund
Complex for
Calendar Year
Ended 12/31/98
Number of
Funds for
Which Person
Serves within
Fund Complex
as of
03/31/99
Lee Abraham++
Allan J.
Bloostein++
Jane F. Dasher++
Joseph H. Fleiss@
Donald R. Foley+
Richard E.
Hanson++
Paul Hardin
Heath B. McLendon*
Roderick C.
Rasmussen
John P. Toolan+
_________________________
* Designates a person that is an "interested Trustee" of the
trust.
+ Pursuant to a deferred compensation plan, the indicated
persons elected to defer payment of the following amounts
of their compensation from the fund: Donald R. Foley -
$______, and John P. Toolan - $_____, and the following
amounts of their compensation from the fund Complex:
Donald R. Foley: $______, and John P. Toolan: $______.
++ Elected as of April 19, 1999, therefore no compensation was
paid by the trust through December 31, 1999.
@ Mr. Fleiss is a Trustee Emeritus. Upon attainment of age
72 the fund's current Trustees may elect to change to
emeritus status. Any Trustees elected or appointed to the
Board in the future will be required to change to emeritus
status upon attainment of age 80. Trustees Emeritus are
entitled to serve in emeritus status for a maximum of 10
years during which time they are paid 50% of the annual
retainer fee and meeting fees otherwise applicable to the
trust's Trustees, together with reasonable out-of-pocket
expenses for each meeting attended. For the last Fiscal
year, the total paid to Emeritus Trustee by the fund was
$_________.
On _________ 1999, the Trustees and officers owned in the
aggregate less than 1% of the outstanding shares of the fund.
Investment Manager and Administrator
SSBC Fund Management, Inc. serves as investment manager to
the fund pursuant to a written agreement (the "Advisory
Agreement"). The services provided by the manager under the
Advisory Agreement are described in the prospectus under
"Management." The manager pays the salary of any officer and
employee who is employed by both it and the fund. The manager
bears all expenses in connection with the performance of its
services. The manager is a wholly owned subsidiary of Citigroup
Inc. ("Citigroup").
The Management Agreement for the Massachusetts Money Market
Portfolio provides for a management fee at the annual rate of
0.50% of the fund's average net assets.
The Management Agreement further provides that all other
expenses not specifically assumed by the manager under the
Management Agreement on behalf of the fund are borne by the fund.
Expenses payable by the fund include, but are not limited to, all
charges of custodians (including sums as custodian and sums for
keeping books and for rendering other services to the fund) and
shareholder servicing agents, expenses of preparing, printing and
distributing all prospectuses, proxy material, reports and
notices to shareholders, all expenses of shareholders' and
Trustees' meetings, filing fees and expenses relating to the
registration and qualification of the fund's shares and the fund
under Federal or state securities laws and maintaining such
registrations and qualifications (including the printing of the
fund's registration statements), fees of auditors and legal
counsel, costs of performing fund valuations, out-of-pocket
expenses of Trustees and fees of Trustees who are not "interested
persons" as defined in the 1940 Act, interest, taxes and
governmental fees, fees and commissions of every kind, expenses
of issue, repurchase or redemption of shares, insurance expense,
association membership dues, all other costs incident to the
fund's existence and extraordinary expenses such as litigation
and indemnification expenses. Direct expenses of each fund of
the trust, including but not limited to the management fee, are
charged to that fund, and general trust expenses are allocated
among the funds on the basis of relative net assets.
The manager has voluntarily agreed to waive its fees if in
any fiscal year the aggregate expenses of any Class of the fund,
exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed the
indicated percentage of the fund's average net assets for that
fiscal year:
Massachusetts Money Market Portfolio
0.70%
The foregoing expense limitations may be terminated at any
time by the manager by notification to existing shareholders and
by supplementing the relevant fund's then-current prospectus
and/or SAI.
DISTRIBUTION
Distributor. CFBDS, Inc., located at 20 Milk Street,
Boston, MA 02109-5408, serves as the trust's distributor on a
best efforts basis pursuant to a distribution agreement dated
October 8, 1998 (the "Distribution Agreement"), which was
approved by the trust's board of directors. Prior to the merger
of Travelers Group, Inc. and Citicorp on October 8, 1998, Salomon
Smith Barney served as the trust's distributor.
The trust, on behalf of each fund, has adopted a plan of
distribution pursuant to Rule 12b-1 (the "Plan") under the 1940
Act under which a service fee is paid by each class of shares
(other than Class Y shares) of each fund to Salomon Smith Barney
in connection with shareholder service expenses. The service fee
is equal to 0.10% of the average daily net assets.
Other Service Providers
Custodian
All fund securities and cash owned by the fund will be held
in the custody of PNC Bank, National Association, 17th and
Chestnut Streets, Philadelphia, Pennsylvania 19103.
Auditors
KPMG LLP, 345 Park Avenue, New York, New York 10154, has
been selected as independent auditors to examine and report on
the fund's financial statements for the fiscal year ending March
31, 2000.
PURCHASE OF SHARES
Detailed information about the purchase, redemption and
exchange of fund shares appears in the prospectus. The offers two
classes of shares: Class A and Class Y. Class A shares of the
fund are sold without an initial sales charge. These
alternatives are designed to provide investors with the
flexibility of selecting an investment best suited to his or her
needs based on the amount of purchase, the length of time the
investor expects to hold the shares and other circumstances.
The following classes of shares are available for purchase.
See the prospectus for a discussion of factors to consider in
selecting which Class of shares to purchase.
Class A Shares. Class A shares are sold to investors without an
initial or deferred sales charge but are subject to an ongoing
service fee equal to 0.10% of average daily net assets of Class A
shares.
Class Y Shares. Class Y shares are sold without an initial sales
charge or deferred sales charge and are available only to
investors investing a minimum of $15,000,000 (except purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount).
General
Investors may purchase shares from a Salomon Smith Barney
Financial Consultant or a Dealer Representative. In addition,
certain investors, including qualified retirement plans
purchasing through certain Dealer Representatives, may purchase
shares directly from the fund. When purchasing shares of the
fund, investors must specify which class is being purchased.
Salomon Smith Barney and Dealer Representatives may charge their
customers an annual account maintenance fee in connection with a
brokerage account through which an investor purchases or holds
shares. Accounts held directly at First Data Investor Services
Group, Inc. ("First Data" or "transfer agent") are not subject to
a maintenance fee.
Investors in Class A shares may open an account in a fund by
making an initial investment of at least $1,000 for each account,
in the fund. Investors in Class Y shares may open an account by
making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
shareholders purchasing shares of a fund through the Systematic
Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A shares and subsequent
investment requirement for all Classes is $25. For shareholders
purchasing shares of the fund through the Systematic Investment
Plan on a quarterly basis, the minimum initial investment
required for Class A shares and the subsequent investment
requirement for all Classes is $50. There are no minimum
investment requirements for Class A shares for employees of
Citigroup and its subsidiaries, including Salomon Smith Barney,
unitholders who invest distributions from a Unit Investment Trust
("UIT") sponsored by Salomon Smith Barney, and Directors/Trustees
of any of the Smith Barney Mutual Funds, and their spouses and
children. The fund reserves the right to waive or change
minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares
purchased will be held in the shareholder's account by First
Data. Share certificates are issued only upon a shareholder's
written request to First Data.
Purchase orders received by the fund or a Salomon Smith Barney
Financial Consultant prior to the close of regular trading on the
NYSE, on any day the fund calculates its net asset value, are
priced according to the net asset value determined on that day
(the "trade date"). Orders received by a Dealer Representative
prior to the close of regular trading on the NYSE on any day the
fund calculates its net asset value, are priced according to the
net asset value determined on that day, provided the order is
received by the fund or the fund's agent prior to its close of
business. For shares purchased through Salomon Smith Barney or a
Dealer Representative purchasing through Salomon Smith Barney,
payment for shares of the fund is due on the third business day
after the trade date. In all other cases, payment must be made
with the purchase order.
Systematic Investment Plan. Shareholders may make additions to
their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic
Investment Plan, Salomon Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly
basis or at least $50 on a quarterly basis to charge the
shareholder's account held with a bank or other financial
institution on a monthly or quarterly basis as indicated by the
shareholder, to provide for systematic additions to the
shareholder's fund account. A shareholder who has insufficient
funds to complete the transfer will be charged a fee of up to $25
by Salomon Smith Barney or First Data. The Systematic Investment
Plan also authorizes Salomon Smith Barney to apply cash held in
the shareholder's Salomon Smith Barney brokerage account or
redeem the shareholder's shares of a Smith Barney money market
fund to make additions to the account. Additional information is
available from the fund or a Salomon Smith Barney Financial
Consultant or a Dealer Representative.
Determination of Public Offering Price
The fund offers its shares to the public on a continuous basis.
The public offering price for a Class A and Class Y share of the
fund is equal to the net asset value per share at the time of
purchase.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of
payment postponed (a) for any period during which the New York
Stock Exchange, Inc. ("NYSE") is closed (other than for customary
weekend and holiday closings), (b) when trading in the markets
the fund normally utilizes is restricted, or an emergency exists,
as determined by the SEC, so that disposal of the fund's
investments or determination of net asset value is not reasonably
practicable or (c) for such other periods as the SEC by order may
permit for protection of the fund's shareholders.
If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or be
accompanied by an endorsed stock power) and must be submitted to
First Data together with the redemption request. Any signature
appearing on a share certificate, stock power or written
redemption request in excess of $10,000 must be guaranteed by an
eligible guarantor institution such as a domestic bank, savings
and loan institution, domestic credit union, member bank of the
Federal Reserve System or member firm of a national securities
exchange. Written redemption requests of $10,000 or less do not
require a signature guarantee unless more than one such
redemption request is made in any 10-day period or the redemption
proceeds are to be sent to an address other than the address of
record. Unless otherwise directed, redemption proceeds will be
mailed to an investor's address of record. First Data may
require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians.
A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
If a shareholder holds shares in more than one Class, any
request for redemption must specify the Class being redeemed. In
the event of a failure to specify which Class, or if the investor
owns fewer shares of the Class than specified, the redemption
request will be delayed until the Transfer Agent receives further
instructions from Salomon Smith Barney, or if the shareholder's
account is not with Salomon Smith Barney, from the shareholder
directly. The redemption proceeds will be remitted on or before
the third business day following receipt of proper tender, except
on any days on which the NYSE is closed or as permitted under the
1940 Act, in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Salomon Smith Barney
brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Salomon
Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other
than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to 15 days or more.
Distributions in Kind
If the Board of Directors of the fund determines that it
would be detrimental to the best interests of the remaining
shareholders to make a redemption payment wholly in cash, the
fund may pay, in accordance with SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1.00% of the
fund's net assets by a distribution in kind of fund securities in
lieu of cash. Securities issued as a distribution in kind may
incur brokerage commissions when shareholders subsequently sell
those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan")
is available to shareholders who own shares with a value of at
least $10,000 and who wish to receive specific amounts of cash
monthly or quarterly. Withdrawals of at least $50 may be made
under the Withdrawal Plan by redeeming as many shares of the fund
as may be necessary to cover the stipulated withdrawal payment.
To the extent withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the fund, there
will be a reduction in the value of the shareholder's investment,
and continued withdrawal payments may reduce the shareholder's
investment and ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in the fund.
Furthermore, as it generally would not be advantageous to a
shareholder to make additional investments in the fund at the
same time he or she is participating in the Withdrawal Plan,
purchases by such shareholder in amounts of less than $5,000
ordinarily will not be permitted. All dividends and distributions
on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the fund.
Shareholders who wish to participate in the Withdrawal Plan
and who hold their shares in certificate form must deposit their
share certificates with the Transfer Agent as agent for
Withdrawal Plan members. For additional information,
shareholders should contact a Salomon Smith Barney Financial
Consultant or their Financial Consultant, the Introducing Broker
or dealer in the selling group. A shareholder who purchases
shares directly through the Transfer Agent may continue to do so
and applications for participation in the Withdrawal Plan must be
received by the Transfer Agent no later than the eighth day of
the month to be eligible for participation beginning with that
month's withdrawal.
VALUATION OF SHARES
The prospectus states that the net asset value of the
fund's Classes of shares will be determined on any date that the
New York Stock Exchange ("NYSE") is open. The NYSE is closed on
the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The fund uses the "amortized cost method" for valuing fund
securities pursuant to Rule 2a-7 under the 1940 Act (the "Rule").
The amortized cost method of valuation of the fund's securities
(including any securities held in the separate account maintained
for when-issued securities) involves valuing a security at its
cost at the time of purchase and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless
of the impact of fluctuating interest rates on the market value
of the instrument. The market value of the fund's securities
will fluctuate on the basis of the creditworthiness of the
issuers of such securities and with changes in interest rates
generally. While the amortized cost method provides certainty in
valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price
the fund would receive if it sold the instrument. During such
periods the yield to investors in the fund may differ somewhat
from that obtained in a similar company that uses mark-to-market
values for all its fund securities. For example, if the use of
amortized cost resulted in a lower (higher) aggregate fund value
on a particular day, a prospective investor in the fund would be
able to obtain a somewhat higher (lower) yield than would result
from investment in such similar company, and existing investors
would receive less (more) investment income. The purpose of this
method of valuation is to attempt to maintain a constant net
asset value per share, and it is expected that the price of the
fund's shares will remain at $1.00; however, shareholders should
be aware that despite procedures that will be followed to have a
stable price, including maintaining a maximum dollar-weighted
average fund maturity of 90 days, investing in securities that
have or are deemed to have remaining maturities of only 13 months
or less and investing in only United States dollar-denominated
instruments determined by the fund's Board of Trustees to be of
high quality with minimal credit risks and which are Eligible
Securities (as defined below), there is no assurance that at some
future date there will not be a rapid change in prevailing
interest rates, a default by an issuer or some other event that
could cause one of these fund's price per share to change from
$1.00.
An Eligible Security is defined in the Rule to mean a
security which: (a) has a remaining maturity of 397 days or
less; (b)(i) is rated in the two highest short-term rating
categories by any two nationally recognized statistical rating
organizations ("NRSROs") that have issued a short-term rating
with respect to the security or class of debt obligations of the
issuer, or (ii) if only one NRSRO has issued a short-term rating
with respect to the security, then by that NRSRO; (c) was a long-
term security at the time of issuance, is rated in the three
highest long-term rating categories by the requisite NRSROs, and
whose issuer has outstanding a short-term debt obligation which
is comparable in priority and security and has a rating as
specified in clause (b) above; or (d) if no rating is assigned by
any NRSRO as provided in clauses (b) and (c) above, the unrated
security is determined to be of comparable quality to any such
rated security.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of certain Smith Barney
Mutual Funds may exchange all or part of their shares for shares
of the same class of other Smith Barney Mutual Funds, to the
extent such shares are offered for sale in the shareholder's
state of residence, on the basis of relative net asset value per
share at the time of exchange as follows:
A. Class A shares of the fund will be subject to the
appropriate sales charge upon the exchange of such shares for
Class A shares of another fund of the Smith Barney Mutual Funds
sold with a sales charge.
B. Class Y shareholders of the fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in
any of the funds identified above may do so without imposition of
any charge.
The exchange privilege enables shareholders to acquire
shares of the same Class in the fund with different investment
objectives when they believe that a shift between funds is an
appropriate investment decision. This privilege is available to
shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current
prospectus of the fund into which an exchange is being
considered. prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and, subject to any
applicable CDSC, the proceeds immediately invested, at a price as
described above, in shares of the fund being acquired. Smith
Barney reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time
after written notice to shareholders.
Additional Information Regarding the Exchange Privilege.
Although the exchange privilege is an important benefit,
excessive exchange transactions can be detrimental to the fund's
performance and its shareholders. The manager may determine that
a pattern of frequent exchanges is excessive and contrary to the
best interests of the fund's other shareholders. In this event,
the fund may, at its discretion, decide to limit additional
purchases and/or exchanges by a shareholder. Upon such a
determination, the fund will provide notice in writing or by
telephone to the shareholder at least 15 days prior to suspending
the exchange privilege and during the 15 day period the
shareholder will be required to (a) redeem his or her shares in
the fund or (b) remain invested in the fund or exchange into any
of the funds of the Smith Barney Mutual funds ordinarily
available, which position the shareholder would be expected to
maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive
pattern of exchanges.
Additional Information Regarding Telephone Redemption and
Exchange Program.
Neither the fund nor its agents will be liable for
following instructions communicated by telephone that are
reasonably believed to be genuine. The fund and its agents will
employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be
recorded). The fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange program or to
impose a charge for this service at any time following at least
sever (7) days prior notice to shareholders.
PERFORMANCE DATA
From time to time, in advertisements and other types of
sales literature, the fund may compare its performance to that of
other mutual funds with similar investment objectives, to
appropriate indices or rankings such as those compiled by Lipper
Analytical Services, Inc. or to other financial alternatives.
From time to time the fund may advertise its yield,
effective yield and taxable equivalent yield. These yield
figures are based on historical earnings and are not intended to
indicate future performance. The yield refers to the net
investment income generated by an investment in the fund over a
specific seven-day period (which will be stated in the
advertisement). This net investment income is then annualized.
The effective yield is calculated similarly but, when annualized,
the income earned by an investment in the fund is assumed to be
reinvested. The effective yield will be slightly higher than the
yield because of the compounding effect of the assumed
reinvestment. The tax equivalent yield also is calculated
similarly to the yield, except that a stated income tax rate is
used to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the tax-exempt yield of the fund.
Performance information may be useful in evaluating the
fund and for providing a basis for comparison with other
financial alternatives. Since the performance of the fund
changes in response to fluctuations in market conditions,
interest rates and fund expenses, no performance quotation should
be considered a representation as to the fund's performance for
any future period.
THE FUND
The interest of a shareholder is in the assets and earnings
of the fund in which he or she holds shares. The Board of
Trustees has authorized the issuance of shares in separate
series, each representing shares in one of the separate funds.
Pursuant to such authority, the Board may also authorize the
creation of additional series of shares and additional classes of
shares within any series. The investment objectives, policies
and restrictions applicable to additional funds would be
established by the Board of Trustees at the time such funds were
established and may differ from those set forth in the
prospectuses and this SAI. In the event of liquidation or
dissolution of a portfolio or of the fund, shares of the fund are
entitled to receive the assets belonging to that fund and a
proportionate distribution, based on the relative net assets of
the respective funds, of any general assets not belonging to any
particular fund that are available for distribution.
The Declaration of Trust may be amended only by a "majority
shareholder vote" as defined therein, except for certain
amendments that may be made by the Board of Trustees. The
Declaration of Trust and the By-Laws of the fund are designed to
make the fund similar in certain respects to an entity organized
as a corporation. The principal distinction between the two
forms of business organization relates to shareholder liability
described below. Under Massachusetts law, shareholders of a
business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust,
which is not the case with a corporation. The Declaration of
Trust of the fund provides that shareholders shall not be subject
to any personal liability for the acts or obligations of the fund
and that every written obligation, contract, instrument or
undertaking made by the fund shall contain a provision to the
effect that the shareholders are not personally liable
thereunder.
Special counsel for the fund is of the opinion that no
personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of
such provision is given, except possibly in a few jurisdictions.
With respect to (a) all types of claims in the latter
jurisdictions; (b) tort claims; (c) contract claims where the
provision referred to is omitted from the undertaking; (c) claims
for taxes; and (d) certain statutory liabilities in other
jurisdictions, a shareholder may be held personally liable to the
extent that claims are not satisfied by the fund; however, upon
payment of any such liability the shareholder will be entitled to
reimbursement from the general assets of the fund. The Board of
Trustees intends to conduct the operations of the fund, with the
advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities
of the fund.
The Declaration of Trust further provides that no Trustee,
officer or employee of the fund is liable to the fund or to a
shareholder, except as such liability may arise from his or her
or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his or its duties, nor is any Trustee,
officer or employee personally liable to any third persons in
connection with the affairs of the fund. It also provides that
all third persons shall look solely to the fund property or the
property of the appropriate portfolio of the fund for
satisfaction of claims arising in connection with the affairs of
the fund or a particular portfolio, respectively. With the
exceptions stated, the Declaration of Trust provides that a
Trustee, officer or employee is entitled to be indemnified
against all liability in connection with the affairs of the fund.
The fund shall continue without limitation of time subject
to the provisions in the Declaration of Trust concerning
termination of the Trust or any of the series of the Trust by
action of the shareholders or by action of the Trustees upon
notice to the shareholders.
VOTING RIGHTS
The Board of Trustees has the power to alter the number and
the terms of office of the Trustees, and may at any time lengthen
their own terms or make their terms of unlimited duration
(subject to certain removal procedures) and fill vacancies,
provided that in accordance with the 1940 Act, (i) a shareholder
meeting to elect Trustees must promptly be called if at any time
at least a majority of the Trustees have not been elected by the
shareholders of the fund, and (ii) at least 2/3 of the Trustees
must have been so elected upon the filing of any vacancy by the
board without a shareholder vote. Shares do not have cumulative
voting rights and therefore the holders of more than 50% of the
outstanding shares of the fund may elect all of the Trustees
irrespective of the votes of other shareholders. Class A and
Class Y shares of the fund represent interests in the assets of
that fund and have identical voting, dividend, liquidation and
other rights on the same terms and conditions, except that each
Class of shares has exclusive voting rights with respect to
provisions of the fund's Rule 12b-1 distribution plan which
pertain to a particular class. For example, a change in
investment policy for the fund would be voted upon only by
shareholders of the fund involved. Additionally, approval of the
fund's Management Agreement is a matter to be determined
separately by that fund. Approval of a proposal by the
shareholders of one fund is effective as to that fund whether or
not enough votes are received from the shareholders of the other
funds to approve the proposal as to those funds.
TAXES
Capital gain distributions, if any, are taxable to
shareholders, and are declared and paid at least annually.
As described above and in the Prospectuses, the fund is
designed to provide investors with current income exempt from
otherwise applicable state and/or local personal income taxes.
The trust is not intended to be a balanced investment program and
is not designed for investors seeking capital gains or maximum
tax-exempt income irrespective of fluctuations in principal.
Investment in the trust would not be suitable for tax-exempt
institutions, qualified retirement plans, H.R. 10 plans and
individual retirement accounts because those investors would not
gain any additional tax benefit from the receipt of tax-exempt
income.
The fund has qualified and intends to continue to qualify
each year as a "regulated investment company" under the Code.
Provided that the fund (a) is a regulated investment company and
(b) distributes to its shareholders at least 90% of its taxable
net investment income (including, for this purpose, its net
realized short-term capital gains) and 90% of its tax-exempt
interest income (reduced by certain expenses), the fund will not
be liable for Federal income taxes to the extent its taxable net
investment income and its net realized long-term and short-term
capital gains, if any, are distributed to its shareholders. Any
such taxes paid by the fund would reduce the amount of income and
gains available for distribution to shareholders.
Because the fund may distribute exempt-interest dividends,
interest on indebtedness incurred by a shareholder to purchase or
carry shares of the fund is not deductible for Federal income tax
purposes. In addition, the indebtedness is not deductible by a
shareholder for purposes of Massachusetts tax purposes. If a
shareholder receives exempt-interest dividends with respect to
any share of the fund and if the share is held by the shareholder
for six months or less, then any loss on the sale or exchange of
the share may, to the extent of the exempt-interest dividends, be
disallowed. In addition, the Code may require a shareholder that
receives exempt-interest dividends to treat as taxable income a
portion of certain otherwise non-taxable social security and
railroad retirement benefit payments. Furthermore, the portion
of any exempt-interest dividend paid by the fund that represents
income derived from private activity bonds held by the fund may
not retain its tax-exempt status in the hands of a shareholder
who is a "substantial user" of a facility financed by the bonds,
or a "related person" of the substantial user. Moreover, as
noted in the Prospectuses (a) some or all of the fund's exempt-
interest dividends may be a specific preference item, or a
component of an adjustment item, for purposes of the Federal
individual and corporate alternative minimum taxes and (b) the
receipt of the fund's dividends and distributions may affect a
corporate shareholder's Federal "environmental" tax liability if
the environment tax is reinstated as proposed by President
Clinton. In addition, the receipt of the fund's dividends and
distributions may affect a foreign corporate shareholder's
Federal "branch profits" tax liability and the Federal and
California "excess net passive income" tax liability of a
Subchapter S corporation. Shareholders should consult their own
tax advisors to determine whether they are (a) "substantial
users" with respect to a facility or "related" to those users
within the meaning of the Code or (b) subject to a Federal
alternative minimum tax, the Federal "environmental" tax, the
Federal "branch profits" tax, or the Federal or California
"excess net passive income" tax. As a general rule, the fund's
gain or loss on a sale or exchange of an investment will be a
long-term capital gain or loss if the fund has held the
investment for more than one year and will be a short-term
capital gain or loss if it has held the investment for one year
or less. Furthermore, as a general rule, a shareholder's gain or
loss on a sale or redemption of shares of the fund will be a
long-term capital gain or loss if the shareholder has held his or
her fund shares for more than one year and will be a short-term
capital gain or loss if he or she has held the fund shares for
one year or less. Shareholders of the fund will receive, as more
fully described in the Prospectuses, an annual statement as to
the income tax status of his or her dividends and distributions
for the prior calendar year. Each shareholder will also receive,
if appropriate, various written notices after the close of the
fund's prior taxable year as to the Federal income tax status of
certain dividends or distributions which were received from the
fund during the fund's prior taxable year.
Generally, interest on municipal obligations is exempt from
regular Federal income tax. However, interest on municipal
obligations that are considered to be "private activity bonds,"
as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), will not be exempt from Federal income tax to any
shareholder who is considered to be a "substantial user" of any
facility financed by the proceeds of such obligations (or a
"related person" to such "substantial user" as defined in the
Code).
In addition, interest on municipal obligations may subject
certain investors' Social Security benefits to Federal income
taxation. Tax-exempt interest is included in modified adjusted
gross income solely for the purpose of determining what portion,
if any, of Social Security benefits will be included in gross
income; no tax-exempt interest, including that received from the
funds, will be subject to regular Federal income tax for most
investors.
The Tax Reform Act of 1986 (the "Tax Reform Act") provided
that interest on certain municipal obligations (i.e. certain
private activity bonds) issued after August 7, 1986 will be
treated as a preference item for purposes of both the corporate
and individual alternative minimum tax. Under Treasury
regulations, that portion of the fund's exempt-interest dividend
which is to be treated as a preference item for shareholders will
be based on the proportionate share of the interest received by
the fund from the specified private activity bonds. In addition,
the Tax Reform Act provided generally that tax preference items
for corporations will include one-half the amount by which
adjusted net book income (which would include tax-exempt
interest) of the taxpayer exceeds the alternative minimum taxable
income of the taxpayer before any amount is added to alternative
minimum taxable income because of this preference.
A shareholder's gain or loss on the disposition of fund
shares whether by redemption, sale or exchange (except in the
case of the California and New York Portfolios), generally will
be a long-term or short-term gain or loss depending whether the
shares had been owned for more than 12 months or not for more
than 12 months at disposition. Losses realized by a shareholder
on the disposition of fund shares owned for six months or less
will be treated as a long-term capital loss to the extent a
capital gain dividend had been distributed on such shares.
From time to time, proceedings have been introduced before
Congress for the purpose of restricting or eliminating the
Federal income tax exemption for interest on municipal
obligations. It may be expected that similar proposals may be
introduced in the future. If such proposals were to be enacted,
the ability of the fund to pay "exempt interest" dividends could
be adversely affected and the fund would then need to reevaluate
its investment objectives and policies and consider changes in
its structure.
ADDITIONAL INFORMATION
The trust, an open-end management investment company, is
organized as a "Massachusetts business trust" pursuant to a
Declaration of Trust dated April 23,1986. Pursuant to the
Declaration of Trust the Board of Trustees has authorized the
issuance of different series of shares, each representing shares
in separate funds. The assets of the fund are segregated and
separately managed. Each share of the fund represents an equal
proportionate interest in the net assets of that fund with each
other share of the same fund and is entitled to such dividends
and distributions out of the net income of that fund as are
declared in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each share held and
will vote by individual fund except as otherwise permitted by the
1940 Act. It is the intention of the trust not to hold annual
meetings of shareholders. The Board of Trustees may call
meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust, and
shareholders are entitled to call a meeting upon a vote of 10% of
the fund's outstanding shares for purposes of voting on removal
of a Trustee or Trustees. The trust will assist shareholders in
calling such a meeting as required by the 1940 Act. Shares do
not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Board of Trustees
may grant in its discretion. Shares are redeemable as set forth
under "Redemption of Shares."
The fund sends to its shareholders a semi-annual report and
an audited annual report, which include listings of the
investment securities held by the funds at the end of the
reporting period. In an effort to reduce the fund's printing and
mailing costs, the fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation
means that a household having multiple accounts with the
identical address of record will receive a single copy of each
report. Shareholders who do not want this consolidation to apply
to their account should contact their Financial Consultants or
the Transfer Agent.
PNC Bank, National Association, located at 17th and
Chestnut Streets, Philadelphia, Pennsylvania 19103, serves as the
custodian of the fund. Under the custody agreement with the fund,
PNC holds the fund's portfolio securities and keeps all necessary
accounts and records. For its services, PNC receives a monthly
fee based upon the month-end market value of securities held in
custody and also receives certain securities transaction charges.
The assets of the fund are held under bank custodianship in
compliance with the 1940 Act.
First Data, located at Exchange Place, Boston,
Massachusetts 02109, serves as the Transfer Agent of the fund.
Under the transfer agency agreement, the Transfer Agent maintains
the shareholder account records for the fund, handles certain
communications between shareholders and the fund and distributes
dividends and distributions payable by the fund. For these
services, the Transfer Agent receives a monthly fee computed on
the basis of the number of shareholder accounts it maintains for
the fund during the month, and is reimbursed for certain out-of-
pocket expenses.
APPENDIX A
Ratings of Municipal Bonds, Notes and Commercial Paper
Moody's Investors Service, Inc. ("Moody's"):
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what
are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large 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 that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered 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.
Standard & Poor's Ratings Group ("S&P"):
AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only in
small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB - Debt rated BBB is regarded as having adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
Fitch/IBCA, Inc.:
AAA - Bonds rated AAA by Fitch have the lowest expectation of
credit risk. The obligor has an exceptionally strong capacity
for timely payment of financial commitments, which is highly
unlikely to be adversely affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of
credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A - Bonds rated A by Fitch are considered to have a low
expectation of credit risk. The capacity for timely payment of
financial commitments is considered to be strong, but may be more
vulnerable to changes in economic conditions and circumstances
than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation
of credit risk. The capacity for timely payment of financial
commitments is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely
to impair this capacity. This is the lowest investment grade
category assigned by Fitch.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus
signs, however, are not used in the AAA category.
Description of State and Local Government Note Ratings
Notes are assigned distinct rating symbols in recognition of the
differences between short-term and long-term credit risk.
Factors affecting the liquidity of the borrower and short-term
cyclical elements are critical in short-term ratings, while other
factors of major importance in bond risk-- long-term secular
trends for example-- may be less important over the short run.
Moody's Investors Service, Inc.:
Moody's ratings for state and municipal notes and other short-
term loans are designated Moody's Investment Grade ("MIG"). A
short-term rating may also be assigned on an issue having a
demand feature, a variable-rate demand obligation. Such ratings
will be designated as "VMIG." Short-term ratings on issues with
demand features are differentiated by the use of the VMIG symbol
to reflect such characteristics as payment upon periodic demand
rather than fixed maturity dates and payment relying on external
liquidity. Additionally, investors should be alert to the fact
that the source of payment may be limited to the external
liquidity with no or limited legal recourse to the issuer in the
event the demand is not met. Symbols used are as follows:
MIG/VMIG 1 - Loans bearing this designation are of the best
quality, enjoying strong protection from established cash flows
of funds, superior liquidity support or demonstrated broad-based
access to the market for refinancing.
MIG 2/VMIG 2 - Loans bearing this designation are of high
quality, with margins of protection ample although not so large
as in the preceding group.
Standard & Poor's Ratings Group:
SP-1 - Very strong or strong capacity to pay principal interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
Fitch/IBCA, Inc.:
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to
three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet financial
commitments in a timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.
The "+" denotes an exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
DESCRIPTION OF HIGHEST COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.:
Prime-1 - Issuers (or related supporting institutions) rated
Prime-1 have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally
be evidenced by the following characteristics: leading market
positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high
internal cash generation; and well-established access to a range
of financial markets and assured sources of alternate liquidity.
Standard & Poor's Ratings Group:
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.
Appendix B - Special Note:
The following information (set forth in Appendix B) is a summary
of special factors available at the time of the preparation of
this SAI affecting municipal obligations for the Massachusetts
Money Market Portfolio. The summary does not purport to be a
complete description and is based on information from official
statements and other public information relating to securities
offerings, finances and bond ratings of issuers within the state.
The manager has not independently verified any such information.
The Commonwealth of Massachusetts has indicated that budgetary
information is based on estimates and projections of revenues and
expenditures for a fiscal year and must not be construed as
statements of fact; estimates and projections are based upon
various assumptions which may be affected by numerous factors,
including future economic conditions in the state and the nation,
and that there can be no assurance that the estimates will be
achieved. Generally, NRSROs base their ratings on information
and materials furnished to the agencies and on investigations,
studies and assumptions by the rating agencies at a particular
point in time. There is no assurance that any such rating
remains in effect for a given period of time or that it will not
be lowered or withdrawn entirely if, in the judgment of the NRSRO
originally establishing the rating, circumstances so warrant.
Any such change or withdrawal of the rating could have an adverse
effect on the market price of the bonds.
APPENDIX B
SPECIAL CONSIDERATION RELATING TO MASSACHUSETTS MUNICIPAL
OBLIGATIONS
The Commonwealth of Massachusetts and certain of its cities and
towns have at certain times in the recent past undergone serious
financial difficulties which have adversely affected their credit
standing. The prolonged effects of such financial difficulties
could adversely affect the market value of the Massachusetts
Municipal Securities held by the fund. The information
summarized below describes some of the more significant factors
that could affect the fund or the ability of the obligors to pay
debt service on certain of these securities. The sources of such
information are the official statements of issuers located in the
Commonwealth of Massachusetts, as well as other publicly
available documents, and statements of public officials. The
Fund has not independently verified any of the information
contained in such statements and documents, but the fund is not
aware of facts which would render such information inaccurate.
Economic Climate
The Commonwealth of Massachusetts is a densely populated urban
state with a well-educated population, comparatively high income
levels, low rates of unemployment and a relatively diversified
economy. According to the 1990 census, Massachusetts had a
population density of 768 persons per square mile, as compared to
70.3 for the United States as a whole. It thus had the third
greatest population density following Rhode Island and New
Jersey. Massachusetts experienced a modest increase in
population between 1980 and 1990. In 1997, the population of
Massachusetts was approximately 6,118,000.
Per capita personal income for Massachusetts residents,
unadjusted for differentials in the cost of living, was $29,792
in 1996, as compared to the national average of $24,426. While
per capita personal income is, on a relative scale, higher in
Massachusetts than in the United States as a whole, this is
offset to some extent by the higher cost of living in
Massachusetts.
The Massachusetts service sector, which constituted 35.6 percent
of the total non-agricultural work force in February 1998, is the
largest sector in the Massachusetts economy. Government
employment represents 13.2 percent of total non-agricultural
employment in Massachusetts. While total employment in
construction, manufacturing, trade, government, services,
finance, insurance and real estate declined between 1988 and
1992, the economic recovery that began in 1993 has been
accompanied by increased employment levels. Since 1994, total
employment levels in Massachusetts have increased at yearly rates
greater than 2.0 percent. In 1997, employment levels in every
industry increased, including manufacturing employment, which had
declined in every year since 1983. The most rapid growth in 1997
came in the construction sector and the services sector, which
grew at rates of 6.7 percent and 4.1 percent, respectively. Total
non-agricultural employment in Massachusetts grew at a rate of
2.7 percent in 1997.
Between 1982 and 1988, the economies of Massachusetts and New
England were among the strongest performers in the nation.
Between 1989 and 1992, however, both Massachusetts and New
England have experienced growth rates significantly below the
national average. An economic recession in the early 1990s caused
unemployment rates in Massachusetts to rise significantly above
the national average. In the first three quarters of 1996, the
gross state product for Massachusetts grew at a rate of 2.9
percent, approximately the same rate as the national average.
Massachusetts' unemployment rate averaged 8.6 percent in 1992,
6.9 percent in 1993, 6.0 percent in 1994, 5.4 percent in 1995,
4.3 percent in 1996 and 4.0 percent in 1997.
The unemployment rate in Massachusetts has fallen almost
consistently since the peak of 9.6% in mid 1991, and has remained
at or below that of the nation for the past three years. Monthly
unemployment in Massachusetts in Fiscal Year 1997 averaged a low
4.0% as compared to a national rate of 5.2%. Unemployment is
projected at 3.7% through Fiscal Year 1998 and to remain steady
at 3.7% to 3.9% annually through calendar year 2000.
Growth in personal income is expected to decline from the Fiscal
Year 1997 rate of about 6.0% to approximately 5.7% in Fiscal
1998. It is expected to fall further in Fiscal Year 1999 to 4.3%
from 4.5%, and to remain at that rate through the following few
years. However, the rate of inflation (as measured by consumer
prices), at least in metropolitan Boston, should continue to
outpace that of the nation by approximately 0.5%. The risks for
Massachusetts include a continued shortage of skilled labor, low
net population growth, which will further constrain job creation,
and the prominence of the financial services industry in the
economy coupled with a relatively high proportion of non-wage
income, both of which are sensitive to the performance of the
financial markets.
Financial Condition
Under its constitution, the Commonwealth may borrow money (a) for
defense or in anticipation of receipts from taxes or other
sources, any such loan to be paid out of the revenue of the year
in which the loan is made, or (b) by a two-thirds vote of the
members of each house of the Legislature present and voting
thereon.
Certain independent authorities and agencies within the
Commonwealth are statutorily authorized to issue bonds and notes
for which the Commonwealth is either directly, in whole or in
part, or indirectly liable. The Commonwealth's liabilities with
respect to these bonds and notes are classified as either (a)
Commonwealth-supported debt, (b) Commonwealth-guaranteed debt or
(c) indirect obligations.
Debt service expenditures of the Commonwealth in Fiscal Year 1992
totaled $898.3 million, representing a 4.7 percent decrease from
Fiscal Year 1991. Debt service expenditures for Fiscal Year
1993, Fiscal Year 1994, Fiscal Year 1995, Fiscal Year 1996 and
Fiscal Year 1997 were $1.140 billion, $1.149 billion, $1.231
billion, $1.183 billion and $1.276 billion, respectively, and are
projected to be $1.224 billion for Fiscal Year 1998. In January
1990, legislation was enacted which imposes a 10 percent limit on
the total appropriations in any fiscal year that may be expended
for payment of interest on general obligation debt (excluding
Fiscal Recovery Bonds) of Massachusetts.
Also, Wall Street demonstrated its confidence in the
Commonwealth's fiscal policies by again raising the bond rating
for Massachusetts. The long-term debt service obligations are
projected to decrease by 2 percent, or $26.24 million, from
Fiscal Year 1997. Short-term debt service obligations are
expected to increase to approximately $49 million in Fiscal Year
1999, as Central Artery/Tunnel Project cash flow requirements
begin to outpace the inflow of federal and other third-party
revenues. The Commonwealth will fund this interim cash shortfall
with Grant Anticipation Notes to be repaid as federal
reimbursements are received and Bond Anticipation Notes on third-
party financing.
In Fiscal Year 1998, legislation was approved to construct a new
convention center in Boston and to expand existing facilities in
Worcester and Springfield. The projects will be financed with
increases in certain taxes on hotels and vehicle rentals, and the
dedication of state taxes on new businesses in Boston's
Convention Center Finance District. These new revenue sources
will be sufficient to pay the interest on the general obligation
notes that will be sold to finance construction. The notes will
be permanently financed with special obligation revenue bonds
when construction of the new facility is completed, which is
scheduled for 2002.
Fiscal 1999
The House of Representatives approved its version of the fiscal
1999 budget on May 7, 1998, and the Senate approved its version
on June 3, 1998. After passage of two interim, partial budgets
to provide for expenditures during the first 30 days of the
fiscal year, the legislative conference committee appointed to
reconcile the two versions of the fiscal 1999 budget released its
report on July 20, 1998, and the budget was enacted by the
Legislature on the same day. Acting Governor Cellucci approved
it on July 30, 1998. The Governor vetoed or reduced
appropriations totaling approximately $100.9 million. On July
31, 1998 the Legislature overrode several of these vetoes,
restoring approximately $63.1 million of appropriations. After
accounting for the value of vetoes and subsequent overrides, the
budget provides for total appropriations of approximately $19.5
billion.
The fiscal 1999 appropriation for pension funding is
approximately $965.3 million. This amount is consistent with the
amount requested by the Acting Governor, but is approximately
$93.9 million less than the amount required by the most recently
approved pension funding schedule. The small appropriation is
based on the assumption that a revised funding schedule will
require reduced funding because of the 1997 change in law
eliminating Commonwealth responsibility for funding cost-of-
living adjustments incurred by local pension systems. A revised
funding schedule has not yet been submitted to the Legislature.
The fiscal 1999 budget is based on a consensus tax revenue
forecast of $14.4 billion, as agreed by both houses of the
Legislature in May. The tax cuts incorporated into the budget,
valued by the Department of Revenue at $990 million in fiscal
1999, had the effect of reducing the consensus forecast to $13.41
billion. Tax collections in July 1998 totaled $895.5 million, an
increase of $96.4 million, or 12.1%, over July 1997. On August
19, 1998 the Executive Office for Administration and Finance
raised the fiscal 1999 tax estimate by $200 million to $13.61
billion. This estimate does not reflect the Acting Governor's
recommendation of an additional $287.5 million tax reduction
pursuant to legislation he filed on August 10, 1998.
Fiscal 1998
Preliminary results indicate that tax collections for fiscal 1998
totaled approximately $14.026 billion, an increase of $1.161
billion or 9.0%, over fiscal 1997, and approximately $326 million
higher than the final estimate for the year made by the Executive
Office for Administration and Finance. On May 5, 1998 the
estimate for the year was raised from $13.154 billion to $13.3
billion, and on June 10, 1998 it was raised to $13.7 billion.
Projected total fiscal 1998 expenditures are $18.887 billion,
including approximately $123 million in anticipated additional
fiscal 1998 supplemental appropriations. Among the anticipated
appropriations are $46.1 million for Medicaid and $8 million for
environmental remediation of certain underground storage tanks in
the Commonwealth. If such remediation efforts are not underway
by December 23, 1998, the Commonwealth may be liable for
substantial penalties imposed by the federal Environmental
Protection Agency.
The Legislature has enacted several bills providing for
disposition of the fiscal 1998 surplus, but it has not completed
action on final fiscal 1998 appropriations. The final fiscal
1998 supplemental appropriation bill or bills are expected to
authorize certain additional post-fiscal 1998 spending to be
charged to fiscal 1998. Acting Governor Cellucci has also filed
a bill calling for a one-time tax cut of $287.5 million to be
charged to fiscal 1998.
Medicaid
Although the Commonwealth has undertaken a number of successful
Medicaid savings and cost control initiatives in the last five
years, the Commonwealth has also expanded the income eligibility
ceiling for the Medicaid program from 100% to 133% of the federal
poverty level. In fiscal 1998, due to changes in state law and
in the state's federal waiver, the Medicaid program enrolled more
than 150,000 new members. The original appropriations for this
expansion, based on census data that was several years old, were
estimated to fund services for 83,000 new members. As a result
of this higher than expected enrollment, the Acting Governor has
filed a request for supplemental appropriations of $46.1 million
for the health care expansion portion of the Medicaid program.
The requested appropriations were expected to bring fiscal 1998
Medicaid spending to approximately $3.652 billion, an increase of
5.7% over fiscal 1997. Traditional Medicaid spending has
remained within the appropriated spending amounts and expected
population growth projections.
Fiscal 1998 Year-End Surplus
Legislation approved by the Acting Governor on July 21, 1998
increased the ceiling, effective June 30, 1998, on the amount
that can be maintained in the Stabilization Fund from 5% to 7.5%
of budgeted revenues. Based on current estimates of fiscal 1998
results, this change increased the statutory ceiling from
approximately $984.8 million to approximately $1.477 billion.
The current projected fiscal 1998 ending balance in the
Stabilization Fund is $972.2 million, assuming enactment of
additional tax cuts aggregating $287.5 million as proposed by the
Acting Governor.
The fiscal 1999 budget approved by the Acting Governor on July
30, 1998 contains a provision calling for the Comptroller to
transfer $162.5 million, as of June 30, 1998, from the General
Fund to a newly established Tax Exemption Escrow Trust Fund. By
June 30, 1999 the Comptroller is to transfer $162.5 million plus
interest from the new fund back to the General Fund. The effect
of this provision is to charge to fiscal 1998 the approximate
cost allocable to fiscal 1998 of the retroactive income tax
reductions approved by the Acting Governor on July 21, 1998.
On August 5, 1998, the Acting Governor approved legislation
establishing a new Brownfields Revitalization Fund and providing
for the transfer of $45 million to that fund, to be used through
fiscal year 2001 to fund a $15 million access-to-capital program
to be administered by the Massachusetts Office of Business
Development and a $30 million Brownfields Redevelopment Fund to
be administered by the Massachusetts Development Finance Agency.
The legislation also contains an additional $12 million in fiscal
1998 appropriations, which are made available through fiscal
2001, to fund Brownfields-related costs of the Attorney General
and the Department of Environmental Protection.
On August 10, 1998 the Acting Governor approved legislation
establishing a $60 million Teacher Quality Endowment Fund.
Earnings from the investment of moneys credited to the new fund
are to be used by the Commissioner of Education to pay signing
bonuses to incoming teachers and salary bonuses to existing
teachers under a new master teacher corps program. The corpus of
the fund is to be left intact. The legislation also provided for
the transfer from the General Fund of $200 million to the Tax
Reduction Fund (to be applied to a temporary increase in the
personal exemptions applicable to 1998 income taxes) and $150
million to the Stabilization Fund (in addition to any other
transfer required by state finance law). In addition, the
legislation authorized approximately $62.9 million in additional
revenues from the state lottery to be distributed to cities and
towns on account of fiscal 1998.
Also on August 10, 1998, the Acting Governor gave his partial
approval to legislation providing for a variety of capital
appropriations to be charged to fiscal 1998. The bill enacted by
the Legislature called for the transfer of approximately $272.4
million from the General Fund and approximately $106.9 million
from the Highway Fund to a Capital Improvement and Investment
Trust Fund to finance various specified capital expenditures
through fiscal 2000. The Acting Governor vetoed many of the
proposed capital expenditures, reducing the amount of the General
Fund transfer to approximately $96.2 million and the amount of
the Highway Fund transfer to $93 million. The Acting Governor
filed legislation on the same day calling for an additional
$287.5 million to be transferred to the Tax Reduction Fund. That
bill has been referred to the House Committee on Ways and Means.
Under existing law, the effect of the vetoes is to increase the
amount of the fiscal 1998 surplus that will be credited to the
Stabilization Fund and the Capital Projects Fund.
On August 12, 1998, the Acting Governor approved a fiscal 1998
supplemental appropriations bill providing for approximately
$70.9 million in fiscal 1998 appropriations to be made available
in fiscal 1999 to fund various collective bargaining agreements.
In November 1980, voters in the Commonwealth approved a state-
wide tax limitation initiative petition, commonly known as
Proposition 2 1/2, to constrain levels of property taxation and
to limit the charges and fees imposed on cities and towns by
certain government entities, including county governments. The
law is not a constitutional provision and accordingly is subject
to amendment or repeal by the legislature. Proposition 2 1/2
limits the property taxes that a Massachusetts city or town may
assess in any fiscal year to the lesser of (i) 2.5% of the full
and fair cash value of real estate and personal property therein
and (ii) 2.5% over the previous fiscal year's levy limit plus any
growth in the base from certain new construction and parcel
subdivisions. In addition, Proposition 2 1/2 limits any increase
in the charges and fees assessed by certain governmental
entities, including county governments, on cities and towns to
the sum of (i) 2.5% of the total charges and fees imposed in the
preceding fiscal year, and (ii) any increase in charges for
services customarily provided locally or services obtained by the
city or town. The law contains certain override provisions and,
in addition, permits certain debt servicings and expenditures for
identified capital projects to be excluded from the limits by a
majority vote, in a general or special election.
During the 1980's, Massachusetts increased payments to its
cities, towns and regional school districts ("Local Aid") to
mitigate the impact of Proposition 2 1/2 on local programs and
services. In fiscal year 1998, approximately 20.6% of
Massachusetts' budget is estimated to be allocated to Local Aid.
Direct Local Aid increased from $2.359 billion in fiscal year
1992 to $2.547 billion in fiscal year 1993, to $2.727 billion in
fiscal year 1994 and to $2.976 billion in fiscal year 1995.
Fiscal year 1996 expenditures for direct Local Aid were $3.246
billion, a 9.1% increase over 1995. It is estimated that fiscal
year 1997 expenditures for Local Aid will be $3.534 billion,
which will be an increase of approximately 8.9% above the fiscal
year 1996 level. In addition to direct Local Aid, Massachusetts
provides substantial indirect aid to local governments.
In November 1990, voters approved a petition which regulates the
distribution of Local Aid by requiring, subject to appropriation,
distribution to cities and towns of no less than 40% of
collection from personal income taxes, sales and use taxes,
corporate excise taxes, and lottery fund proceeds. The Local Aid
distribution to each city or town would equal no less than 100%
of the total Local Aid received for fiscal year 1989.
Distributions in excess of fiscal year 1989 levels would be based
on new formulas that would replace the current Local Aid
distribution formulas. By its terms, the new formulas would have
called for a substantial increase in direct Local Aid in fiscal
year 1992, and would call for such an increase in fiscal year
1993 and in subsequent years. However, Local Aid payments
expressly remain subject to annual appropriation, and
appropriations for Local Aid in fiscal years 1992 through 1998
have not met the levels set forth in the initiative law.
During Fiscal Years 1993, 1994, 1995, 1996 and 1997 Medicaid
expenditures of the Commonwealth were $3.151 billion, $3.313
billion, $3.898 billion, $3.416 billion and $3.456 billion,
respectively. The average annual growth rate from Fiscal Year
1993 to Fiscal Year 1997 was 2.3 percent. The Executive Office
for Administration and Finance estimates that Fiscal Year 1998
Medicaid expenditures will be approximately $3.620 billion, an
increase of 4.7% from fiscal 1997.
The Division of Medical Assistance has implemented a number of
savings and cost control initiatives including managed care,
utilization review and the identification of third party
liabilities. In spite of increasing caseloads, Massachusetts has
managed a substantial reduction in the Medicaid growth rate in
expenditures over the last six years. From fiscal 1993 through
fiscal 1997, per capita costs grew on average less than 0.6%
annually. The total Medicaid caseload for fiscal 1997 was
approximately 676,323 (approximately 11.1% of the most recently
estimated population of the Commonwealth), as compared to
approximately 630,902 in fiscal 1993.
Litigation
There are pending in courts within the Commonwealth various suits
in which the Commonwealth is a defendant. In the opinion of the
Attorney General, as of September 2, 1998, no litigation was
pending or, to his knowledge, threatened which was likely to
result, either individually or in the aggregate, in final
judgments against the Commonwealth that would affect materially
its financial condition. Listed below are certain litigation
affecting the Commonwealth.
In Massachusetts Wholesalers of Malt Beverages v. Commonwealth,
associations of bottlers challenged as an unconstitutional taking
the 1990 amendments to the bottle bill which escheat abandoned
deposits to the Commonwealth. In August 1994, the Superior Court
ruled that the Commonwealth is liable for certain amounts. In
February 1996, the Commonwealth settled all remaining issues with
one group of plaintiffs. Payments to that group will total
approximately $7 million. The Legislature appropriated the funds
necessary for these payments in its final supplemental budget for
fiscal 1996. The Legislature has appropriated approximately $8
million to implement the terms of the settlement with the
remaining group of plaintiffs.
Year 2000
In June 1997, the Executive Office for Administration and Finance
established a Year 2000 Program Management Office within its
Information Technology Division. The purpose of the office is to
ensure accurate monitoring of the Commonwealth's progress in
achieving year 2000 compliance, i.e., remediating or replacing
and redeploying affected systems, as well as to identify risk
areas and risk mitigation activities and serve as a resource for
all state agencies and departments.
Legislation approved by the Acting Governor on August 10, 1998
appropriated $20.4 million for expenditure by the Information
Technology Division to achieve year 2000 compliance for the six
Executive Offices and other departments that report directly to
the Governor. This amount, together with previously appropriated
amounts and expenditures at the departmental level from existing
funds, is anticipated to be sufficient to meet most of the
remediation efforts for such Executive Offices and departments.
The Secretary of Administration and Finance is to report
quarterly to the Legislature on the progress being made to
address the year 2000 compliance efforts, and to assess the
sufficiency of funding levels.
Special Considerations Relating to Puerto Rico
The following highlights some of the more significant financial
trends and problems affecting the Commonwealth of Puerto Rico
(the "Commonwealth" or "Puerto Rico"), and is based on
information drawn from official statements and prospectuses
relating to the securities offerings of Puerto Rico, its agencies
and instrumentalities, as available on the date of this SAI. SSBC
has not independently verified any of the information contained
in such official statements, prospectuses, and other publicly
available documents, but is not aware of any fact that would
render such information materially inaccurate.
The economy of Puerto Rico is fully integrated with that of the
United States. In fiscal 1997, trade with the United States
accounted for approximately 88% of Puerto Rico's exports and
approximately 62% of its imports. In this regard, in fiscal 1997
Puerto Rico experienced a $2.7 billion positive adjusted
merchandise trade balance.
Since fiscal 1985, personal income, both aggregate and per
capita, has increased consistently each fiscal year. In fiscal
1997, aggregate personal income was $32.1 billion ($30.0 billion
in 1992 prices) and personal per capita income was $8,509 ($7,957
in 1992 prices). Gross product in fiscal 1993 was $25.1 billion
($24.5 billion in 1992 prices) and gross product in fiscal 1997
was $32.1 billion ($27.7 billion in 1992 prices). This represents
an increase in gross product of 27.7% from fiscal 1993 to 1997
(13.0% in 1992 prices).
Puerto Rico's economic expansion, which has lasted over ten
years, continued throughout the five-year period from fiscal 1993
through fiscal 1997. Almost every sector of the economy
participated, and record levels of employment were achieved.
Factors behind the continued expansion included Government-
sponsored economic development programs, periodic declines in the
exchange value of the U.S. dollar, increases in the level of
federal transfers, and the relatively low cost of borrowing funds
during the period.
Average employment increased from 999,000 in fiscal 1993 to
1,128,300 in fiscal 1997. Unemployment, although at relatively
low historical levels, remains above the U.S. average. Average
unemployment decreased from 16.8% in fiscal 1993 to 13.1% in
fiscal 1997.
Manufacturing is the largest sector in the economy accounting for
$19.8 billion or 41.2% of gross domestic product in fiscal 1997.
The manufacturing sector employed 153,273 workers as of March
1997. Manufacturing in Puerto Rico is now more diversified than
during earlier phases of industrial development. In the last two
decades industrial development has tended to be more capital
intensive and dependent on skilled labor. This gradual shift is
best exemplified by heavy investment in pharmaceuticals,
scientific instruments, computers, microprocessors, and
electrical products over the last decade. The service sector,
which includes wholesale and retail trade and finance, insurance,
real estate, hotels and related services, and other services,
ranks second in its contribution to gross domestic product and is
the sector that employs the greatest number of people.
In fiscal 1997, the service sector generated $18.4 billion in
gross domestic product or 38.2% of the total. Employment in this
sector grew from 467,000 in fiscal 1993 to 551,000 in fiscal
1997, a cumulative increase of 17.8%. This increase was greater
than the 12.9% cumulative growth in employment over the same
period providing 48% of total employment. The Government sector
of the Commonwealth plays an important role in the economy of the
island. In fiscal year 1997, the Government accounted for $5.2
billion of Puerto Rico's gross domestic product and provided
10.9% of the total employment. The construction industry has
experienced real growth since fiscal 1987. In fiscal 1997,
investment in construction rose to $4.7 billion, an increase of
14.7% as compared to $4.1 billion for fiscal 1996. Tourism also
contributes significantly to the island economy, accounting for
$2.0 billion of gross domestic product in fiscal 1997.
The present administration has developed and is implementing a
new economic development program which is based on the premise
that the private sector should provide the primary impetus for
economic development and growth. This new program, which is
referred to as the New Economic Model, promotes changing the role
of the Government from one of being a provider of most basic
services to that of a facilitator for private sector initiatives
and encourages private sector investment by reducing Government-
imposed regulatory restraints.
The New Economic Model contemplates the development of
initiatives that will foster private investment in, and private
management of, sectors that are served more efficiently and
effectively by the private enterprise. One of these initiatives
has been the adoption of a new tax code intended to expand the
tax base, reduce top personal and corporate tax rates, and
simplify the tax system. Another initiative is the improvement
and expansion of Puerto Rico's infrastructure to facilitate
private sector development and growth, such as the construction
of the water pipeline and cogeneration facilities described below
and the construction of a light rail system for the San Juan
metropolitan area.
The New Economic Model also seeks to identify and promote areas
in which Puerto Rico can compete more effectively in the global
markets. Tourism has been identified as one such area because of
its potential for job creation and contribution to the gross
product. In 1993, a new Tourism Incentives Act and a Tourism
Development Fund were implemented in order to provide special tax
incentives and financing for the development of new hotel
projects and the tourism industry. As a result of these
initiatives, new hotels have been constructed or are under
construction which have increased the number of hotel rooms on
the island from 8,415 in fiscal 1992 to 10,877 at the end of
fiscal 1997 and to a projected 11,972 by the end of fiscal 1998.
The New Economic Model also seeks to reduce the size of the
Government's direct contribution to gross domestic product. As
part of this goal, the Government has transferred certain
Governmental operations and sold a number of its assets to
private parties. Among these are: (i) the Government sold the
assets of the Puerto Rico Maritime Authority; (ii) the Government
executed a five-year management agreement for the operation and
management of the Aqueducts and Sewer Authority by a private
company; (iii) the Aqueducts and Sewer Authority executed a
construction and operating agreement with a private consortium
for the design, construction, and operation of an approximately
75 million gallon per day water pipeline to the San Juan
metropolitan area from the Dos Bocas reservoir in Utuado; (iv)
the Electric Power Authority executed power purchase contracts
with private power producers under which two cogeneration plants
(with a total capacity of 800 megawatts) will be constructed; (v)
the Corrections Administration entered into operating agreements
with two private companies for the operation of three new
correctional facilities; (vi) the Government entered into a
definitive agreement to sell certain assets of a pineapple juice
processing business and sold certain mango growing operations;
(vii) the Government is in the process of transferring to local
sugar cane growers certain sugar processing facilities; (viii)
the Government sold two hotel properties and is currently
negotiating the sale of a complex consisting of two hotels and a
convention center; and (ix) the Government has announced its
intention to sell the Puerto Rico Telephone Company and is
currently involved in the sale process.
One of the goals of the Rossello administration is to change
Puerto Rico's public health care system from one in which the
Government provides free health services to low income
individuals through public health facilities owned and
administered by the Government to one in which all medical
services are provided by the private sector and the Government
provides comprehensive health insurance coverage for qualifying
(generally low income) Puerto Rico residents. Under this new
system, the Government selects, through a bidding system, one
private health insurance company in each of several designated
regions of the island and pays such insurance company the
insurance premium for each eligible beneficiary within such
region. This new health insurance system is now covering 61
municipalities out of a total of 78 on the island. It is expected
that 11 municipalities will be added by the end of fiscal 1998
and 5 more by the end of fiscal 1999. The total cost of this
program will depend on the number of municipalities included in
the program, the number of participants receiving coverage, and
the date coverage commences. As of December 31, 1997, over 1.1
million persons were participating in the program at an estimated
annual cost to Puerto Rico for fiscal 1998 of approximately $672
million. In conjunction with this program, the operation of
certain public health facilities has been transferred to private
entities. The Government's current privatization plan for health
facilities provides for the transfer of ownership of all health
facilities to private entities. The Government sold six health
facilities to private companies and is currently in negotiations
with other private companies for the sale of thirteen health
facilities to such companies.
One of the factors assisting the development of the manufacturing
sector in Puerto Rico has been the federal and Commonwealth tax
incentives available, particularly those under the Puerto Rico
Industrial Incentives Program and Sections 30A and 936 of the
Internal Revenue Code 1986, as amended (the "Code").
Since 1948, Puerto Rico has promulgated various industrial
incentives laws designed to stimulate industrial investment.
Under these laws, companies engaged in manufacturing and certain
other designated activities were eligible to receive full or
partial exemption from income, property, and other taxes. The
most recent of these laws is Act No. 135 of December 2, 1997 (the
"1998 Tax Incentives Law").
The benefits provided by the 1998 Tax Incentives Law are
available to new companies as well as companies currently
conducting tax-exempt operations in Puerto Rico that choose to
renegotiate their existing tax exemption grant. Activities
eligible for tax exemption include manufacturing, certain
services performed for markets outside Puerto Rico, the
production of energy from local renewable sources for consumption
in Puerto Rico, and laboratories for scientific and industrial
research. For companies qualifying thereunder, the 1998 Tax
Incentives Law imposes income tax rates ranging from 2% to 7%. In
addition, it grants 90% exemption from property taxes, 100%
exemption from municipal license taxes during the first eighteen
months of operation and between 80% and 60% thereafter, and 100%
exemption from municipal excise taxes. The 1998 Tax Incentives
Law also provides various special deductions designated to
stimulate employment and productivity, research and development,
and capital investment in Puerto Rico.
Under the 1998 Tax Incentives Law, companies are able to
repatriate or distribute their profits free of tollgate taxes. In
addition, passive income derived from designated investments will
continue to be fully exempt from income and municipal license
taxes. Individual shareholders of an exempted business will be
allowed a credit against their Puerto Rico income taxes equal to
30% of their proportionate share in the exempted business' income
tax liability. Gain from the sale or exchange of shares of an
exempted business by its shareholders during the exemption period
will be subject to a 4% income tax rate.
For many years, U.S. companies operating in Puerto Rico enjoyed a
special tax credit that was available under Section 936 of the
Code. Originally, the credit provided an effective 100% federal
tax exemption for operating and qualifying investment income from
Puerto Rico sources. Amendments to Section 936 made in 1993 (the
"1993 Amendments") instituted two alternative methods for
calculating the tax credit and limited the amount of the credit
that a qualifying company could claim. These limitations are
based on a percentage of qualifying income (the "percentage of
income limitation") and on qualifying expenditures on wages and
other wage related benefits (the "economic activity limitation",
also known as the "wage credit limitation"). As a result of
amendments incorporated in the Small Business Job Protection Act
of 1996 enacted by the U.S. Congress and signed into law by
President Clinton on August 20, 1996 (the "1996 Amendments"), the
tax credit, as described below, is now being phased out over a
ten-year period for existing claimants and is no longer available
for corporations that established operations in Puerto Rico after
October 13, 1995 (including existing Section 936 Corporations (as
defined below) to the extent substantially new operations are
established in Puerto Rico). The 1996 Amendments also moved the
credit based on the economic activity limitation to Section 30A
of the Code and phased it out over 10 years. In addition, the
1996 Amendments eliminated the credit previously available for
income derived from certain qualified investments in Puerto Rico.
The Section 30A credit and the remaining Section 936 credit are
discussed below.
Section30A. The 1996 Amendments added a new Section 30A to the
Code. Section 30A permits a "qualifying domestic corporation"
("QDC") that meets certain gross income tests (which are similar
to the 80% and 75% gross income tests of Section 936 of the Code
discussed below) to claim a credit (the "Section 30A credit")
against the federal income tax imposed on taxable income derived
from sources outside the United States from the active conduct of
a trade or business in Puerto Rico or from the sale of
substantially all the assets used in such business ("possession
income").
A QDC is a U.S. corporation which (i) was actively conducting a
trade or business in Puerto Rico on October 13, 1995, (ii) had a
Section 936 election in effect for its taxable year that included
October 13, 1995, (iii) does not have in effect an election to
use the percentage limitation of Section 936(a)(4)(B) of the
Code, and (iv) does not add a "substantial new line of business."
The Section 30A credit is limited to the sum of (i) 60% of
qualified possession wages as defined in the Code, which includes
wages up to 85% of the maximum earnings subject to the OASDI
portion of Social Security taxes plus an allowance for fringe
benefits of 15% of qualified possession wages, (ii) a specified
percentage of depreciation deductions ranging between 15% and
65%, based on the class life of tangible property, and (iii) a
portion of Puerto Rico income taxes paid by the QDC, up to a 9%
effective tax rate (but only if the QDC does not elect the
profit-split method for allocating income from intangible
property).
A QDC electing Section 30A of the Code may compute the amount of
its active business income, eligible for the Section 30A Credit,
by using either the cost sharing formula, the profit-split
formula, or the cost-plus formula, under the same rules and
guidelines prescribed for such formulas as provided under Section
936 (see discussion below). To be eligible for the first two
formulas, the QDC must have a significant presence in Puerto
Rico.
In the case of taxable years beginning after December 31, 2001,
the amount of possession income that would qualify for the
Section 30A credit would be subject to a cap based on the QDC's
possession income for an average adjusted base period ending
before October 14, 1995.
Section 30A applies only to taxable years beginning after
December 31, 1995 and before January 1, 2006.
Section 936. Under Section 936 of the Code, as amended by the
1996 Amendments, and as an alternative to the Section 30A credit,
U.S. corporations that meet certain requirements and elect its
application ("Section 936 Corporations") are entitled to credit
against their U.S. corporate income tax, the portion of such tax
attributable to income derived from the active conduct of a trade
or business within Puerto Rico ("active business income") and
from the sale or exchange of substantially all assets used in the
active conduct of such trade or business. To qualify under
Section 936 in any given taxable year, a corporation must derive
for the three-year period immediately preceding the end of such
taxable year (i) 80% or more of its gross income from sources
within Puerto Rico and (ii) 75% or more of its gross income from
the active conduct of a trade or business in Puerto Rico.
Under Section 936, a Section 936 Corporation may elect to compute
its active business income, eligible for the Section 936 credit,
under one of three formulas: (A) a cost-sharing formula, whereby
it is allowed to claim all profits attributable to manufacturing
intangibles, and other functions carried out in Puerto Rico,
provided it contributes to the research and development expenses
of its affiliated group or pays certain royalties; (B) a profit-
split formula, whereby it is allowed to claim 50% of the net
income of its affiliated group from the sale of products
manufactured in Puerto Rico; or (C) a cost-plus formula, whereby
it is allowed to claim a reasonable profit on the manufacturing
costs incurred in Puerto Rico. To be eligible for the first two
formulas, the Section 936 Corporation must have a significant
business presence in Puerto Rico for purposes of the Section 936
rules.
As a result of the 1993 Amendments and the 1996 Amendments, the
Section 936 credit is only available to companies that elect the
percentage of income limitation and is limited in amount to 40%
of the credit allowable prior to the 1993 Amendments, subject to
a five-year phase-in period from 1994 to 1998 during which period
the percentage of the allowable credit is reduced from 60% to
40%.
In the case of taxable years beginning on or after 1998, the
possession income subject to the Section 936 credit will be
subject to a cap based on the Section 936 Corporation's
possession income for an average adjusted base period ending on
October 14, 1995. The Section 936 credit is eliminated for
taxable years beginning in 2006.
Proposal to Extend the Phaseout of Section 30A. During 1997, the
Government of Puerto Rico proposed to Congress the enactment of a
new permanent federal incentive program similar to that provided
under Section 30A. Such a program would provide U.S. companies a
tax credit based on qualifying wages paid and other wage-related
expenses, such as fringe benefits, as well as depreciation
expenses for certain tangible assets and research and development
expenses. Under the Governor's proposal, the credit granted to
qualifying companies would continue in effect until Puerto Rico
shows, among other things, substantial economic improvements in
terms of certain economic parameters. The fiscal 1998 budget
submitted by President Clinton to Congress in February 1997
included a proposal to modify Section 30A to (i) extend the
availability of the Section 30A credit indefinitely; (ii) make it
available to companies establishing operations in Puerto Rico
after October 13, 1995; and (iii) eliminate the income cap.
Although this proposal, was not included in the final fiscal 1998
federal budget, President Clinton's fiscal 1999 budget submitted
to Congress again included these modifications to Section 30A.
While the Government of Puerto Rico plans to continue lobbying
for this proposal, it is not possible at this time to predict
whether the Section 30A credit will be so modified.
Outlook. It is not possible at this time to determine the long-
term effect on the Puerto Rico economy of the enactment of the
1996 Amendments. The Government of Puerto Rico does not believe
there will be short-term or medium-term material adverse effects
on Puerto Rico's economy as a result of the enactment of the 1996
Amendments. The Government of Puerto Rico further believes that
during the phase-out period sufficient time exists to implement
additional incentive programs to safeguard Puerto Rico's
competitive position.
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Part C. Other Information
Item 23. Exhibits
a.1 Restated Declaration of Trust dated as of April 23,
1986 is incorporated herein by reference to Exhibit 1 to
Pre-Effective Amendment No. 1 to the Registration Statement
No. 2-99861.
a.2 Instrument of the Trustees Establishing and
Designating Classes of Shares of Certain Series of the Trust
is incorporated herein by reference to Exhibit 1(b) to Post-
Effective Amendment No. 24.
a.3 Instrument of the Trustees, dated June 12, 1998,
establishing and designating classes of certain
series of the Trust is incorporated by reference to Exhibit
1(a) to Post-Effective Amendment No. 40.
b. Bylaws of the Trust are incorporated by reference to Exhibit
2 to Pre-Effective Amendment No. 2.
c. Not applicable.
d.1 Management Agreement between the National Portfolio &
Mutual Management Corp. is incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 18.
d.2 Management Agreement between the Limited Term
Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(c) to Post-Effective Amendment No.
18.
d.3 Management Agreement between the New York Portfolio
and Mutual Management Corp. is incorporated by reference to
Exhibit 5(e) to Post-Effective Amendment No. 18.
d.4 Management Agreement between the Florida Portfolio and
Mutual Management Corp. is incorporated by reference to
Exhibit (5)(h) to Post-Effective Amendment No. 16.
d.5 Management Agreement between the Georgia Portfolio and
Mutual Management Corp. is incorporated by reference to
Exhibit 5(m) to Post-Effective Amendment No. 27.
d.6 Management Agreement between the Pennsylvania
Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(q) to Post-Effective Amendment No.
27.
d.7 Form of Management Agreement between California Money
Market Portfolio (and New York Money Market Portfolio) and
Mutual Management Corp. is incorporated by reference to
Exhibit 5(s) to Post-Effective Amendment No. 34.
e.1 Distribution Agreement between Registrant and Smith
Barney, Harris Upham & Co. Incorporated is incorporated by
reference to Exhibit 6 to Post-Effective Amendment No. 7.
e.2 Distribution Agreement between Registrant and CFBDS,
Inc. is incorporated by reference to Exhibit e.2 to Post-
Effective Amendment No. 41.
e.3 Broker Dealer Contract between the Mutual Management
Corp. and CFBDS, Inc. is incorporated by reference to
Exhibit e.3 to Post-Effective Amendment No. 41.
f. Not applicable.
g. Custodian Agreement between Registrant and Provident
National Bank is incorporated by reference to Exhibit 8 to
Pre-Effective Amendment No. 1.
h. Transfer Agency Agreement between Registrant and Provident
Financial Processing Corp. is incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 12.
i. Opinion of Gaston & Snow is incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1.
j. Auditors' Consent (to be filed by further amendment).
k. Schedule of Computation of Performance Quotations is
incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 5.
l. Subscription Agreement between Registrant and Mutual
Management Corp. is incorporated by reference to Exhibit 13
to Pre-Effective Amendment No. 1.
m.1 Plan of Distribution pursuant to Rule 12b-1 on behalf
of the California Money Market Portfolio is incorporated by
reference to Exhibit 15 to Post-Effective Amendment No. 21.
m.2 Plan of Distribution pursuant to Rule 12b-1 on behalf
of the Georgia Portfolio is incorporated by reference to
Exhibit 15(f) to Post-Effective Amendment No. 27.
m.3 Plan of Distribution pursuant to Rule 12b-1 on behalf
of the Pennsylvania Portfolio is incorporated by reference
to Exhibit 15(j) to Post-Effective Amendment No. 27.
m.4 Form of Plan of Distribution pursuant to Rule 12b-1 on
behalf of Class A shares of each Portfolio, except the
California Money Market and the New York Money Market
Portfolios is incorporated by reference to Exhibit 15(n) to
Post-Effective Amendment No. 34.
m.5 Form of Amended and Restated Shareholder Services and
Distribution Plan pursuant to Rule 12b-1 is incorporated by
reference to Exhibit m.5 to Post-Effective Amendment No. 41.
n. Financial Data Schedule (to be filed by further amendment).
o.1 Amended and Restated Plan pursuant to Rule 18f-3 is
incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 40.
Item 24. Persons Controlled by or under Common Control with
Registrant
The Registrant is not controlled directly or indirectly by
any person. Information with respect to the Registrant's
investment manager is set forth under the caption
"Management" in the prospectus included in Part A of this
Post-Effective Amendment on Form N-1A.
Item 25. Indemnification
Reference is made to ARTICLE V of Registrant's Declaration
of Trust for a complete statement of its terms. Section 5.2
of ARTICLE V provides: "No Trustee, officer, employee or
agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer,
employee or agent thereof for any action or failure to act
(including without limitation the failure to compel in any
way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of his or its
duties."
Item 26. Business and other Connections of Investment Adviser
See the material under the caption "Management" included in
Part A (Prospectus) of this Registration Statement and the
material appearing under the caption "Investment Objective
and Management Policies" included in Part B (Statement of
Additional Information) of this Registration Statement.
Information as to the Directors and Officers of SSBC Fund
Management Inc., (formerly known as Mutual Management Corp.)
is included in its Form ADV (File No. 801-8314), filed with
the Commission, which is incorporated herein by reference
thereto.
Item 27. Principal Underwriters
(a) CFBDS, Inc., ("CFBDS") the Registrant's Distributor,
is also the distributor for the following Smith Barney
funds: Concert Investment Series, Consulting Group Capital
Markets Funds, Greenwich Street Series Fund, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney
Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Arizona Municipals Fund Inc., Smith
Barney California Municipals Fund Inc., Smith Barney Concert
Allocation Series Inc., Smith Barney Equity Funds, Smith
Barney Fundamental Value Fund Inc., Smith Barney Funds,
Inc., Smith Barney Income Funds, Smith Barney Institutional
Cash Management Fund, Inc., Smith Barney Investment Funds
Inc., Smith Barney Investment Trust, Smith Barney Managed
Governments Fund Inc., Smith Barney Managed Municipals Fund
Inc., Smith Barney Massachusetts Municipals Fund, Smith
Barney Money Funds, Inc., Smith Barney Muni Funds, Smith
Barney Municipal Money Market Fund, Inc., Smith Barney New
Jersey Municipals Fund Inc., Smith Barney Oregon Municipals
Fund Inc., Smith Barney Principal Return Fund, Smith Barney
Small Cap Blend Fund, Inc., Smith Barney Telecommunications
Trust, Smith Barney Variable Account Funds, Smith Barney
World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
CFBDS also serves as the distributor for the following
funds: The Travelers Fund UL for Variable Annuities, The
Travelers Fund VA for Variable Annuities, The Travelers Fund
BD for Variable Annuities, The Travelers Fund BD II for
Variable Annuities, The Travelers Fund BD III for Variable
Annuities, The Travelers Fund BD IV for Variable Annuities,
The Travelers Fund ABD for Variable Annuities, The Travelers
Fund ABD II for Variable Annuities, The Travelers Separate
Account PF for Variable Annuities, The Travelers Separate
Account PF II for Variable Annuities, The Travelers Separate
Account QP for Variable Annuities, The Travelers Separate
Account TM for Variable Annuities, The Travelers Separate
Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate
Account Six for Variable Annuities, The Travelers Separate
Account Seven for Variable Annuities, The Travelers Separate
Account Eight for Variable Annuities, The Travelers Fund UL
for Variable Annuities, The Travelers Fund UL II for
Variable Annuities, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance
Separate Account Two, The Travelers Variable Life Insurance
Separate Account Three, The Travelers Variable Life
Insurance Separate Account Four, The Travelers Separate
Account MGA, The Travelers Separate Account MGA II, The
Travelers Growth and Income Stock Account for Variable
Annuities, The Travelers Quality Bond Account for Variable
Annuities, The Travelers Money Market Account for Variable
Annuities, The Travelers Timed Growth and Income Stock
Account for Variable Annuities, The Travelers Timed Short-
Term Bond Account for Variable Annuities, The Travelers
Timed Aggressive Stock Account for Variable Annuities, The
Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also
the distributor for CitiFunds Multi-State Tax Free Trust,
CitiFunds Premium Trust, CitiFunds Institutional Trust,
CitiFunds Tax Free Reserves, CitiFunds Trust I, CitiFunds
Trust II, CitiFunds Trust III, CitiFunds International
Trust, CitiFunds Fixed Income Trust, CitiSelect VIP Folio
200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400,
CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP
Portfolio. CFBDS is also the placement agent for Large Cap
Value Portfolio, Small Cap Value Portfolio, International
Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio,
U.S. Fixed Income Portfolio, Large Cap Growth Portfolio,
Small Cap Growth Portfolio, International Equity Portfolio,
Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following
Salomon Brothers funds: Salomon Brothers Opportunity Fund
Inc., Salomon Brothers Investors Fund Inc., Salomon Brothers
Capital Fund Inc., Salomon Brothers Series Funds Inc.,
Salomon Brothers Institutional Series Funds Inc., Salomon
Brothers Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion
Funds, Inc.
(b) The information required by this Item 27 with respect
to each director and officer of CFBDS is incorporated by
reference to Schedule A of Form BD filed by CFBDS pursuant
to the Securities and Exchange Act of 1934 (File No. 8-
32417).
(c) Not applicable.
Item 28. Location of Accounts and Records
PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, and First Data Investor
Services Group Inc., One Exchange Place, Boston, Massachusetts
02109, will maintain the custodian and the shareholders
servicing agent records, respectively required by Section
31(a).
All other records required by Section 31(a) are maintained at
the offices of the Registrant at 388 Greenwich Street, New
York, New York 10013 (and preserved for the periods specified
by Rule 31a-2).
Item 29. Management Services
Not applicable.
Item 30. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest
report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, has duly caused this Post-Effective Amendment to its
Registration Statement to be signed on its behalf by the
undersigned and where applicable, the true and lawful attorney-in-
fact, thereto duly authorized, in the City of New York, and State
of New York on the 18th day of June, 1999.
SMITH BARNEY MUNI FUNDS
By: /s/ Heath B. McLendon
Heath B. McLendon,
President
and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on the
date indicated.
Signature Title Date
/s/ Heath B. McLendon President, Chief Executive Officer and
Trustee 6/18/99
(Heath B. McLendon)
* Trustee
6/18/99
(Lee Abraham)
* Trustee
6/18/99
(Allan J. Bloostein)
* Trustee
6/18/99
(Jane F. Dasher)
* Trustee
6/18/99
(Donald R. Foley)
* Trustee
6/18/99
(Paul Hardin III)
* Trustee
6/18/99
(Richard E. Hanson)
* Trustee
6/18/99
(Roderick C. Rasmussen)
* Trustee
6/18/99
(John P. Toolan)
/s/ Lewis E. Daidone Senior
Vice President and Treasurer
6/18/99
(Lewis E. Daidone)
*By: /s/ Christina T. Sydor Secretary
6/18/99
Christina T. Sydor
Pursuant to Power of Attorney
EXHIBIT INDEX
Exhibit No. Exhibit
j. Auditors' Consent (to be filed by further amendment).
