<PAGE>
[LOGO] Smith Barney
Mutual Funds
Your Serious Money. Professionally Managed./SM/
P R O S P E C T U S
National
Portfolio
Class A, B, L and Y Shares
----------------------------------------------------
July 28, 2000
The Securities and Exchange Commission has not approved or disapproved these
securities as an investment or determined whether this prospectus is accurate or
complete. Any statement to the contrary is a crime.
<PAGE>
National Portfolio
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 6
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
Comparing the fund's classes................................................ 9
Sales charges............................................................... 10
More about 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................................................................. 21
Financial highlights........................................................ 22
</TABLE>
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.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
Investment objective
The fund seeks as high a level of income exempt from federal income taxes as is
consistent with prudent investing.
Principal investment strategies
Key investments The fund invests at least 80% of its net assets in "municipal
securities," which are debt obligations issued by any of the 50 states and
their political subdivisions, agencies and public authorities. The interest on
these securities is excluded from gross income for federal income tax purposes.
As a result, the interest rate on these securities normally is lower than it
would be if the securities were subject to federal taxation. The fund may
invest in municipal securities of varying maturities, but typically focuses on
municipal securities that have remaining maturities at the time of purchase of
from five to more than thirty years. The fund invests exclusively in municipal
securities that are rated investment grade at the time of purchase or are of
comparable quality if unrated. At least two-thirds of the municipal securities
must be rated, at the time of purchase, within the three highest investment
grade rating categories.
Selection process The manager selects securities primarily by identifying
undervalued sectors and individual securities, while also selecting securities
it believes will benefit from changes in market conditions. In selecting indi-
vidual securities, the manager:
. Uses fundamental credit analysis to estimate the relative value and attrac-
tiveness of various securities and sectors and to exploit opportunities in
the municipal bond market
. Considers the potential impact of supply/demand imbalances for obligations of
different states, the yield available for securities with different maturi-
ties and a security's maturity in light of the outlook for the issuer and its
sector and interest rates
. May trade between general obligation and revenue bonds and among various reve-
nue bond sectors, such as housing, hospital and industrial development, based
on their apparent relative values and their impact on the level of dividends
generated by the overall portfolio
. Identifies individual securities with the most potential for added value, such
as those involving unusual situations, new issuers, the potential for credit
upgrades, unique structural characteristics or innovative features
National Portfolio
2
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Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, 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
. Unfavorable legislation affects the tax-exempt status of municipal bonds
. The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
It is possible that some of the fund's income distributions may be, and distri-
butions of the fund's gains generally will be, subject to federal taxation. The
fund may realize taxable gains on the sale of its securities or on transactions
in futures contracts. 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 generally be subject to state income taxation.
Who may want to invest The fund may be an appropriate investment if you:
. Are in a high federal tax bracket seeking income exempt from federal taxation
. Currently have exposure to other asset classes and are seeking to broaden your
investment portfolio
. Are willing to accept the risks of municipal securities but are seeking to
diversify your investment among issuers of different states
Smith Barney Mutual Funds
3
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Risk return bar chart
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future. The bar chart shows
the performance of the fund's Class A shares for each of the past 10 calendar
years. Class B, L and Y shares would have different performance because of
their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
Total Returns for Class A Shares
[BAR GRAPH]
90 7.57%
91 13.01%
92 9.61%
93 13.43%
94 -5.83%
95 18.9%
96 3.68%
97 10.58%
98 5.64%
99 -4.61%
Calendar years ended December 31
Quarterly returns:
Highest: 7.36% in 1st quarter 1995; Lowest: (4.96)% in 1st quarter 1994; Year
to date: 4.48% through 6/30/00
Risk return table
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
Lehman Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unman-
aged index of municipal bonds, and the Lipper General Municipal Debt Funds
Average (the "Lipper Average"), an average composed of the fund's peer group of
mutual funds. This table assumes imposition of the maximum sales charge appli-
cable to the class, redemption of shares at the end of the period, and rein-
vestment of distributions and dividends.
Average Annual Total Returns
Calendar Years Ended December 31, 1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since inception Inception date
<S> <C> <C> <C> <C> <C>
A (8.45)% 5.68% 6.50% 6.78% 8/20/86
B (9.18)% 5.84% n/a 6.36% 11/7/94
L (6.95)% 5.70% n/a 4.78% 1/5/93
Lehman Index (2.06)% 6.91% 6.89% 7.12% *
Lipper Average (4.64)% 5.77% 6.18% 6.39% *
</TABLE>
*Index comparison begins on August 31, 1986.
National Portfolio
4
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Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases
(as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge (load) (as a % of
the lower of net asset value at purchase or
redemption) None* 4.50% 1.00% None
</TABLE>
Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets) Class A Class B Class L Class Y**
<S> <C> <C> <C> <C>
Management fee 0.45% 0.45% 0.45% 0.45%
Distribution and service (12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.08% 0.08% 0.11% 0.08%
----- ----- ----- -----
Total annual fund operating expenses 0.68% 1.18% 1.26% 0.53%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
**For Class Y shares, "Other Expenses" have been estimated for the fiscal
year ended March 31, 2000, based on expenses
incurred by Class A shares because prior to March 31, 2000, no Class Y shares
were sold.
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
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $467 $609 $764 $1,213
Class B (redemption at end of period) $570 $675 $749 $1,293
Class B (no redemption) $120 $375 $649 $1,293
Class L (redemption at end of period) $327 $496 $785 $1,607
Class L (no redemption) $227 $496 $785 $1,607
Class Y (with or without redemption) $ 54 $170 $296 $ 665
</TABLE>
Smith Barney Mutual Funds
5
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More on the fund's investments
Municipal securities Municipal securities include debt obligations issued by
certain governmental issuers such as Puerto Rico, the Virgin Islands and Guam.
The municipal securities in which the fund invests include general obligation
bonds, revenue bonds and municipal leases. These securities may pay interest at
fixed, variable or floating rates. The fund may also hold zero coupon securi-
ties which pay no interest during the life of the obligation but trade at
prices below their stated maturity value.
Other debt securities The fund may invest up to 20% of its assets in debt secu-
rities which are issued or guaranteed by the full faith and credit of the U.S.
government. These securities will generally be subject to federal and state
taxation.
Derivative contracts The fund may, but need not, use derivative contracts, such
as financial futures, for any of the following purposes:
. To hedge against the economic impact of adverse changes in the market value of
portfolio securities due to changes in interest rates
. As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities.
The other parties to certain futures contracts present the same types of
default risk as issuers of fixed income securities.
The fund may also invest in inverse floating rate securities. These securities
pay interest at a rate which moves in the opposite direction from movements in
market interest rates. Inverse floaters and futures are volatile and involve
leverage which may expose the fund to increased risk of loss. Therefore, using
futures contracts can disproportionately increase losses and reduce
opportunities for gains when interest rates are changing. The fund may not
fully benefit from or may lose money on futures or inverse floaters used for
hedging purposes if changes in their value do not correspond accurately to
changes in the value of the fund's holdings. Futures and inverse floaters can
also make a fund less liquid and harder to value, especially in declining mar-
kets.
Defensive investing The fund may depart from its principal investment strate-
gies in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
National Portfolio
6
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Management
Manager The fund's investment adviser (the manager) is SSB Citi Fund Management
LLC (successor to 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 manage-
ment, banking and consumer finance, credit and charge cards, insurance, invest-
ments, investment banking and trading--and use diverse channels to make them
available to consumer and corporate customers around the world.
Peter M. Coffey, investment officer of SSB Citi Fund Management LLC and manag-
ing director of Salomon Smith Barney, has been responsible for the day-to-day
management of the fund's portfolio since November 1987. Mr. Coffey has 31 years
of experience with the manager or its predecessors.
Management fees During the fiscal year ended March 31, 2000, the manager
received an advisory fee equal to 0.45% of the fund's average daily net assets.
Distributor The fund has entered into an agreement with Salomon Smith Barney
Inc. to distribute the fund's shares.
Distribution plan The fund has adopted a Rule 12b-1 distribution plan for its
Class A, B and L shares. Under the plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
Transfer agent and shareholder servicing agent Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement
with the transfer agent, PFPC Global Fund Services serves as the fund's sub-
transfer agent (the "sub-transfer agent") to render certain shareholder record
keeping and accounting services and functions.
Smith Barney Mutual Funds
7
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Choosing a class of shares to buy
You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
. If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
. For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
. Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class
L shares do not, Class B shares may be more attractive to long-term invest-
ors.
You may buy shares from:
. A Salomon Smith Barney Financial Consultant
. An investment dealer in the selling group or a broker that clears through Sal-
omon Smith Barney--a dealer representative
. The fund, but only if you are investing through 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>
Initial Additional
Classes A, B, L Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment Plans $50 n/a $50
Uniform Gift to Minors Accounts $250 $15 million $50
</TABLE>
National Portfolio
8
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Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Key features .Initial .No initial .Initial .No initial
sales sales sales or
charge charge charge is deferred
.You may .Deferred lower than sales
qualify sales Class A charge
for reduc- charge .Deferred .Must
tion or declines sales invest at
waiver of over time charge for least $15
initial .Converts only 1 million
sales to Class A year .Lower
charge after 8 .Does not annual
.Lower years convert to expenses
annual .Higher Class A than the
expenses annual .Higher other
than Class expenses annual classes
B and than Class expenses
Class L A than Class
A
------------------------------------------------------------------------
Initial sales charge Up to None 1.00% None
4.00%;
reduced for
large pur-
chases and
waived for
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
------------------------------------------------------------------------
Deferred sales charge 1.00% on Up to 4.50% 1.00% if None
purchases charged you redeem
of $500,000 when you within 1
or more if redeem year of
you redeem shares. The purchase
within 1 charge is
year of reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
------------------------------------------------------------------------
Annual distribution and 0.15% of 0.65% of 0.70% of None
service fees average average average
daily net daily net daily net
assets assets assets
------------------------------------------------------------------------
Exchange privilege* Class A Class B Class L Class Y
shares shares shares shares
of most of most of most of most
Smith Smith Smith Smith
Barney Barney Barney Barney
funds funds funds funds
------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds
9
<PAGE>
Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge
on the fund's distributions or dividends you reinvest in additional Class A
shares.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
Less than $25,000 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more -0- -0-
</TABLE>
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
. Accumulation privilege - lets you combine the current value of Class A shares
owned
. by you, or
. by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
. Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.
National Portfolio
10
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Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
. Employees of members of the NASD
. Clients of newly employed Salomon Smith Barney Financial Consultants, if cer-
tain conditions are met
. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").
Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith Barney
distributions fund
<S> <C> <C>
Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
(excluding shares
issued as
dividends)
</TABLE>
Class L shares
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund and/or other Smith
Barney mutual funds on June 12, 1998, you will not pay an initial sales charge
on Class L shares you buy before June 22, 2001.
Smith Barney Mutual Funds
11
<PAGE>
Class Y shares
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
. Shares exchanged for shares of another Smith Barney fund
. Shares representing reinvested distributions and dividends
. Shares no longer subject to the deferred sales charge
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to deferred sales charge and then
the shares in your account that have been held the longest.
If you have 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 representa-
tive.
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 each share class will generally be waived:
. On payments made through certain systematic withdrawal plans
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
National Portfolio
12
<PAGE>
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
representative If you do not provide the following information, your order
will be rejected:
. 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.
--------------------------------------------------------------------------------
Through the Certain investors who are clients of the selling group are
fund's sub- eligible to buy shares directly from the fund.
transfer
agent
. Write the sub-transfer agent at the following address:
Smith Barney National Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
. Enclose a check made payable to the fund 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.
Smith Barney Mutual Funds
13
<PAGE>
Through a You may authorize Salomon Smith Barney, your dealer represen-
systematic tative or the sub-transfer agent to transfer funds automati-
investment cally from a regular bank account, cash held in a Salomon
plan Smith Barney brokerage account or Smith Barney money market
fund to buy shares on a regular basis.
. 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 represen-
tative or the sub-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.
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the . You may exchange shares only for shares of the same class of
varying needs another Smith Barney fund. Not all Smith Barney funds offer
of both large all classes.
and small . Not all Smith Barney funds may be offered in your state of
investors residence. Contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent.
. You must meet the minimum investment amount for each fund
(except for systematic changes).
. If you hold share certificates, the sub-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.
National Portfolio
14
<PAGE>
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be
reduced.
--------------------------------------------------------------------------------
By telephone
If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete 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 4:00 p.m. (Eastern
time).
You can make telephone exchanges only between accounts that
have identical registrations.
--------------------------------------------------------------------------------
By mail
If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the sub-trans-
fer agent at the address on the following page.
Smith Barney Mutual Funds
15
<PAGE>
Redeeming shares
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the sub-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 redemp-
tion 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.
--------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written requests
to the sub-transfer agent at the following address:
Smith Barney National Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02490-9699
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 regis-
tered
National Portfolio
16
<PAGE>
By telephone
If you do not have a brokerage account, you may be eligible
to redeem 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 4:00 p.m. (Eastern time).
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 docu-
ments.
--------------------------------------------------------------------------------
Automatic
cash You can arrange for the automatic redemption of a portion of
withdrawal your shares on a monthly or quarterly basis. To qualify you
plans must own shares of the fund with a value of at least $10,000
and each automatic 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.
Smith Barney Mutual Funds
17
<PAGE>
Other things to know about share transactions
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 redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal 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 sub-transfer
agent
. Instruct the sub-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 regis-
tration
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.
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
National Portfolio
18
<PAGE>
. 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 Securi-
ties 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 share-
holders. 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.
Smith Barney Mutual Funds
19
<PAGE>
Dividends, distributions and taxes
Dividends The fund pays dividends each month from its net investment income.
The fund generally makes capital gain distributions, if any, once a year, typi-
cally 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 dis-
tributions 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. Alterna-
tively, you can instruct your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent to have your distributions and/or divi-
dends 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 effec-
tive until the next distribution or dividend is paid.
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status
<C> <S>
Redemption or Usually capital gain or loss;
exchange of shares long-term only if shares owned
more than one year
Long-term capital Taxable gain
gain distributions
Short-term capital Ordinary income
gain distributions
Dividends Excluded from gross income if from interest on tax-exempt
securities, otherwise ordinary income
</TABLE>
Any taxable dividends and capital gain distributions are taxable whether
received in cash or reinvested in fund shares. Long-term capital gain distribu-
tions are taxable to you as long-term capital gain regardless of how long you
have owned your shares. You may want to avoid buying shares when the fund is
about to declare a capital gain distribution or a taxable dividend, because it
will be taxable to you even though it may actually be a return of a portion of
your investment.
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 dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer identification 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 circum-
National Portfolio
20
<PAGE>
stances are different and special tax rules may apply, you should consult your
tax adviser about your investment in the fund.
Share price
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 liabili-
ties. 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 calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. A fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer repre-
sentative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
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.
Smith Barney Mutual Funds
21
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance of each class for the past 5 years. Certain information reflects finan-
cial results for a single share. Total return represents the rate that a
shareholder would have earned (or lost) on a fund share assuming reinvestment
of all dividends and distributions. The information in the following tables was
audited by KPMG LLP, independent auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon
request). No information is present for Class Y shares because no shares were
outstanding during these fiscal years.
For a Class A share of beneficial interest outstanding throughout each year
ended March 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 13.97 $ 14.16 $ 13.60 $ 13.67 $ 13.32
---------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.74 0.74 0.79 0.81 0.81
Net realized and
unrealized gain (loss) (1.03) 0.03 0.73 (0.09) 0.35
---------------------------------------------------------------------------------
Total income (loss) from
operations (0.29) 0.77 1.52 0.72 1.16
---------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.73) (0.75) (0.80) (0.79) (0.81)
Net realized gains (0.01) (0.21) (0.16) -- --
---------------------------------------------------------------------------------
Total distributions (0.74) (0.96) (0.96) (0.79) (0.81)
---------------------------------------------------------------------------------
Net asset value, end of
year $ 12.94 $ 13.97 $ 14.16 $ 13.60 $ 13.67
---------------------------------------------------------------------------------
Total return (2.03)% 5.50% 11.47% 5.41% 8.83%
---------------------------------------------------------------------------------
Net assets, end of year
(000) $363,812 $404,498 $370,891 $351,395 $378,421
---------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 0.68% 0.66% 0.66% 0.70% 0.70%
Net investment income 5.59 5.21 5.61 5.92 5.88
---------------------------------------------------------------------------------
Portfolio turnover rate 68% 61% 87% 31% 27%
---------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts have been calculated using the monthly average shares
method.
National Portfolio
22
<PAGE>
For a Class B share of beneficial interest outstanding throughout each year
ended March 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 13.96 $ 14.16 $ 13.61 $ 13.67 $ 13.33
-------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.67 0.67 0.70 0.74 0.73
Net realized and unrealized
gain (loss) (1.03) 0.02 0.74 (0.08) 0.35
-------------------------------------------------------------------------------
Total income (loss) from
operations (0.36) 0.69 1.44 0.66 1.08
-------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.66) (0.68) (0.73) (0.72) (0.74)
Net realized gains (0.01) (0.21) (0.16) -- --
-------------------------------------------------------------------------------
Total distributions (0.67) (0.89) (0.89) (0.72) (0.74)
-------------------------------------------------------------------------------
Net asset value, end of year $ 12.93 $ 13.96 $ 14.16 $ 13.61 $ 13.67
-------------------------------------------------------------------------------
Total return (2.56)% 4.92% 10.80% 4.95% 8.26%
-------------------------------------------------------------------------------
Net assets, end of year (000) $42,872 $36,451 $20,313 $12,691 $11,605
-------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.18% 1.16% 1.29% 1.20% 1.19%
Net investment income 5.11 4.71 4.95 5.42 5.37
-------------------------------------------------------------------------------
Portfolio turnover rate 68% 61% 87% 31% 27%
-------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts have been calculated using the monthly average shares
method.
Smith Barney Mutual Funds
23
<PAGE>
For a Class L share of beneficial interest outstanding throughout each year
ended March 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/)(/2/) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 13.97 $ 14.16 $ 13.59 $ 13.65 $ 13.32
-------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.66 0.65 0.69 0.73 0.73
Net realized and
unrealized gain (loss) (1.02) 0.02 0.74 (0.08) 0.34
-------------------------------------------------------------------------------
Total income (loss) from
operations (0.36) 0.67 1.43 0.65 1.07
-------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.65) (0.65) (0.70) (0.71) (0.74)
Net realized gains (0.01) (0.21) (0.16) -- --
-------------------------------------------------------------------------------
Total distributions (0.66) (0.86) (0.86) (0.71) (0.74)
-------------------------------------------------------------------------------
Net assets value, end of
year $ 12.95 $ 13.97 $ 14.16 $ 13.59 $ 13.65
-------------------------------------------------------------------------------
Total return (2.57)% 4.79% 10.71% 4.90% 8.13%
-------------------------------------------------------------------------------
Net assets, end of year
(000) $19,434 $18,528 $15,926 $14,901 $16,563
-------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.26% 1.24% 1.35% 1.27% 1.27%
Net investment income 5.03 4.63 4.91 5.35 5.31
-------------------------------------------------------------------------------
Portfolio turnover rate 68% 61% 87% 31% 27%
-------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts have been calculated using the monthly average shares
method.
(/2/) On June 12, 1998, the Class C shares were renamed Class L shares.
National Portfolio
24
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
National Portfolio
An investment portfolio of Smith Barney Muni Funds
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket 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 refer-
ence 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
Information about the fund (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Pub-
lic Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Data-
base on the Commission's Internet site at http://www.sec.gov. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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 law-
fully sell its shares.
SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file
no. 811-04395)
FD0663 7/00
<PAGE>
[SMITH BARNEY MUTUAL FUNDS LOGO]
Your Serious Money. Professionally Managed.(SM)
P R O S P E C T U S
Georgia Portfolio
Class A, B, L and Y Shares
--------------------------
July 28, 2000
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.
<PAGE>
<PAGE>
(This page intentionally left blank)
<PAGE>
GEORGIA PORTFOLIO
CONTENTS
<TABLE>
<S> <C>
Investments, risks and performance......................... 2
More on the fund's investments............................. 8
Management................................................. 10
Choosing a class of shares to buy.......................... 11
Comparing the fund's classes............................... 12
Sales charges.............................................. 13
More about deferred sales charges.......................... 16
Buying shares.............................................. 17
Exchanging shares.......................................... 18
Redeeming shares........................................... 20
Other things to know about share transactions.............. 22
Dividends, distributions and taxes......................... 24
Share price................................................ 25
Financial highlights....................................... 26
</TABLE>
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.
Smith Barney Mutual Funds 1
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
The fund seeks as high a level of income exempt from federal income taxes and
Georgia personal income taxes as is consistent with prudent investing.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests at least 80% of its net assets in municipal
securities and at least 65% of its net assets in Georgia municipal securities.
Georgia municipal securities include securities issued by the State of Georgia
and certain other municipal issuers, political subdivisions, agencies and public
authorities that pay interest which is exempt from Georgia state personal income
taxes. The fund focuses primarily on intermediate-term and long-term municipal
securities which have remaining maturities at the time of purchase of from five
to more than thirty years. The fund invests exclusively in municipal securities
that are rated investment grade at the time of purchase or are of comparable
quality if unrated. At least two-thirds of the municipal securities must be
rated, at the time of purchase, within the three highest investment grade rating
categories by a nationally recognized rating organization.
SELECTION PROCESS The manager selects securities primarily by identifying
undervalued sectors and individual securities, while also selecting securities
it believes will benefit from changes in market conditions. In selecting
individual securities, the manager:
- Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit opportunities
in the municipal bond market
- 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 and their impact on the level of
dividends generated by the overall portfolio
- Identifies individual securities with the most potential for added value, such
as those involving unusual situations, new issuers, the potential for credit
upgrades, unique structural characteristics or innovative features
- Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer and its sector and
interest rates
2 Georgia Portfolio
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, 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
- Georgia municipal securities fall out of favor with investors. The fund will
suffer more than a national municipal fund from adverse events affecting
Georgia municipal issuers
- Unfavorable legislation affects the tax-exempt status of municipal bonds
- The manager's judgment about the attractiveness, value or income potential 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
Georgia state taxation. The fund may realize taxable gains on the sale of its
securities or on transactions in futures contracts. 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 Georgia.
The fund is classified as "non-diversified," which means it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the fund invests its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- Are a Georgia taxpayer in a high federal tax bracket seeking income exempt
from federal income taxes and Georgia personal income taxes
- Currently have exposure to other asset classes and are seeking to broaden your
investment portfolio
- Are willing to accept the risks of municipal securities, including the risks
of concentrating in a single state
Smith Barney Mutual Funds 3
<PAGE>
RISK RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future. The bar chart
shows the performance of the fund's Class A shares for each of the past 5 full
calendar years. Class B, L and Y shares would have different performance because
of their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
TOTAL RETURN: CLASS A SHARES
[RISK RETURN BAR CHART IN PRINTABLE GRAPHIC]
<TABLE>
<CAPTION>
95 96 97 98 99
-- -- -- -- --
<S> <C> <C> <C> <C>
21.99 3.98 12.67 5.66 -5.78
</TABLE>
CALENDAR YEARS ENDED DECEMBER 31
QUARTERLY RETURNS:
Highest: 8.52% in 1st quarter 1995; Lowest: (2.95)% in 2nd quarter 1999; Year
to date: (1.48)% through 6/30/00
4 Georgia Portfolio
<PAGE>
RISK RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unmanaged
index of municipal bonds, and the Lipper Georgia Municipal Debt Fund Average
(the "Lipper Average"), an average composed of the fund's peer group of mutual
funds. This table assumes imposition of the maximum sales charge applicable to
the class, redemption of shares at the end of the period, and reinvestment of
distributions and dividends.
AVERAGE ANNUAL TOTAL RETURNS
CALENDAR YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CLASS 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C> <C>
A (9.52)% 6.43% n/a 5.19% 4/4/94
B (10.27)% 6.61% n/a 5.06% 6/15/94
L (8.21)% 6.50% n/a 5.09% 4/14/94
Lehman Index (2.06)% 6.91% n/a 5.98% *
Lipper Average (4.51)% 5.77% n/a 4.93% *
</TABLE>
*Index comparison begins on April 30, 1994.
Smith Barney Mutual Funds 5
<PAGE>
FEE TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
SHAREHOLDER FEES
<TABLE>
<CAPTION>
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge (load) (as
a % of the lower of net asset value at
purchase or redemption) None* 4.50% 1.00% None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<CAPTION>
(EXPENSES DEDUCTED FROM ASSETS) CLASS A CLASS B CLASS L CLASS Y**
<S> <C> <C> <C> <C>
Management fee 0.45% 0.45% 0.45% 0.45%
Distribution and service
(12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.08% 0.20% 0.18% 0.18%
===== ===== ===== =====
Total annual fund operating
expenses 0.68% 1.30% 1.33% 0.63%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
**For Class Y shares, "Other Expenses" have been estimated for the fiscal year
ended March 31, 2000, based on expenses
incurred by Class A shares because prior to March 31, 2000, no Class Y shares
were sold.
6 Georgia Portfolio
<PAGE>
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
NUMBER OF YEARS YOU OWN YOUR SHARES
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $467 $609 $764 $1,213
Class B (redemption at end of
period) $582 $712 $813 $1,397
Class B (no redemption) $132 $412 $713 $1,397
Class L (redemption at end of
period) $334 $517 $821 $1,685
Class L (no redemption) $234 $517 $821 $1,685
Class Y (with or without
redemption) $ 64 $202 $351 $ 786
</TABLE>
Smith Barney Mutual Funds 7
<PAGE>
MORE ON THE FUND'S INVESTMENTS
GEORGIA MUNICIPAL SECURITIES Georgia municipal securities include debt
obligations issued by certain non-Georgia governmental issuers such as Puerto
Rico, the Virgin Islands and Guam. The interest on these bonds is exempt from
federal income tax and Georgia personal income tax. As a result, the interest
rate on these bonds normally is lower than it would be if the bonds were subject
to taxation. The Georgia municipal securities in which the fund invests include
general obligation bonds, revenue bonds and municipal leases. These securities
may pay interest at fixed, variable or floating rates. The fund may also hold
zero coupon securities which pay no interest during the life of the obligation
but trade at prices below their stated maturity value.
OTHER DEBT SECURITIES The fund may invest up to 35% of its assets in municipal
securities of non-Georgia issuers. These securities will generally be exempt
from federal, but not Georgia income taxes. The fund may also invest up to 20%
of its assets in debt securities which are issued or guaranteed by the full
faith and credit of the U.S. government. These securities will be subject to
federal taxation and may be subject to state taxation.
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as financial futures, for any of the following purposes:
- To hedge against the economic impact of adverse changes in the market value of
portfolio securities due to changes in interest rates
- As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities.
The other parties to certain futures contracts present the same types of default
risk as issuers of fixed income securities.
8 Georgia Portfolio
<PAGE>
The fund may invest in inverse floating rate securities. These securities pay
interest at a rate which moves in the opposite direction from movements in
market interest rates. Inverse floaters and futures are volatile and involve
leverage which may expose the fund to increased risk of loss. Therefore, using
futures contracts can disproportionately increase losses and reduce
opportunities for gains when interest rates are changing. The fund may not fully
benefit from or may lose money on futures or inverse floaters used for hedging
purposes if changes in their value do not correspond accurately to changes in
the value of the fund's holdings. Futures and inverse floaters can also make a
fund less liquid and harder to value, especially in declining markets.
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 money market and short-term
debt securities. If the fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
Smith Barney Mutual Funds 9
<PAGE>
MANAGEMENT
MANAGER The fund's investment adviser (the manager) is SSB Citi Fund Management
LLC (successor to 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.
Peter M. Coffey, investment officer of SSB Citi Fund Management LLC and managing
director of Salomon Smith Barney, has been responsible for the day-to-day
management of the fund's portfolio since the fund commenced operations in April
1994. Mr. Coffey has 31 years of experience with the manager or its
predecessors.
MANAGEMENT FEES During the fiscal year ended March 31, 2000, the manager
received an advisory fee equal to 0.45% of the fund's average daily net assets.
DISTRIBUTOR The fund has entered into an agreement with Salomon Smith Barney
Inc. to distribute the fund's shares.
DISTRIBUTION PLAN The fund has adopted a Rule 12b-1 distribution plan for its
Class A, B and L shares. Under the plan, the fund pays distribution and/or
service fees. These fees are an ongoing expense and, over time, may cost you
more than other types of sales charges.
TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement with
the transfer agent, PFPC Global Fund Services serves as the fund's sub-transfer
agent (the "sub-transfer agent") to render certain shareholder record keeping
and accounting services and functions.
10 Georgia Portfolio
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
- If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
- For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
- Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class L
shares do not, Class B shares may be more attractive to long-term investors.
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 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>
INITIAL ADDITIONAL
CLASSES A, B, L CLASS Y ALL CLASSES
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment
Plans $50 n/a $50
Uniform Gift to Minors Accounts $250 $15 million $50
</TABLE>
Smith Barney Mutual Funds 11
<PAGE>
COMPARING THE FUND'S CLASSES
Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
KEY FEATURES - Initial sales - No initial - Initial sales - No initial or
charge sales charge charge is deferred
- You may - Deferred lower than sales charge
qualify for sales charge Class A - Must invest
reduction or declines over - Deferred at least $15
waiver of time sales charge million
initial sales - Converts to for only 1 - Lower annual
charge Class A after year expenses than
- Lower annual 8 years - Does not the other
expenses than - Higher annual convert to classes
Class B and expenses than Class A
Class L Class A - Higher annual
expenses than
Class A
---------------------------------------------------------------------------------------------
INITIAL SALES CHARGE Up to 4.00%; None 1.00% None
reduced for
large purchases
and waived for
certain
investors. No
charge for
purchases of
$500,000 or
more
---------------------------------------------------------------------------------------------
DEFERRED SALES CHARGE 1.00% on Up to 4.50% 1.00% if you None
purchases of charged when redeem within 1
$500,000 or you redeem year of
more if you shares. The purchase
redeem within 1 charge is
year of reduced over
purchase time and there
is no deferred
sales charge
after 6 years
---------------------------------------------------------------------------------------------
ANNUAL DISTRIBUTION 0.15% of 0.65% of 0.70% of None
AND SERVICE FEES average daily average daily average daily
net assets net assets net assets
---------------------------------------------------------------------------------------------
EXCHANGE PRIVILEGE* Class A shares Class B shares Class L shares Class Y shares
of most Smith of most Smith of most Smith of most Smith
Barney funds Barney funds Barney funds Barney funds
---------------------------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
12 Georgia Portfolio
<PAGE>
SALES CHARGES
CLASS A SHARES
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF
OFFERING NET AMOUNT
AMOUNT OF PURCHASE PRICE (%) INVESTED (%)
<S> <C> <C>
Less than $25,000 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more 0.00 0.00
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
- Accumulation privilege - lets you combine the current value of Class A shares
owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases on
which you paid a sales charge within 90 days before you sign the letter.
Smith Barney Mutual Funds 13
<PAGE>
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- Employees of members of the NASD
- Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about the additional waivers of Class A initial sales
charges, contact your Salomon Smith Barney Financial Consultant or dealer
representative or consult the Statement of Additional Information ("SAI").
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
YEAR AFTER PURCHASE 1ST 2ND 3RD 4TH 5TH 6TH THROUGH 8TH
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<S> <C> <C>
Shares issued: On Shares issued: Upon
reinvestment exchange from another
Shares issued: At of dividends and Smith Barney fund
initial purchase distributions
Eight years after the In same proportion On the date the
date of purchase as the number of shares originally
Class B shares acquired would have
converting is to converted into Class
total Class B A shares
shares you own
(excluding shares
issued as dividends)
</TABLE>
14 Georgia Portfolio
<PAGE>
CLASS L SHARES
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund and/or other Smith
Barney mutual funds on June 12, 1998, you will not pay an initial sales charge
on Class L shares you buy before June 22, 2001.
CLASS Y SHARES
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.
Smith Barney Mutual Funds 15
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
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.
In addition, you do not pay a deferred sales charge on:
- Shares exchanged for shares of another Smith Barney fund
- Shares representing reinvested distributions and dividends
- Shares no longer subject to the deferred sales charge
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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 each share class will generally be waived:
- On payments made through certain systematic withdrawal plans
- For involuntary redemptions of small account balances
- For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
16 Georgia Portfolio
<PAGE>
BUYING SHARES
<TABLE>
<C> <S>
Through a You should contact your Salomon Smith Barney
Salomon Smith Financial Consultant or dealer representative to
Barney Financial open a brokerage account and make arrangements
representative to buy shares.
If you do not provide the following information,
your order will be rejected:
- 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.
-----------------------------------------------------------------------
Through the Certain investors who are clients of the selling
fund's sub-transfer group are eligible to buy shares directly from
agent the fund.
- Write the sub-transfer agent at the following
address:
SMITH BARNEY GEORGIA PORTFOLIO
SMITH BARNEY MUNI FUNDS
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02940-9699
- Enclose a check made payable to the fund 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.
-----------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your
systematic dealer representative or the sub-transfer agent
investment plan to transfer funds automatically from a regular
bank account, cash held in a Salomon Smith
Barney brokerage account or Smith Barney money
market fund to buy shares on a regular basis.
- 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
sub-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>
Smith Barney Mutual Funds 17
<PAGE>
EXCHANGING SHARES
<TABLE>
<C> <S>
Smith Barney offers You should contact your Salomon Smith Barney
a distinctive Financial Consultant or dealer representative
family of funds to exchange into other Smith Barney funds. Be
tailored to help sure to read the prospectus of the Smith
meet the varying Barney fund you are exchanging into. An
needs of both exchange is a taxable transaction.
large and small
investors - You may exchange shares only for shares of
the same class of another Smith Barney fund.
Not all Smith Barney funds offer all
classes.
- Not all Smith Barney funds may be offered
in your state of residence. Contact your
Salomon Smith Barney Financial Consultant,
dealer representative or the transfer
agent.
- You must meet the minimum investment amount
for each fund (except for systematic
changes).
- If you hold share certificates, the
sub-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.
--------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial
additional sales charge at the time of the exchange.
sales charges
Your deferred sales charge (if any) will
continue to be measured from the date of your
original purchase. If the fund you exchange
into has a higher deferred sales charge, you
will be subject to that charge. If you
exchange at any time into a fund with a lower
charge, the sales charge will not be reduced.
--------------------------------------------------------------------
</TABLE>
18 Georgia Portfolio
<PAGE>
<TABLE>
<C> <S>
By telephone If you do not have a brokerage account, you
may be eligible to exchange 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
4:00 p.m. (Eastern time).
You can make telephone exchanges only between
accounts that have identical registrations.
--------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney
brokerage account, contact your dealer
representative or write to the sub-transfer
agent at the address on the following page.
</TABLE>
Smith Barney Mutual Funds 19
<PAGE>
REDEEMING SHARES
<TABLE>
<C> <S>
Generally Contact your Salomon Smith Barney Financial
Consultant or dealer representative to redeem
shares of the fund.
If you hold share certificates, the
sub-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.
--------------------------------------------------------------------
By mail For accounts held directly at the fund, send
written requests to the sub-transfer agent at
the following address:
SMITH BARNEY GEORGIA PORTFOLIO
SMITH BARNEY MUNI FUNDS
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02490-9699
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
--------------------------------------------------------------------
</TABLE>
20 Georgia Portfolio
<PAGE>
<TABLE>
<C> <S>
By telephone If you do not have a brokerage account, you
may be eligible to redeem 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 4:00
p.m. (Eastern time).
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.
--------------------------------------------------------------------
Automatic You can arrange for the automatic redemption
cash of a portion of your shares on a monthly or
withdrawal quarterly basis. To qualify you must own
plans shares of the fund with a value of at least
$10,000 and each automatic 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>
Smith Barney Mutual Funds 21
<PAGE>
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
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 sub-transfer
agent
- Instruct the sub-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.
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
22 Georgia Portfolio
<PAGE>
- 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.
Smith Barney Mutual Funds 23
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS The fund pays dividends each month from its net investment income.
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 GEORGIA TAX STATUS
<S> <C> <C>
Redemption or exchange Usually capital gain or Usually capital gain or
of shares loss; long-term only if loss
shares owned more than
one year
Long-term capital gain Taxable gain Taxable gain
distributions
Short-term capital gain Ordinary income Ordinary income
distributions
Dividends Excluded from gross Exempt from personal
income if from interest income taxes if from
on tax-exempt interest on Georgia
securities, otherwise municipal securities,
ordinary income otherwise ordinary
income
</TABLE>
Any taxable dividends and capital gain distributions are taxable whether
received in cash or reinvested in fund shares. Long-term capital gain
distributions are taxable to you as long-term capital gain regardless of how
long you have owned your shares. You may want to avoid buying shares when the
fund is about to declare a capital gain distribution or a taxable dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
24 Georgia Portfolio
<PAGE>
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 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.
SHARE PRICE
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).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. A fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
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.
Smith Barney Mutual Funds 25
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years. Certain information reflects
financial results for a single share. Total return represents the rate that a
shareholder would have earned (or lost) on a fund share assuming reinvestment of
all dividends and distributions. The information in the following tables was
audited by KPMG LLP, independent auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon request).
No information is present for Class Y shares because no shares were outstanding
during these fiscal years.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Net asset value,
beginning of year $ 13.43 $ 13.43 $ 12.48 $ 12.50 $12.10
-------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(2) 0.65 0.62 0.67 0.69 0.70
Net realized and unrealized gain
(loss) (1.06) 0.12 1.03 0.04 0.45
-------------------------------------------------------------------------------------
Total income (loss) from operations (0.41) 0.74 1.70 0.73 1.15
-------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.62) (0.62) (0.67) (0.67) (0.70)
In excess of net investment income -- (0.03) -- -- --
Net realized gains -- (0.09) (0.08) (0.08) (0.05)
-------------------------------------------------------------------------------------
Total distributions (0.62) (0.74) (0.75) (0.75) (0.75)
-------------------------------------------------------------------------------------
Net asset value, end of year $ 12.40 $ 13.43 $ 13.43 $ 12.48 $12.50
-------------------------------------------------------------------------------------
Total return (2.97)% 5.61% 13.85% 5.95% 9.67%
-------------------------------------------------------------------------------------
Net assets, end of year (000) $43,100 $34,680 $20,502 $14,495 $9,744
-------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2)(3) 0.68% 0.64% 0.50% 0.48% 0.38%
Net investment income 4.74 4.63 5.10 5.49 5.57
-------------------------------------------------------------------------------------
Portfolio turnover rate 98% 48% 36% 81% 63%
-------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using monthly average
shares method.
(2) The manager has waived all or a portion of its fees for the
years ended March 31, 1999, 1998, 1997 and 1996. In
addition, the manager reimbursed expenses of $56,755 for the
year ended March 31, 1996. If such fees were not waived and
expenses not reimbursed, the effect on net investment income
and expense ratios would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
EXPENSE RATIOS
NET INVESTMENT INCOME PER WITHOUT FEE WAIVERS AND/OR
SHARE DECREASES EXPENSE REIMBURSEMENTS(4)
1999 1998 1997 1996 1999 1998 1997 1996
------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.01 $0.04 $0.04 $0.11 0.74% 0.83% 0.90% 1.23%
------------------------------------------------------ -------------------------
</TABLE>
<TABLE>
<C> <S>
(3) As a result of voluntary expense limitations, expense ratios
will not exceed 0.80% for Class A shares.
</TABLE>
26 Georgia Portfolio
<PAGE>
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
Net asset value, beginning of year $13.42 $13.43 $ 12.47 $12.50 $12.11
------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(2) 0.56 0.56 0.61 0.62 0.64
Net realized and unrealized
gain (loss) (1.03) 0.10 1.03 0.04 0.45
------------------------------------------------------------------------------------
Total income (loss) from operations (0.47) 0.66 1.64 0.66 1.09
------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.55) (0.55) (0.60) (0.61) (0.65)
In excess of net investment income -- (0.03) -- -- --
Net realized gains -- (0.09) (0.08) (0.08) (0.05)
------------------------------------------------------------------------------------
Total distributions (0.55) (0.67) (0.68) (0.69) (0.70)
------------------------------------------------------------------------------------
Net asset value, end of year $12.40 $13.42 $ 13.43 $12.47 $12.50
------------------------------------------------------------------------------------
Total return (3.45)% 4.99% 13.39% 5.33% 9.08%
------------------------------------------------------------------------------------
Net assets, end of year (000) $11,503 $13,633 $10,712 $7,354 $5,461
------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2)(3) 1.30% 1.15% 1.02% 1.00% 0.92%
Net investment income 4.47 4.12 4.58 4.97 5.20
------------------------------------------------------------------------------------
Portfolio turnover rate 98% 48% 36% 81% 63%
------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) The manager has waived all or a portion of its fees for the
years ended March 31, 1999, 1998, 1997 and 1996. In
addition, the manager reimbursed expenses of $56,755 for the
year ended March 31, 1996. If such fees were not waived and
expenses not reimbursed, the effect on net investment income
and expense ratios would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
EXPENSE RATIOS
NET INVESTMENT INCOME PER SHARE WITHOUT FEE WAIVERS AND/OR
DECREASES EXPENSE REIMBURSEMENTS
1999 1998 1997 1996 1999 1998 1997 1996
--------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $0.02 $0.04 $0.05 $0.10 1.26% 1.35% 1.42% 1.77%
--------------------------------------------------------- ----------------------------
</TABLE>
<TABLE>
<C> <S>
(3) As a result of voluntary expense limitations, expense ratios will not exceed 1.30% for Class B shares.
</TABLE>
Smith Barney Mutual Funds 27
<PAGE>
FOR A CLASS L SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1)(2) 1998 1997 1996
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
Net asset value,
beginning of year $13.41 $13.41 $12.46 $12.49 $12.09
-----------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(3) 0.56 0.55 0.60 0.62 0.63
Net realized and unrealized
gain (loss) (1.04) 0.12 1.02 0.03 0.46
-----------------------------------------------------------------------------------
Total income (loss) from
operations (0.48) 0.67 1.62 0.65 1.09
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.54) (0.55) (0.59) (0.60) (0.64)
In excess of net investment
income -- (0.03) -- -- --
Net realized gains -- (0.09) (0.08) (0.08) (0.05)
-----------------------------------------------------------------------------------
Total distributions (0.54) (0.67) (0.67) (0.68) (0.69)
-----------------------------------------------------------------------------------
Net assets value, end of year $12.39 $13.41 $13.41 $12.46 $12.49
-----------------------------------------------------------------------------------
Total return (3.51)% 5.01% 13.23% 5.28% 9.12%
-----------------------------------------------------------------------------------
Net assets, end of year (000) $5,893 $7,304 $4,641 $3,221 $2,914
Ratios to average net assets:
Expenses(3)(4) 1.33% 1.20% 1.06% 1.04% 0.97%
Net investment income 4.44 4.07 4.54 4.93 5.18
-----------------------------------------------------------------------------------
Portfolio turnover rate 98% 48% 36% 81% 63%
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) On June 12, 1998, the Class C shares were renamed Class L
shares.
(3) The manager has waived all or a portion of its fees for the
years ended March 31, 1999, 1998, 1997 and 1996. In
addition, the manager reimbursed expenses of $56,755 for the
year ended March 31,1996. If such fees were not waived and
expenses not reimbursed, the effect on net investment income
and expense ratios would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
EXPENSE RATIOS
NET INVESTMENT INCOME PER SHARE WITHOUT FEE WAIVERS AND/OR
DECREASES EXPENSE REIMBURSEMENTS
1999 1998 1997 1996 1999 1998 1997 1996
--------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class L $0.02 $0.04 $0.05 $0.10 1.31% 1.39% 1.46% 1.82%
--------------------------------------------------------- ----------------------------
</TABLE>
<TABLE>
<C> <S>
(4) As a result of voluntary expense limitations, expense ratios will not exceed 1.35% for Class L shares.
</TABLE>
28 Georgia Portfolio
<PAGE>
[SALOMON SMITH BARNEY LOGO]
GEORGIA 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
Information about the fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission") Public Reference Room in
Washington, D.C. In addition, information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Database
on the Commission's Internet site at HTTP://WWW.SEC.GOV. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act
file no. 811-04395)
FD0771 7/00
<PAGE>
[SMITH BARNEY MUTUAL FUNDS LOGO]
Your Serious Money. Professionally Managed.(SM)
PROSPECTUS
FLORIDA PORTFOLIO
CLASS A, B, L AND Y SHARES
----------------------------------
JULY 28, 2000
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.
<PAGE>
<PAGE>
(This page intentionally left blank)
<PAGE>
FLORIDA PORTFOLIO
CONTENTS
<TABLE>
<S> <C>
Investments, risks and performance......................... 2
More on the fund's investments............................. 7
Management................................................. 9
Choosing a class of shares to buy.......................... 10
Comparing the fund's classes............................... 11
Sales charges.............................................. 12
More about deferred sales charges.......................... 15
Buying shares.............................................. 16
Exchanging shares.......................................... 17
Redeeming shares........................................... 19
Other things to know about share transactions.............. 21
Dividends, distributions and taxes......................... 23
Share price................................................ 25
Financial highlights....................................... 26
</TABLE>
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.
1 Smith Barney Mutual Funds
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
The fund seeks as high a level of income exempt from federal income taxes as is
consistent with prudent investing.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests at least 80% of its net assets in municipal
securities and at least 65% of its net assets in Florida municipal securities.
Florida municipal securities include securities issued by the State of Florida
and certain other municipal issuers, political subdivisions, agencies and public
authorities that pay interest which is excluded from gross income for federal
income purposes. The fund generally favors municipal securities which enable its
shares to be exempt from the Florida intangibles tax. The fund focuses primarily
on intermediate-term and long-term municipal securities which have remaining
maturities at the time of purchase of from three to more than thirty years. The
fund invests exclusively in municipal securities that are rated investment grade
at the time of purchase or are of comparable quality if unrated. Investment
grade bonds are those rated in any of the four highest long-term rating
categories or, if unrated, of comparable quality. At least two-thirds of the
municipal securities must be rated, at the time of purchase, within the three
highest investment grade rating categories by a nationally recognized rating
organization.
SELECTION PROCESS The manager selects securities primarily by identifying
undervalued sectors and individual securities, while also selecting securities
it believes will benefit from changes in market conditions. In selecting
individual securities, the manager:
- Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit opportunities
in the municipal bond market
- 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 and their impact on the level of
dividends generated by the overall portfolio
- Identifies individual securities with the most potential for added value, such
as those involving unusual situations, new issuers, the potential for credit
upgrades, unique structural characteristics or innovative features
- Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer and its sector and
interest rates
Florida Portfolio 2
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, 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
- Florida municipal securities fall out of favor with investors. The fund will
suffer more than a national municipal fund from adverse events affecting
Florida municipal issuers
- Unfavorable legislation affects the tax-exempt status of municipal bonds
- The manager's judgment about the attractiveness, value or income potential 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
taxation. Depending upon the composition of the fund's portfolio, shares of the
fund may be subject to the Florida intangibles tax. The fund may realize taxable
gains on the sale of its securities or on transactions in futures contracts.
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 Florida.
The fund is classified as "non-diversified," which means it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the fund invests its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- Are a Florida resident in a high federal tax bracket seeking income exempt
from federal income taxes
- Currently have exposure to other asset classes and are seeking to broaden your
investment portfolio
- Are willing to accept the risks of municipal securities, including the risks
of concentrating in a single state
3 Smith Barney Mutual Funds
<PAGE>
RISK RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future. The bar chart
shows the performance of the fund's Class A shares for each of the past 8 full
calendar years. Class B, L and Y shares would have different performance because
of their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
TOTAL RETURN: CLASS A SHARES
[RISK RETURN BAR CHART IN PRINTABLE GRAPHIC]
<TABLE>
<S> <C>
92 8.90
93 13.14
94 -5.11
95 17.45
96 4.51
97 10.15
98 5.70
99 -4.54
</TABLE>
CALENDAR YEARS ENDED DECEMBER 31
QUARTERLY RETURNS:
Highest: 6.86% in 1st quarter 1995; Lowest: (5.02)% in 1st quarter 1994;
Year to date: 1.65% through 6/30/00
Florida Portfolio 4
<PAGE>
RISK RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unmanaged
index of municipal bonds and the Lipper Florida Municipal Debt Fund Average (the
"Lipper Average"), an average composed of the fund's peer group of mutual funds.
This table assumes imposition of the maximum sales charge applicable to the
class, redemption of shares at the end of the period, and reinvestment of
distributions and dividends.
AVERAGE ANNUAL TOTAL RETURNS
CALENDAR YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CLASS 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C> <C>
A (8.39)% 5.54% n/a 6.03% 4/2/91
B (9.12)% 5.72% n/a 6.48% 11/16/94
L (6.89)% 5.60% n/a 4.78% 1/5/93
Lehman Index (2.06)% 6.91% n/a 6.68% *
Lipper Average (4.35)% 5.89% n/a 6.00% *
</TABLE>
*Index comparison begins on April 30, 1991.
5 Smith Barney Mutual Funds
<PAGE>
FEE TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
SHAREHOLDER FEES
<TABLE>
<CAPTION>
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge (load) (as
a % of the lower of net asset value at
purchase or redemption) None* 4.50% 1.00% None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<CAPTION>
(EXPENSES DEDUCTED FROM ASSETS) CLASS A CLASS B CLASS L CLASS Y**
<S> <C> <C> <C> <C>
Management fee 0.50% 0.50% 0.50% 0.50%
Distribution and service
(12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.09% 0.11% 0.12% 0.09%
Total annual fund operating
expenses 0.74% 1.26% 1.32% 0.59%
===== ===== ===== =====
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
**For Class Y shares, "Other Expenses" have been estimated for the fiscal year
ended March 31, 2000, based on expenses
incurred by Class A shares because prior to March 31, 2000, no Class Y shares
were sold.
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
NUMBER OF YEARS YOU OWN YOUR SHARES
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $473 $627 $795 $1,282
Class B (redemption at end of
period) $578 $700 $792 $1,379
Class B (no redemption) $128 $400 $692 $1,379
Class L (redemption at end of
period) $333 $514 $816 $1,674
Class L (no redemption) $233 $514 $816 $1,674
Class Y (with or without
redemption) $60 $189 $329 $738
</TABLE>
Florida Portfolio 6
<PAGE>
MORE ON THE FUND'S INVESTMENTS
FLORIDA MUNICIPAL SECURITIES Florida municipal securities include debt
obligations issued by certain non-Florida governmental issuers such as Puerto
Rico, the Virgin Islands and Guam. The interest on these bonds is exempt from
federal income tax. As a result, the interest rate on these bonds normally is
lower than it would be if the bonds were subject to taxation. The Florida
municipal securities in which the fund invests include general obligation bonds,
revenue bonds and municipal leases. These securities may pay interest at fixed,
variable or floating rates. The fund may also hold zero coupon securities which
pay no interest during the life of the obligation but trade at prices below
their stated maturity value.
OTHER DEBT SECURITIES The fund may invest up to 35% of its assets in municipal
securities of non-Florida issuers. These securities will generally be exempt
from federal taxation but not from the Florida intangibles tax. The fund may
also invest up to 20% of its assets in debt securities which are issued or
guaranteed by the full faith and credit of the U.S. government. These securities
will generally be subject to federal and state taxation.
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as financial futures, for any of the following purposes:
- To hedge against the economic impact of adverse changes in the market value of
portfolio securities due to changes in interest rates
- As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities.
The other parties to certain futures contracts present the same types of default
risk as issuers of fixed income securities.
7 Smith Barney Mutual Funds
<PAGE>
The fund may invest in inverse floating rate securities. These securities pay
interest at a rate which moves in the opposite direction from movements in
market interest rates. Inverse floaters and futures are volatile and involve
leverage which may expose the fund to increased risk of loss. Therefore, using
futures or inverse floaters can disproportionately increase losses and reduce
opportunities for gains when interest rates are changing. The fund may not fully
benefit from or may lose money on futures contracts used for hedging
purposes if changes in their value do not correspond accurately to changes in
the value of the fund's holdings. Futures and inverse floaters can also make a
fund less liquid and harder to value, especially in declining markets.
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 money market and short-term
debt securities. If the fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
Florida Portfolio 8
<PAGE>
MANAGEMENT
MANAGER The fund's investment adviser (the manager) is SSB Citi Fund Management
LLC (successor to 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.
Peter M. Coffey, investment officer of SSB Citi Fund Management LLC and managing
director of Salomon Smith Barney, has been responsible for the day-to-day
management of the fund's portfolio since the fund commenced operations in April
1991. Mr. Coffey has 31 years of experience with the manager or its
predecessors.
MANAGEMENT FEES During the fiscal year ended March 31, 2000, the manager
received an advisory fee equal to 0.50% of the fund's average daily net assets.
DISTRIBUTOR The fund has entered into an agreement with Salomon Smith Barney
Inc. to distribute the fund's shares.
DISTRIBUTION PLANS The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement with
the transfer agent, PFPC Global Fund Services serves as the fund's sub-transfer
agent (the "sub-transfer agent") to render certain shareholder record keeping
and accounting services and functions.
9 Smith Barney Mutual Funds
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
- If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
- For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
- Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class L
shares do not, Class B shares may be more attractive to long-term investors.
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 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>
INITIAL ADDITIONAL
CLASSES A, B, L CLASS Y ALL CLASSES
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment
Plans $50 n/a $50
Uniform Gift to Minors Accounts $250 $15 million $50
</TABLE>
Florida Portfolio 10
<PAGE>
COMPARING THE FUND'S CLASSES
Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
KEY FEATURES - Initial sales - No initial - Initial sales - No initial or
charge sales charge charge is deferred
- You may - Deferred lower than sales charge
qualify for sales charge Class A - Must invest
reduction or declines over - Deferred at least $15
waiver of time sales charge million
initial sales - Converts to for only 1 - Lower annual
charge Class A after year expenses than
- Lower annual 8 years - Does not the other
expenses than - Higher annual convert to classes
Class B and expenses than Class A
Class L Class A - Higher annual
expenses than
Class A
---------------------------------------------------------------------------------------------
INITIAL SALES CHARGE Up to 4.00%; None 1.00% None
reduced for
large purchases
and waived for
certain
investors. No
charge for
purchases of
$500,000 or
more
---------------------------------------------------------------------------------------------
DEFERRED SALES CHARGE 1.00% on Up to 4.50% 1.00% if you None
purchases of charged when redeem within 1
$500,000 or you redeem year of
more if you shares. The purchase
redeem within 1 charge is
year of reduced over
purchase time and there
is no deferred
sales charge
after 6 years
---------------------------------------------------------------------------------------------
ANNUAL DISTRIBUTION 0.15% of 0.65% of 0.70% of None
AND SERVICE FEES average daily average daily average daily
net assets net assets net assets
---------------------------------------------------------------------------------------------
EXCHANGE PRIVILEGE* Class A shares Class B shares Class L shares Class Y shares
of most Smith of most Smith of most Smith of most Smith
Barney funds Barney funds Barney funds Barney funds
---------------------------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
11 Smith Barney Mutual Funds
<PAGE>
SALES CHARGES
CLASS A SHARES
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF
OFFERING NET AMOUNT
AMOUNT OF PURCHASE PRICE (%) INVESTED (%)
<S> <C> <C>
Less than $25,000 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more 0.00 0.00
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
- Accumulation privilege - lets you combine the current value of Class A shares
owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases on
which you paid a sales charge within 90 days before you sign the letter.
Florida Portfolio 12
<PAGE>
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- Employees of members of the NASD
- Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
YEAR AFTER PURCHASE 1ST 2ND 3RD 4TH 5TH 6TH THROUGH 8TH
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<S> <C> <C>
Shares issued: On Shares issued: Upon
reinvestment of exchange from another
Shares issued: At dividends and Smith Barney fund
initial purchase distributions
Eight years after the In same proportion On the date the
date of purchase as the number of shares originally
Class B shares acquired would have
converting is to converted into Class
total Class B A shares
shares you own
(excluding shares
issued as dividends)
</TABLE>
13 Smith Barney Mutual Funds
<PAGE>
CLASS L SHARES
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund and/or other Smith
Barney mutual funds on June 12, 1998, you will not pay an initial sales charge
on Class L shares you buy before June 22, 2001.
CLASS Y SHARES
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.
Florida Portfolio 14
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
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.
In addition, you do not pay a deferred sales charge on:
- Shares exchanged for shares of another Smith Barney fund
- Shares representing reinvested distributions and dividends
- Shares no longer subject to the deferred sales charge
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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 each share class will generally be waived:
- On payments made through certain systematic withdrawal plans
- For involuntary redemptions of small account balances
- For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
15 Smith Barney Mutual Funds
<PAGE>
BUYING SHARES
<TABLE>
<C> <S>
Through a You should contact your Salomon Smith Barney
Salomon Smith Financial Consultant or dealer representative to
Barney Financial open a brokerage account and make arrangements
representative to buy shares.
If you do not provide the following information,
your order will be rejected:
- 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.
-----------------------------------------------------------------------
Through the Certain investors who are clients of the selling
fund's sub-transfer group are eligible to buy shares directly from
agent the fund.
- Write the sub-transfer agent at the following
address:
SMITH BARNEY FLORIDA PORTFOLIO
SMITH BARNEY MUNI FUNDS
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02940-9699
- Enclose a check made payable to the fund 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.
-----------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your
systematic dealer representative or the sub-transfer agent
investment plan to transfer funds automatically from a regular
bank account, cash held in a Salomon Smith
Barney brokerage account or Smith Barney money
market fund to buy shares on a regular basis.
- 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
sub-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>
Florida Portfolio 16
<PAGE>
EXCHANGING SHARES
<TABLE>
<C> <S>
Smith Barney offers You should contact your Salomon Smith Barney
a distinctive Financial Consultant or dealer representative
family of funds to exchange into other Smith Barney funds. Be
tailored to help sure to read the prospectus of the Smith
meet the varying Barney fund you are exchanging into. An
needs of both exchange is a taxable transaction.
large and small
investors - You may exchange shares only for shares of
the same class of another Smith Barney fund.
Not all Smith Barney funds offer all
classes.
- Not all Smith Barney funds may be offered
in your state of residence. Contact your
Salomon Smith Barney Financial Consultant,
dealer representative or the transfer
agent.
- You must meet the minimum investment amount
for each fund (except for systematic
changes).
- If you hold share certificates, the
sub-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.
--------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial
additional sales charge at the time of the exchange.
sales charges
Your deferred sales charge (if any) will
continue to be measured from the date of your
original purchase. If the fund you exchange
into has a higher deferred sales charge, you
will be subject to that charge. If you
exchange at any time into a fund with a lower
charge, the sales charge will not be reduced.
--------------------------------------------------------------------
</TABLE>
17 Smith Barney Mutual Funds
<PAGE>
<TABLE>
<C> <S>
By telephone If you do not have a brokerage account, you
may be eligible to exchange 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
4:00 p.m. (Eastern time).
You can make telephone exchanges only between
accounts that have identical registrations.
--------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney
brokerage account, contact your dealer
representative or write to the sub-transfer
agent at the address on the following page.
</TABLE>
Florida Portfolio 18
<PAGE>
REDEEMING SHARES
<TABLE>
<C> <S>
Generally Contact your Salomon Smith Barney Financial
Consultant or dealer representative to redeem
shares of the fund.
If you hold share certificates, the
sub-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.
--------------------------------------------------------------------
By mail For accounts held directly at the fund, send
written requests to the sub-transfer agent at
the following address:
SMITH BARNEY FLORIDA PORTFOLIO
SMITH BARNEY MUNI FUNDS
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02490-9699
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
--------------------------------------------------------------------
</TABLE>
19 Smith Barney Mutual Funds
<PAGE>
<TABLE>
<C> <S>
By telephone If you do not have a brokerage account, you
may be eligible to redeem 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 4:00
p.m. (Eastern time).
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.
--------------------------------------------------------------------
Automatic You can arrange for the automatic redemption
cash of a portion of your shares on a monthly or
withdrawal quarterly basis. To qualify you must own
plans shares of the fund with a value of at least
$10,000 and each automatic 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>
Florida Portfolio 20
<PAGE>
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
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 sub-transfer
agent
- Instruct the sub-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.
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
21 Smith Barney Mutual Funds
<PAGE>
- 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.
Florida Portfolio 22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS The fund pays dividends each month from its net investment income.
The fund generally makes capital gain distributions and pays dividends, 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.
Florida currently does not impose a personal income tax on individuals. Thus,
individual shareholders of the fund will not be subject to any Florida state
income tax on distributions received from the fund.
Florida does currently impose an "intangibles tax" on certain securities and
other intangible assets owned by Florida residents. However, certain types of
municipal obligations of Florida issuers, U.S. Treasury securities and municipal
obligations issued by certain U.S. territories and possessions are exempt from
this intangibles tax. The fund seeks generally to select investments that will
enable its shares to be exempt from the Florida intangibles tax and attempts to
ensure that all of its assets held on the annual assessment date are exempt from
this tax. Certain of the fund's distributions will be taxable to corporate
shareholders that are subject to Florida corporate income tax.
23 Smith Barney Mutual Funds
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION FEDERAL TAX STATUS
<S> <C>
Redemption or exchange of shares Usually capital gain or loss;
long-term only if shares owned
more than one year
Long-term capital gain Taxable gain
distributions
Short-term capital gain Ordinary income
distributions
Dividends Excluded from gross income if
from interest on tax-exempt
securities, otherwise ordinary
income
</TABLE>
Any taxable dividends and capital gain distributions are taxable whether
received in cash or reinvested in fund shares. Long-term capital gain
distributions are taxable to you as long-term capital gain regardless of how
long you have owned your shares. You may want to avoid buying shares when the
fund is about to declare a capital gain distribution or a taxable dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
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 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.
Florida Portfolio 24
<PAGE>
SHARE PRICE
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).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. A fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
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.
25 Smith Barney Mutual Funds
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years. Certain information reflects
financial results for a single share. Total return represents the rate that a
shareholder would have earned (or lost) on a fund share assuming reinvestment of
all dividends and distributions. The information in the following tables was
audited by KPMG LLP, independent auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon request).
No information is present for Class Y shares because no shares were outstanding
during these fiscal years.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
Net asset value, beginning of
year $13.70 $13.74 $13.16 $13.24 $12.89
--------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.69 0.69 0.72 0.73 0.74
Net realized and unrealized
gain (loss) (1.01) 0.06 0.72 (0.03) 0.35
--------------------------------------------------------------------------------
Total income (loss) from
operations (0.32) 0.75 1.44 0.70 1.09
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.68) (0.69) (0.73) (0.73) (0.74)
In excess of net
investment income -- (0.01) -- -- --
Net realized gains -- (0.09) (0.13) (0.05) --
--------------------------------------------------------------------------------
Total distributions (0.68) (0.79) (0.86) (0.78) (0.74)
--------------------------------------------------------------------------------
Net asset value, end of year $12.70 $13.70 $13.74 $13.16 $13.24
--------------------------------------------------------------------------------
Total return (2.25)% 5.56% 11.15% 5.44% 8.65%
--------------------------------------------------------------------------------
Net assets, end of year
(millions) $ 151 $160 $143 $127 $117
--------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2) 0.74% 0.73% 0.76% 0.85% 0.70%
Net investment income 5.32 4.99 5.28 5.56 5.62
--------------------------------------------------------------------------------
Portfolio turnover rate 56% 43% 59% 62% 47%
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) As a result of voluntary expense limitations, expense ratios
will not exceed 0.85% for Class A shares.
</TABLE>
Florida Portfolio 26
<PAGE>
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
Net asset value, beginning of
year $13.69 $13.73 $13.14 $13.23 $12.89
---------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.62 0.62 0.65 0.65 0.68
Net realized and unrealized
gain (loss) (1.00) 0.06 0.72 (0.01) 0.35
---------------------------------------------------------------------------------
Total income (loss) from
operations (0.38) 0.68 1.37 0.64 1.03
---------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.61) (0.62) (0.65) (0.68) (0.69)
In excess of net
investment income -- (0.01) -- -- --
Net realized gains -- (0.09) (0.13) (0.05) --
---------------------------------------------------------------------------------
Total distributions (0.61) (0.72) (0.78) (0.73) (0.69)
---------------------------------------------------------------------------------
Net asset value, end of year $12.70 $13.69 $13.73 $13.14 $13.23
---------------------------------------------------------------------------------
Total return (2.70)% 5.01% 10.59% 4.91% 8.09%
---------------------------------------------------------------------------------
Net assets, end of year
(millions) $59 $66 $59 $51 $46
---------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2) 1.26% 1.24% 1.28% 1.35% 1.20%
Net investment income 4.80 4.48 4.76 4.93 5.00
---------------------------------------------------------------------------------
Portfolio turnover rate 56% 43% 59% 62% 47%
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) As a result of voluntary expense limitations, expense ratios
will not exceed 1.35%.
</TABLE>
27 Smith Barney Mutual Funds
<PAGE>
FOR A CLASS L SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1)(2) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
Net asset value, beginning of
year $13.69 $13.74 $13.14 $13.22 $12.89
--------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.61 0.61 0.64 0.65 0.66
Net realized and unrealized
gain (loss) (1.00) 0.05 0.72 (0.01) 0.35
--------------------------------------------------------------------------------
Total income (loss) from
operations (0.39) 0.66 1.36 0.64 1.01
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.61) (0.63) (0.67) (0.68)
In excess of net
investment income -- (0.01) -- -- --
Net realized gains -- (0.09) (0.13) (0.05) --
--------------------------------------------------------------------------------
Total distributions (0.60) (0.71) (0.76) (0.72) (0.68)
--------------------------------------------------------------------------------
Net assets value, end of year $12.70 $13.69 $13.74 $13.14 $13.22
--------------------------------------------------------------------------------
Total return (2.78)% 4.87% 10.51% 4.94% 7.96%
--------------------------------------------------------------------------------
Net assets, end of year
(millions) $13 $12 $9 $7 $3
--------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(3) 1.32% 1.31% 1.33% 1.40% 1.28%
Net investment income 4.74 4.41 4.71 4.84 5.04
--------------------------------------------------------------------------------
Portfolio turnover rate 56% 43% 59% 62% 47%
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) On June 12, 1998, the Class C shares were renamed Class L
shares.
(3) As a result of voluntary expense limitations, expense ratios
will not exceed 1.40%.
</TABLE>
Florida Portfolio 28
<PAGE>
[SALOMON SMITH BARNEY LOGO]
FLORIDA 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
Information about the fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission") Public Reference Room in
Washington, D.C. In addition, information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Database
on the Commission's Internet site at HTTP://WWW.SEC.GOV. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act
file no. 811-04395)
FD0605 7/00
<PAGE>
[SB]Smith Barney
[MF]Mutual Funds
Your Serious Money.Professionally Managed./SM/
P R O S P E C T U S
New York
Portfolio
Class A, B, L and Y Shares
-------------------------------------------
July 28, 2000
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.
<PAGE>
New York Portfolio
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 6
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
Comparing the fund's classes................................................ 9
Sales charges............................................................... 10
More about 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................................................................. 21
Financial highlights........................................................ 22
</TABLE>
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.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
Investment objective
The fund seeks as high a level of income exempt from federal income taxes and
New York state and New York City personal income taxes as is consistent with
prudent investing.
Principal investment strategies
Key investments The fund invests at least 80% of its net assets in municipal
securities, and at least 65% of its net assets in New York municipal securi-
ties. New York municipal securities include securities issued by the State of
New York and certain other municipal issuers, political subdivisions, agencies
and public authorities that pay interest which is exempt from New York State
and New York City personal income taxes. The fund focuses primarily on interme-
diate-term and long-term municipal securities which have remaining maturities
at the time of purchase from three to more than thirty years. The fund invests
exclusively in municipal securities that are rated investment grade at the time
of purchase or are of equivalent quality if unrated. At least two-thirds of the
municipal securities must be rated, at the time of purchase, within the three
highest investment grade rating categories by a nationally recognized rating
organization.
Selection process The manager selects securities primarily by identifying
undervalued sectors and individual securities, while also selecting securities
it believes will benefit from changes in market conditions. In selecting indi-
vidual securities, the manager:
.Uses fundamental credit analysis to estimate the relative value and attrac-
tiveness of various securities and sectors and to exploit opportunities in
the municipal bond market
.May trade between general obligation and revenue bonds and among various reve-
nue bond sectors, such as housing, hospital and industrial development, based
on their apparent relative values
.Identifies individual securities with the most potential for added value, such
as those involving unusual situations, new issuers, the potential for credit
upgrades, unique structural characteristics or innovative features
.Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer and its sector and
interest rates
New York Portfolio
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, 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
.New York municipal securities fall out of favor with investors. The fund will
suffer more than a national municipal fund from adverse events affecting New
York municipal issuers
.Unfavorable legislation affects the tax-exempt status of municipal bonds
.The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
It is possible that some of the fund's income distributions may be, and distri-
butions of the fund's gains generally will be, subject to federal income taxa-
tion and New York State and New York City personal income taxation. The fund
may realize taxable gains on the sale of its securities or on transactions in
futures contracts. 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 New York.
The fund is classified as "non-diversified," which means it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the fund invests its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers.
Who may want to invest The fund may be an appropriate investment if you:
.Are a New York taxpayer in a high federal tax bracket seeking income exempt
from federal income taxes and New York personal income taxes
.Currently have exposure to other asset classes and are seeking to broaden your
investment portfolio
.Are willing to accept the risks of municipal securities, including the risks
of concentrating in a single state
Smith Barney Mutual Funds
3
<PAGE>
Risk return bar chart
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future. The bar chart shows
the performance of the fund's Class A shares for each of the past 10 calendar
years. Class B, L and Y shares would have different performance because of
their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
Total Return for Class A Shares
[BAR CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
5.42% 14.77% 9.92% 12.93% -5.95% 18.26% 4.19% 10.34% 5.89% -4.36%
Calendar years ended December 31
Quarterly returns:
Highest: 7.17% in 1st quarter 1995; Lowest: (5.20)% in 1st quarter 1994
Year to date: 4.84% through 6/30/00.
Risk return table
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
Lehman Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unman-
aged index of municipal bonds and the Lipper New York Municipal Debt Funds
Average (the "Lipper Average"), an average composed of the fund's peer group of
mutual funds. This table assumes imposition of the maximum sales charge appli-
cable to the class, redemption of shares at the end of the period, and rein-
vestment of distributions and dividends.
Average Annual Total Returns
Calendar Years Ended December 31, 1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since inception Inception date
<S> <C> <C> <C> <C> <C>
A (8.17)% 5.73% 6.44% 6.30% 1/16/87
B (8.91)% 5.91% n/a 6.42% 11/11/94
L (6.73)% 5.80% n/a 4.81% 1/8/93
Lehman Index (2.06)% 6.91% 6.89% 6.81% *
Lipper Average (4.86)% 5.68% 6.09% 5.82% *
</TABLE>
* Index comparison begins on January 31, 1987.
New York Portfolio
4
<PAGE>
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge (load) (as a %
of the lower of net asset value at purchase
or redemption) None* 4.50% 1.00% None
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B Class L Class Y**
<S> <C> <C> <C> <C>
Management fee 0.50% 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.06% 0.08% 0.07% 0.06%
----- ----- ----- -----
Total annual fund operating expenses 0.71% 1.23% 1.27% 0.56%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
**For Class Y shares "Other Expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares were outstanding for the
fiscal year ended March 31, 2000.
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
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $470 $618 $779 $1,247
Class B (redemption at end of period) $575 $690 $776 $1,344
Class B (no redemption) $125 $390 $676 $1,344
Class L (redemption at end of period) $328 $499 $790 $1,619
Class L (no redemption) $228 $499 $790 $1,619
Class Y (with or without redemption) $ 57 $179 $313 $ 701
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
More on the fund's investments
New York municipal securities New York municipal securities include debt obli-
gations issued by certain non-New York governmental issuers such as Puerto
Rico, the Virgin Islands and Guam. The interest on these bonds is exempt from
federal income tax and New York personal income tax. As a result, the interest
rate on these bonds normally is lower than it would be if the bonds were sub-
ject to taxation. The New York municipal securities in which the fund invests
include general obligation bonds, revenue bonds and municipal leases. These
securities may pay interest at fixed, variable or floating rates. The fund may
also hold zero coupon securities which pay no interest during the life of the
obligation but trade at prices below their stated maturity value.
Other debt securities The fund may invest up to 35% of its assets in municipal
securities of non-New York issuers. These securities will generally be exempt
from federal, but not New York, income taxes. The fund may also invest up to
20% of its assets in debt securities which are issued or guaranteed by the full
faith and credit of the U.S. government. These securities will generally be
subject to federal and state taxation.
Derivative contracts The fund may, but need not, use derivative contracts, such
as financial futures and options on financial futures, for any of the following
purposes:
.To hedge against the economic impact of adverse changes in the market value of
portfolio securities because of changes in interest rates
.As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities.
Even a small investment in futures can have a big impact on a fund's interest
rate exposure. Therefore, using futures can disproportionately increase losses
and reduce opportunities for gains when interest rates are changing. The fund
may not fully benefit from or may lose money on futures if changes in their
value do not correspond accurately to changes in the value of the fund's hold-
ings. The other parties to certain futures contracts present the same types of
default risk as issuers of fixed income securities. Futures can also make a
fund less liquid and harder to value, especially in declining markets.
Defensive investing The fund may depart from its principal investment strate-
gies in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
New York Portfolio
6
<PAGE>
Management
Manager The fund's investment adviser is SSB Citi Fund Management LLC (succes-
sor to 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 busi-
nesses produce a broad range of financial services--asset management, banking
and consumer finance, credit and charge cards, insurance, investments, invest-
ment banking and trading--and use diverse channels to make them available to
consumer and corporate customers around the world.
Joseph P. Deane, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund's portfolio since February 1999. Mr. Deane has 30 years of securities
business experience.
Management fees During the fiscal year ended March 31, 2000, the manager
received an advisory fee equal to 0.50% of the fund's average daily net assets.
Distributor The fund has entered into an agreement with Salomon Smith Barney
Inc. and PFS Distributors, Inc. to distribute the fund's shares.
Distribution plan The fund has adopted a Rule 12b-1 distribution plan for its
Class A, B and L shares. Under the plan, the fund pays distribution and/or
service fees. These fees are an ongoing expense and, over time, may cost you
more than other types of sales charges.
Transfer agent and shareholder servicing agent Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement
with the transfer agent, PFPC Global Fund Services serves as the fund's sub-
transfer agent (the "sub-transfer agent") to render certain shareholder record
keeping and accounting services and functions.
Smith Barney Mutual Funds
7
<PAGE>
Choosing a class of shares to buy
You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
.If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
.For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
.Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class
L shares do not, Class B shares may be more attractive to long-term invest-
ors.
You may buy shares from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through Sal-
omon Smith Barney--a dealer representative
.The fund, but only if you are investing through 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>
Initial Additional
Classes A, B, L Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $ 25 n/a $25
Quarterly Systematic Investment Plans $ 50 n/a $50
Uniform Gift to Minors Accounts $ 250 $15 million $50
</TABLE>
New York Portfolio
8
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Key features .Initial .No initial .Initial .No initial
sales sales sales or
charge charge charge is deferred
.You may .Deferred lower than sales
qualify sales Class A charge
for reduc- charge .Deferred .Must
tion or declines sales invest at
waiver of over time charge for least $15
initial .Converts only 1 million
sales to Class A year .Lower
charge after 8 .Does not annual
.Lower years convert to expenses
annual .Higher Class A than the
expenses annual .Higher other
than Class expenses annual classes
B and than Class expenses
Class L A than Class
A
------------------------------------------------------------------------
Initial sales charge Up to None 1.00% None
4.00%;
reduced for
large pur-
chases and
waived for
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
------------------------------------------------------------------------
Deferred sales charge 1.00% on Up to 4.50% 1.00% if None
purchases charged you redeem
of $500,000 when you within 1
or more if redeem year of
you redeem shares. The purchase
within 1 charge is
year of reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
------------------------------------------------------------------------
Annual distribution and 0.15% of 0.65% of 0.70% of None
service fees average average average
daily net daily net daily net
assets assets assets
------------------------------------------------------------------------
Exchange privilege Class A Class B Class L Class Y
shares of shares of shares of shares of
most Smith most Smith most Smith most Smith
Barney Barney Barney Barney
funds funds funds funds
------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds
9
<PAGE>
Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge
on the fund's distributions or dividends you reinvest in additional Class A
shares.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
Less than $25,000 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more -0- -0-
</TABLE>
Investments of $500,000 or more You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
.Accumulation privilege - lets you combine the current value of Class A shares
owned
.by you, or
.by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
.Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.
New York Portfolio
10
<PAGE>
Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
.Employees of members of the NASD
.Clients of newly employed Salomon Smith Barney Financial Consultants, if cer-
tain conditions are met
.Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").
Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: At initial purchase Shares issued: On Shares issued:
reinvestment of Upon exchange from
dividends and another Smith
distributions Barney fund
<S> <C> <C>
Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
(excluding shares
issued as divi-
dends)
</TABLE>
Smith Barney Mutual Funds
11
<PAGE>
Class L shares
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund and/or other Smith
Barney mutual funds on June 12, 1998, you will not pay an initial sales charge
on Class L shares you buy before June 22, 2001.
Class Y shares
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
requirement. You can use a letter of intent to meet this requirement by buying
Class Y shares of the fund over a 13-month period. To qualify, you must ini-
tially invest $5,000,000.
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
.Shares exchanged for shares of another Smith Barney fund
.Shares representing reinvested distributions and dividends
.Shares no longer subject to the deferred sales charge
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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.
New York Portfolio
12
<PAGE>
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
.On payments made through certain systematic withdrawal plans
.For involuntary redemptions of small account balances
.For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
representative If you do not provide the following information, your order
will be rejected:
.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.
--------------------------------------------------------------------------------
Certain investors who are clients of the selling group are
Through the eligible to buy shares directly from the fund.
fund's sub-
transfer
agent
.Write the sub-transfer agent at the following address:
Smith Barney New York Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
.Enclose a check made payable to the fund 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.
Smith Barney Mutual Funds
13
<PAGE>
Through a
systematic You may authorize Salomon Smith Barney, your dealer represen-
investment tative or the sub-transfer agent to transfer funds automati-
plan cally from a regular bank account, cash held in a Salomon
Smith Barney brokerage account or Smith Barney money market
fund to buy shares on a regular basis.
.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 represen-
tative or the sub-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.
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the .You may exchange shares only for shares of the same class of
varying needs another Smith Barney fund. Not all Smith Barney funds offer
of both large all classes.
and small .Not all Smith Barney funds may be offered in your state of
investors residence. Contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent.
.You must meet the minimum investment amount for each fund
(except for systematic exchanges).
.If you hold share certificates, the sub-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.
New York Portfolio
14
<PAGE>
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be
reduced.
--------------------------------------------------------------------------------
By telephone
If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete 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 4:00 p.m. (Eastern
time).
You can make telephone exchanges only between accounts that
have identical registrations.
--------------------------------------------------------------------------------
By mail
If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the sub-trans-
fer agent at the address on the following page.
Smith Barney Mutual Funds
15
<PAGE>
Redeeming shares
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the sub-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 redemp-
tion 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.
--------------------------------------------------------------------------------
By mail
For accounts held directly at the fund, send written requests
to the sub-transfer agent at the following address:
Smith Barney New York Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
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 regis-
tered
New York Portfolio
16
<PAGE>
By telephone
If you do not have a brokerage account, you may be eligible
to redeem 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 4:00 p.m. (Eastern time).
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 docu-
ments.
--------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans and each automatic 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.
Smith Barney Mutual Funds
17
<PAGE>
Other things to know about share transactions
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 redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal 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 sub-transfer
agent
.Instruct the sub-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 regis-
tration
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.
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
New York Portfolio
18
<PAGE>
.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 Securi-
ties 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 share-
holders. 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.
Smith Barney Mutual Funds
19
<PAGE>
Dividends, distributions and taxes
Dividends The fund pays dividends each month from its net investment income.
The fund generally makes capital gain distributions and pays dividends, 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 primar-
ily 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 distribu-
tions 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 distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status New York tax status
<S> <C> <C>
Redemption or Usually capital Usually capital gain
exchange of shares gain or loss; long-term only or loss
if shares owned
more than one year
Long-term capital gain Taxable gain Taxable gain
distributions
Short-term capital gain Ordinary income Ordinary income
distributions
Dividends Excluded from gross Exempt from personal
income if from interest income taxes if from
on tax- exempt interest on New York
securities, otherwise municipal securities,
ordinary income otherwise ordinary income
</TABLE>
Any taxable dividends and capital gain distributions are taxable whether
received in cash or reinvested in fund shares. Long-term capital gain distribu-
tions are taxable to you as long-term capital gain regardless of how long you
have owned your shares. You may want to avoid buying shares when the fund is
about to declare a capital gain distribution or a dividend, because it will be
taxable to you even though it may actually be a return of a portion of your
investment.
After the end of each year, the fund will provide you with information about
the distributions and dividends you received and any redemptions of
New York Portfolio
20
<PAGE>
shares during the previous year. If you do not provide the fund with your cor-
rect taxpayer identification 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.
Share price
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 liabili-
ties. 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 calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. A fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer repre-
sentative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
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.
Smith Barney Mutual Funds
21
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance of each class for the past 5 years. Certain information reflects finan-
cial results for a single share. Total return represents the rate that a
shareholder would have earned (or lost) on a fund share assuming reinvestment
of all dividends and distributions. The information in the following tables was
audited by KPMG LLP, independent auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon
request). No information is presented for Class Y shares because no shares were
outstanding during these fiscal years.
For a Class A share of capital stock outstanding throughout each year ended
March 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $13.69 $13.91 $13.16 $13.19 $12.83
-------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.68 0.68 0.72 0.74 0.75
Net realized and unrealized gain
(loss) (0.91) 0.07 0.81 (0.03) 0.35
-------------------------------------------------------------------------------
Total income (loss) from
operations (0.23) 0.75 1.53 0.71 1.10
-------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.67) (0.70) (0.73) (0.74) (0.74)
Net realized gains (0.01) (0.27) (0.05) -- --
-------------------------------------------------------------------------------
Total distributions (0.68) (0.97) (0.78) (0.74) (0.74)
-------------------------------------------------------------------------------
Net asset value, end of year $12.78 $13.69 $13.91 $13.16 $13.19
-------------------------------------------------------------------------------
Total return (1.61)% 5.50% 11.83% 5.48% 8.71%
-------------------------------------------------------------------------------
Net assets, end of year
(millions) $482 $556 $554 $531 $558
-------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 0.71% 0.70% 0.71% 0.75% 0.72%
Net investment income 5.20 4.94 5.28 5.58 5.84
-------------------------------------------------------------------------------
Portfolio turnover rate 33% 60% 71% 53% 36%
-------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts have been calculated using the monthly average shares
method.
(/2/) As a result of voluntary expense limitations, the expense ratio will not
exceed 0.85% for Class A shares.
New York Portfolio
22
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
March 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/) 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $13.68 $13.89 $13.15 $13.18 $12.84
--------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.61 0.61 0.65 0.67 0.67
Net realized and unrealized gain
(loss) (0.90) 0.07 0.80 (0.03) 0.35
--------------------------------------------------------------------------------
Total income (loss) from
operations (0.29) 0.68 1.45 0.64 1.02
--------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.62) (0.66) (0.67) (0.68)
Net realized gains (0.01) (0.27) (0.05) -- --
--------------------------------------------------------------------------------
Total distributions (0.61) (0.89) (0.71) (0.67) (0.68)
--------------------------------------------------------------------------------
Net asset value, end of year $12.78 $13.68 $13.89 $13.15 $13.18
--------------------------------------------------------------------------------
Total return (2.09)% 5.02% 11.19% 4.96% 8.05%
--------------------------------------------------------------------------------
Net assets, end of year
(millions) $156 $192 $195 $185 $181
--------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 1.23% 1.23% 1.23% 1.27% 1.25%
Net investment income 4.67 4.42 4.76 5.06 5.45
--------------------------------------------------------------------------------
Portfolio turnover rate 33% 60% 71% 53% 36%
--------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts have been calculated using the monthly average shares
method.
(/2/) As a result of voluntary expense limitations, the expense ratio will not
exceed 1.35% for Class B shares.
Smith Barney Mutual Funds
23
<PAGE>
For a Class L share of capital stock outstanding throughout each year ended
March 31:
<TABLE>
<CAPTION>
2000(/2/) 1999(/1/)(/2/) 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 13.67 $ 13.88 $ 13.14 $ 13.17 $12.83
------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.60 0.60 0.64 0.66 0.66
Net realized and
unrealized gain (loss) (0.90) 0.07 0.80 (0.02) 0.36
------------------------------------------------------------------------------
Total income (loss) from
operations (0.30) 0.67 1.44 0.64 1.02
------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.59) (0.61) (0.65) (0.67) (0.68)
Net realized gains (0.01) (0.27) (0.05) -- --
------------------------------------------------------------------------------
Total distributions (0.60) (0.88) (0.70) (0.67) (0.68)
------------------------------------------------------------------------------
Net assets value, end of
year $ 12.77 $ 13.67 $ 13.88 $ 13.14 $13.17
------------------------------------------------------------------------------
Total return (2.14)% 4.95% 11.13% 4.91% 8.07%
------------------------------------------------------------------------------
Net assets, end of year
(000s) $17,633 $18,221 $10,611 $10,055 $8,931
------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses(/3/) 1.27% 1.27% 1.28% 1.32% 1.28%
Net investment income 4.64 4.37 4.71 5.01 5.02
------------------------------------------------------------------------------
Portfolio turnover rate 33% 60% 71% 53% 36%
------------------------------------------------------------------------------
</TABLE>
(/1/) On June 12, 1998, Class C shares were renamed Class L shares.
(/2/) Per share amounts have been calculated using the monthly average shares
method.
(/3/) As a result of voluntary expense limitations, the expense ratio will not
exceed 1.40% for Class L shares.
New York Portfolio
24
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
New York Portfolio
An investment portfolio of Smith Barney Muni Funds
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket 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 refer-
ence 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
Information about the fund (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Pub-
lic Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Data-
base on the Commission's Internet site at http://www.sec.gov. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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 law-
fully sell its shares.
/SM/Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file
no. 811-04395)
FD0604 7/00
<PAGE>
[LOGO] Smith Barney
Mutual Funds
Your Serious Money. Professionally Managed./SM/
P R O S P E C T U S
Massachusetts
Money Market
Portfolio
Class A and Y Shares
------------------------------------------------------------
July 28, 2000
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.
<PAGE>
Massachusetts Money Market Portfolio
Contents
<TABLE>
<S> <C>
Investments, risks and expenses............................................. 2
More on the fund's investments.............................................. 6
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
Salomon Smith Barney brokerage accounts..................................... 9
Letter of intent: Class Y shares............................................ 9
Deferred sales charges...................................................... 10
Buying shares............................................................... 11
Exchanging shares........................................................... 12
Redeeming shares............................................................ 14
Other things to know about share transactions............................... 16
Dividends, distributions and taxes.......................................... 18
Share price................................................................. 19
Financial highlights........................................................ 20
</TABLE>
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.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and expenses
Investment objective
The fund seeks to provide income exempt from both federal income taxes and Mas-
sachusetts personal income taxes.
Principal investment strategies
Key investments The fund invests at least 80% of its assets in short-term high
quality Massachusetts municipal securities. These include securities issued by
the Commonwealth of Massachusetts and certain other municipal issuers, politi-
cal 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 securi-
ties 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 attrac-
tiveness of various securities and sectors
. May trade between general obligation and revenue bonds and among various reve-
nue 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
Massachusetts Money Market Portfolio
2
<PAGE>
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 distri-
butions of the fund's gains generally will be, subject to federal income taxa-
tion and Massachusetts state personal income 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 federal income taxes and Massachusetts personal income
taxes
. 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
Because this fund commenced operations on September 14, 1999, the fund does not
yet have a sufficient operating history to generate the performance information
in bar chart and table form which appears in this location in the other Smith
Barney Muni Funds prospectuses.
Smith Barney Mutual Funds
3
<PAGE>
Fee table
This table sets forth the estimated fees and expenses you will pay if you
invest in fund shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class Y
<S> <C> <C>
Maximum sales charge (load) imposed None None
on purchases (as a % of offering price)
Maximum deferred sales charge (load) None* None
(as a % of the lower of net asset value at
purchase or redemption)
</TABLE>
Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets) Class A Class Y**
<S> <C> <C>
Management fees*** 0.50% 0.50%
Distribution and service (12b-1) fees 0.10% None
Other expenses 0.16% 0.16%
----- -----
Total annual fund operating expenses 0.76% 0.66%
</TABLE>
*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 con-
tingent deferred sales charge ("CDSC") remain subject to the original fund's
CDSC.
**For Class Y shares "Other Expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares were outstanding for the
fiscal year ended March 31, 2000.
***Because the manager has voluntarily agreed to limit total annual fund oper-
ating expenses to 0.65% of the fund's average net assets exclusive of 12b-1
fees and certain other expenses, actual expenses were:
<TABLE>
<CAPTION>
Class A Class Y**
<S> <C> <C>
Management fee 0.39% 0.39%
Total annual fund operating expenses 0.65% 0.55%
</TABLE>
The manager may change or eliminate these expenses at any time.
Massachusetts Money Market Portfolio
4
<PAGE>
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 of your shares at the end of the period
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A $78 $243 $422 $942
Class Y $67 $211 $368 $822
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
More on the fund's investments
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 per-
sonal 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 part-
nership 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 perfor-
mance of the fund.
Defensive investing The fund may depart from its principal investment strate-
gies 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.
Massachusetts Money Market Portfolio
6
<PAGE>
Management
Manager The fund's investment manager is SSB Citi Fund Management LLC (succes-
sor to 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 busi-
nesses produce a broad range of financial services--asset management, banking
and consumer finance, credit and charge cards, insurance, investments, invest-
ment banking and trading--and use diverse channels to make them available to
consumer and corporate customers around the world.
Management fees During the fiscal year ended March 31, 2000, the manager
received an advisory fee equal to 0.39% of the fund's average daily net assets.
Distributor The fund has entered into an agreement with Salomon Smith Barney
Inc. to distribute the fund's shares.
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. The fee in
Class A shares is an ongoing expense and, over time, it increases the cost of
your investment and may cost you more than other types of sales charges.
Transfer agent and shareholder servicing agent Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement
with the transfer agent, PFPC Global Fund Services serves as the fund's sub-
transfer agent (the "sub-transfer agent") to render certain shareholder record
keeping and accounting services and functions.
Smith Barney Mutual Funds
7
<PAGE>
Choosing a class of shares to buy
You may purchase Class A shares which are sold at net asset value with no ini-
tial or deferred sales charge. Class A shares are subject to ongoing distribu-
tion 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 Sal-
omon Smith Barney--a dealer representative
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>
Initial Additional
Class A Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
Salomon Smith Barney Sweep Features variable n/a variable
Uniform Gift to Minors Accounts $250 $15 million $50
</TABLE>
Massachusetts Money Market Portfolio
8
<PAGE>
Salomon Smith Barney Brokerage Accounts
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 PLUSSM accounts may also take advantage of: free dividend
reinvestment, unlimited checking, 100 free ATM withdrawals each year, gain/loss
analysis and online computer access to account information. Contact your Salo-
mon Smith Barney Financial Consultant for more complete information.
Letter of intent: Class Y shares
You may buy Class Y shares of the fund at net asset value with no initial sales
charge. To purchase Class Y shares, you must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of a fund over a 13-month period. To qualify, you must
initially invest $5,000,000.
Smith Barney Mutual Funds
9
<PAGE>
Deferred sales charges
If Class A shares of the fund are acquired by exchange from another Smith Bar-
ney 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 sub-
ject to a deferred sales charge of 1.00%.
The deferred sales charge is based on the net asset value at the time of pur-
chase 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
Each time you place a request to redeem shares that were acquired by exchange
from another Smith Barney fund subject to a deferred sales charge, the fund
will first redeem any shares in your account that are not subject to a deferred
sales charge and then the shares in your account that have been held the long-
est.
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, con-
tact your Salomon Smith Barney Financial Consultant or dealer representative or
consult the Statement of Additional Information ("SAI").
Massachusetts Money Market Portfolio
10
<PAGE>
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
Consultant or
dealer
representative
If you do not provide the following information, your order
will be rejected:
.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.
--------------------------------------------------------------------------------
Through the Certain investors who are clients of the selling group are
fund's sub- eligible to buy shares directly from the fund.
transfer
agent
.Write the sub-transfer agent at the following address:
Smith Barney Massachusetts Money Market Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
.Enclose a check made payable to the fund 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.
For more information, contact your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer
agent or consult the SAI.
Smith Barney Mutual Funds
11
<PAGE>
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into.
funds
tailored to
help meet the
varying needs
of both large
and small
investors
.You may exchange shares only for shares of the same class of
another Smith Barney fund. Not all Smith Barney funds offer
all classes.
.Not all Smith Barney funds may be offered in your state of
residence. Contact your Salomon Smith Barney Financial Con-
sultant, dealer representative or the transfer agent.
.You must meet the minimum investment amount for each fund.
.If you hold share certificates, the sub-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 charges Your shares may be subject to an initial sales charge at the
time of the exchange. For more information, contact your Sal-
omon Smith Barney Financial Consultant, dealer representative
or the transfer agent.
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase of another
fund's shares subject to a deferred sales charge.
Massachusetts Money Market Portfolio
12
<PAGE>
By telephone If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete 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 4:00 p.m. (Eastern
time).
You can make telephone exchanges only between accounts that
have identical registrations.
--------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the sub-trans-
fer agent at the address on the following page.
Smith Barney Mutual Funds
13
<PAGE>
Redeeming shares
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the sub-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 redemp-
tion 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.
--------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written requests
to the sub-transfer agent at the following address:
Smith Barney Massachusetts Money Market Portfolio
Smith Barney Muni Funds
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
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 regis-
tered
Massachusetts Money Market Portfolio
14
<PAGE>
By telephone If you do not have a brokerage account, you may be eligible
to redeem 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 4:00 p.m. (Eastern time).
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 docu-
ments.
For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the
SAI.
Smith Barney Mutual Funds
15
<PAGE>
Other things to know about share transactions
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
A request to purchase becomes effective only when Salomon Smith Barney, a sell-
ing group member of the transfer agent receives, or converts the purchase
amount into federal funds. The transfer agent will try to confirm that any tel-
ephone 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 sub-transfer
agent
.Instruct the sub-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 regis-
tration
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.
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
Massachusetts Money Market Portfolio
16
<PAGE>
.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 Securi-
ties 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 share-
holders. 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.
Smith Barney Mutual Funds
17
<PAGE>
Dividends, distributions and taxes
Dividends The fund declares a dividend of substantially all of its net invest-
ment income on each day the New York Stock Exchange (NYSE) is open. Income div-
idends are paid monthly. The fund generally makes capital gain distributions,
if any, once a year, typically in December. The fund may pay additional distri-
butions and dividends at other times if necessary for the fund to avoid a fed-
eral 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 distribu-
tions 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 distribu-
tions (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 Usually no gain or Usually no gain or
shares loss; loss may result loss; loss may
to extent of any result to extent of
deferred sales charge any deferred sales
charge
Long-term capital gain Taxable gain Taxable gain
distributions
Short-term capital gain Ordinary income Ordinary income
distributions
Dividends Excluded from gross Exempt from personal
income if from income taxes if from
interest on tax-exempt interest on
securities, otherwise Massachusetts
ordinary income municipal
securities,
otherwise ordinary
income
</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
Massachusetts Money Market Portfolio
18
<PAGE>
shares during the previous year. If you do not provide the fund with your cor-
rect taxpayer identification number and any required certifications, you may be
subject to back-up withholding of 31% of your distributions and dividends.
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.
Share price
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 liabili-
ties. 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 calcu-
lation 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. The fund intends to use its best effort to
continue to maintain a constant net asset value of $1.00.
<TABLE>
<CAPTION>
Purchase is Effective and Dividends
Form of Purchase Payment Begin
<S> <C> <C>
.Payment in federal funds If received before At the close of
.Having a sufficient cash balance in the close of regular trading on
your account with Salomon Smith Barney regular trading on the Exchange on
or a selling group member the Exchange: that day
If received after At the close of
the close of regular trading on
regular trading on the Exchange on
the Exchange: the next business
day
.Other forms of payment, with conversion At the close of regular trading on
into, or advance of, federal funds by the Exchange on the next business day
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.
Smith Barney Mutual Funds
19
<PAGE>
Financial highlights
The financial highlights table is intended to help you understand the perfor-
mance of each class for the past 5 years (or since inception if less than 5
years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent audi-
tors, whose report, along with the fund's financial statements, is included in
the annual report (available upon request). No information is presented for
Class Y shares because no shares were outstanding during the fiscal period.
For a Class A share of beneficial interest outstanding throughout the period
ended March 31:
<TABLE>
<CAPTION>
2000(/1/)
-------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $1.00
-------------------------------------------------------------
Net investment income(/2/) 0.016
Dividends from net investment income (0.016)
-------------------------------------------------------------
Net asset value, end of period $1.00
-------------------------------------------------------------
Total return++ 1.66%
-------------------------------------------------------------
Net assets, end of period (millions) $260
-------------------------------------------------------------
Ratios to average net assets+:
Expenses(/2/)(/3/) 0.65%
Net investment income 3.05
-------------------------------------------------------------
(/1/For)the period from September 14, 1999 to March 31, 2000.
</TABLE>
(/2/The)manager waived a portion of its fees for the period ended March 31,
2000. If such fees were not waived, the per share decrease on net invest-
ment income and the actual expense ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases to Expense Ratios
Net Investment Income Without Waivers
<S> <C> <C>
2000 (/1/) $0.001 0.76%
--------------------------------------------------
</TABLE>
(/3/As)a result of voluntary expense limitations, the expense ratio will not
exceed 0.65%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
Massachusetts Money Market Portfolio
20
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Massachusetts
Money Market Portfolio
An investment portfolio of Smith Barney Muni Funds
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket 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 refer-
ence 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
Information about the fund (including the SAI) can be reviewed and copied at
the Securities and Ex-change Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Pub-
lic Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Data-
base on the Commission's Internet site at http://www.sec.gov. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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 law-
fully sell its shares.
SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file
no. 811-04395)
FD01673 7/00
<PAGE>
[SMITH BARNEY MUTUAL FUNDS LOGO] SMITH BARNEY MUTUAL FUNDS
YOURS SERIOUS MONEY. PROFESSIONALLY MANAGED. (TM)
PROSPECTUS
PENNSYLVANIA
PORTFOLIO
CLASS A, B, L AND Y SHARES
-----------------------------------------------
JULY 28, 2000
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.
<PAGE>
PENNSYLVANIA PORTFOLIO
CONTENTS
<TABLE>
<S> <C>
Investments, risks and performance......................... 2
More on the fund's investments............................. 7
Management................................................. 9
Choosing a class of shares to buy.......................... 10
Comparing the fund's classes............................... 11
Sales charges.............................................. 12
More about deferred sales charges.......................... 15
Buying shares.............................................. 16
Exchanging shares.......................................... 17
Redeeming shares........................................... 19
Other things to know about share transactions.............. 21
Dividends, distributions and taxes......................... 23
Share price................................................ 25
Financial highlights....................................... 25
</TABLE>
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.
1 Pennsylvania Portfolio
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
INVESTMENT OBJECTIVE
The fund seeks as high a level of income exempt from federal income taxes and
Pennsylvania personal income taxes as is consistent with prudent investing.
PRINCIPAL INVESTMENT STRATEGIES
KEY INVESTMENTS The fund invests at least 80% of its net assets in municipal
securities, and at least 65% of its net assets in Pennsylvania municipal
securities. Pennsylvania municipal securities include securities issued by the
Commonwealth of Pennsylvania and certain other municipal issuers, political
subdivisions, agencies and public authorities that pay interest which is exempt
from Pennsylvania state personal income taxes. The fund focuses primarily on
intermediate-term and long-term municipal securities which have remaining
maturities at the time of purchase from five to more than thirty years. The fund
invests exclusively in municipal securities that are rated investment grade at
the time of purchase or are of comparable quality if unrated. At least
two-thirds of the municipal securities must be rated, at the time of purchase,
within the three highest investment grade rating categories by a nationally
recognized rating organization.
SELECTION PROCESS The manager selects securities primarily by identifying
undervalued sectors and individual securities, while also selecting securities
it believes will benefit from changes in market conditions. In selecting
individual securities, the manager:
- Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit opportunities
in the municipal bond market
- 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 and their impact on the level of
dividends generated by the overall portfolio
- Identifies individual securities with the most potential for added value, such
as those involving unusual situations, new issuers, the potential for credit
upgrades, unique structural characteristics or innovative features
- Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer and its sector and
interest rates
2 Pennsylvania Portfolio
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, 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
- Pennsylvania municipal securities fall out of favor with investors. The fund
will suffer more than a national municipal fund from adverse events affecting
Pennsylvania municipal issuers
- Unfavorable legislation affects the tax-exempt status of municipal bonds
- The manager's judgment about the attractiveness, value or income potential 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 income
taxation and Pennsylvania state personal income taxation. The fund may realize
taxable gains on the sale of its securities or on transactions in futures
contracts. 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 Pennsylvania.
The fund is classified as "non-diversified," which means it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the fund invests its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers.
WHO MAY WANT TO INVEST The fund may be an appropriate investment if you:
- Are a Pennsylvania taxpayer in a high federal tax bracket seeking income
exempt from federal income taxes and Pennsylvania personal income taxes
- Currently have exposure to other asset classes and are seeking to broaden your
investment portfolio
- Are willing to accept the risks of municipal securities, including the risks
of concentrating in a single state
Smith Barney Mutual Funds 3
<PAGE>
RISK RETURN BAR CHART
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future. The bar chart
shows the performance of the fund's Class A shares for each of the past 5 full
calendar years. Class B, L and Y shares would have different performance because
of their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
TOTAL RETURN CLASS A SHARES
[Bar Chart]
<TABLE>
<CAPTION>
95 96 97 98 99
-- -- -- -- --
<S> <C> <C> <C> <C>
19.52% 4.06% 12.00% 5.76% (6.24)%
</TABLE>
CALENDAR YEARS ENDED DECEMBER 31
QUARTERLY RETURNS:
Highest: 8.04% in 1st quarter 1995; Lowest: (2.69)% in 4th quarter 1999
Year to date: 4.53% through 6/30/00.
RISK RETURN TABLE
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unmanaged
index of municipal bonds, and the Lipper Pennsylvania Municipal Debt Funds
Average (the "Lipper Average"), an average composed of the fund's peer group of
mutual funds. This table assumes imposition of the maximum sales charge
applicable to the class, redemption of shares at the end of the period, and
reinvestment of distributions and dividends.
AVERAGE ANNUAL TOTAL RETURNS
CALENDAR YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CLASS 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C> <C>
A (9.97)% 5.80% n/a 5.17% 4/4/94
B (10.17)% 5.96% n/a 4.92% 6/20/94
L (8.59)% 5.84% n/a 5.12% 4/5/94
Lehman Index (2.06)% 6.91% 6.89% 5.98% *
Lipper Average (4.70)% 5.71% 6.20% 4.86% *
</TABLE>
*Index comparison begins on April 30, 1994.
4 Pennslyvania Portfolio
<PAGE>
FEE TABLE
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
SHAREHOLDER FEES
<TABLE>
<CAPTION>
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge (load) (as
a % of the lower of net asset value at
purchase or redemption) None* 4.50% 1.00% None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<CAPTION>
(EXPENSES DEDUCTED FROM ASSETS) CLASS A CLASS B CLASS L CLASS Y**
<S> <C> <C> <C> <C>
Management fee*** 0.45% 0.45% 0.45% 0.45%
Distribution and service
(12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.15% 0.16% 0.17% 0.15%
----- ----- ----- -----
Total annual fund operating
expenses 0.75% 1.26% 1.32% 0.60%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
**For Class Y shares, "Other Expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares were outstanding for the
fiscal year ended March 31, 2000.
***Because the manager has voluntarily agreed to limit total annual fund
operating expenses to 0.65% of the fund's average net assets exclusive of 12b-1
fees and certain other expenses, actual expenses were:
CLASS A CLASS B CLASS L CLASS Y**
Management fee 0.33% 0.33% 0.33% 0.33%
Total annual fund operating
expenses 0.63% 1.15% 1.20% 0.48%
The manager may change or eliminate these expense limits at any time.
Smith Barney Mutual Funds 5
<PAGE>
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
NUMBER OF YEARS YOU OWN YOUR SHARES
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Class A (with or without
redemption) $474 $630 $800 $1,293
Class B (redemption at end of
period) $578 $700 $792 $1,382
Class B (no redemption) $128 $400 $692 $1,382
Class L (redemption at end of
period) $333 $514 $816 $1,674
Class L (no redemption) $233 $514 $816 $1,674
Class Y (with or without
redemption) $ 61 $192 $335 $ 750
</TABLE>
6 Pennslyvania Portfolio
<PAGE>
MORE ON THE FUND'S INVESTMENTS
PENNSYLVANIA MUNICIPAL SECURITIES Pennsylvania municipal securities include
debt obligations issued by certain non-Pennsylvania governmental issuers such as
Puerto Rico, the Virgin Islands and Guam. The interest on these bonds is exempt
from federal income tax and Pennsylvania personal income tax. As a result, the
interest rate on these bonds normally is lower than it would be if the bonds
were subject to taxation. The Pennsylvania municipal securities in which the
fund invests include general obligation bonds, revenue bonds and municipal
leases. These securities may pay interest at fixed, variable or floating rates.
The fund may also hold zero coupon securities which pay no interest during the
life of the obligation but trade at prices below their stated maturity value.
OTHER DEBT SECURITIES The fund may invest up to 35% of its assets in municipal
securities of non-Pennsylvania issuers. These securities will generally be
exempt from federal, but not Pennsylvania income taxes. The fund may also invest
up to 20% of its assets in debt securities which are issued or guaranteed by the
full faith and credit of the U.S. government. These securities will generally be
subject to federal and state taxation.
DERIVATIVE CONTRACTS The fund may, but need not, use derivative contracts, such
as financial futures, for any of the following purposes:
- To hedge against the economic impact of adverse changes in the market value of
portfolio securities because of changes in interest rates
- As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities.
The other parties to certain futures contracts present the same types of default
risk as issuers of fixed income securities.
Smith and Barney Mutual Funds 7
<PAGE>
The fund may invest in inverse floating rate securities. These securities pay
interest at a rate which moves in the opposite direction from movements in
market interest rates. Inverse floaters and futures are volatile and involve
leverage which may expose the fund to increased risk of loss. Therefore, using
futures or inverse floaters can disproportionately increase losses and reduce
opportunities for gains when interest rates are changing. The fund may not fully
benefit from or may lose money on futures used for hedging purposes if changes
in their value do not correspond accurately to changes in the value of the
fund's holdings. Futures and inverse floaters can also make a fund less
liquid and harder to value, especially in declining markets.
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 money market and short-term
debt securities. If the fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
8 Pennsylvania Portfolio
<PAGE>
MANAGEMENT
MANAGER The fund's investment adviser (the manager) is SSB Citi Fund Management
LLC (successor to 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.
Peter M. Coffey, investment officer of the manager and managing director of
Salomon Smith Barney, has been responsible for the day-to-day management of the
fund's portfolio since the fund commenced operations in April 1994. Mr. Coffey
has 31 years of securities business experience with the manager or its
predecessor.
MANAGEMENT FEES During the fiscal year ended March 31, 2000, the manager
received an advisory fee equal to 0.33% of the fund's average daily net assets.
DISTRIBUTOR The fund has entered into an agreement with Salomon Smith Barney
Inc. to distribute the fund's shares.
DISTRIBUTION PLAN The fund has adopted a Rule 12b-1 distribution plan for its
Class A, B and L shares. Under the plan, the fund pays distribution and/or
service fees. These fees are an ongoing expense and, over time, may cost you
more than other types of sales charges.
TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a subtransfer agency and services agreement with
the transfer agent, PFPC Global Fund Services serves as the fund's sub-transfer
agent (the "sub-transfer agent") to render certain shareholder record keeping
and accounting services and functions.
Smith Barney Mutual Funds 9
<PAGE>
CHOOSING A CLASS OF SHARES TO BUY
You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
- If you plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
- For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
- Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class L
shares do not, Class B shares may be more attractive to long-term investors.
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 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>
INITIAL ADDITIONAL
CLASSES A, B, L CLASS Y ALL CLASSES
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment
Plans $50 n/a $50
Uniform Gift to Minors Accounts $250 $15 million $50
</TABLE>
10 Pennsylvania Portfolio
<PAGE>
COMPARING THE FUND'S CLASSES
Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS L CLASS Y
<S> <C> <C> <C> <C>
KEY FEATURES - Initial sales - No initial - Initial sales - No initial or
charge sales charge charge is deferred
- You may - Deferred lower than sales charge
qualify for sales charge Class A - Must invest
reduction or declines over - Deferred at least $15
waiver of time sales charge million
initial sales - Converts to for only 1 - Lower annual
charge Class A after year expenses than
- Lower annual 8 years - Does not the other
expenses than - Higher annual convert to classes
Class B and expenses than Class A
Class L Class A - Higher annual
expenses than
Class A
---------------------------------------------------------------------------------------------
INITIAL SALES CHARGE Up to 4.00%; None 1.00% None
reduced for
large purchases
and waived for
certain
investors. No
charge for
purchases of
$500,000 or
more
---------------------------------------------------------------------------------------------
DEFERRED SALES CHARGE 1.00% on Up to 4.50% 1.00% if you None
purchases of charged when redeem within 1
$500,000 or you redeem year of
more if you shares. The purchase
redeem within 1 charge is
year of reduced over
purchase time and there
is no deferred
sales charge
after 6 years
---------------------------------------------------------------------------------------------
ANNUAL DISTRIBUTION 0.15% of 0.65% of 0.70% of None
AND SERVICE FEES average daily average daily average daily
net assets net assets net assets
---------------------------------------------------------------------------------------------
EXCHANGE PRIVILEGE* Class A shares Class B shares Class L shares Class Y shares
of most Smith of most Smith of most Smith of most Smith
Barney funds Barney funds Barney funds Barney funds
---------------------------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds 11
<PAGE>
SALES CHARGES
CLASS A SHARES
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.
<TABLE>
<CAPTION>
SALES CHARGE AS A % OF
OFFERING NET AMOUNT
AMOUNT OF PURCHASE PRICE (%) INVESTED (%)
<S> <C> <C>
Less than $25,000 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more 0.00 0.00
</TABLE>
INVESTMENTS OF $500,000 OR MORE You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR A REDUCED CLASS A SALES CHARGE There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
- Accumulation privilege - lets you combine the current value of Class A shares
owned
- by you, or
- by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases on
which you paid a sales charge within 90 days before you sign the letter.
12 Pennsylvania Portfolio
<PAGE>
WAIVERS FOR CERTAIN CLASS A INVESTORS Class A initial sales charges are waived
for certain types of investors, including:
- Employees of members of the NASD
- Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
- Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn about additional waivers of Class A initial sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information ("SAI").
CLASS B SHARES
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
YEAR AFTER PURCHASE 1ST 2ND 3RD 4TH 5TH 6TH THROUGH 8TH
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
CLASS B CONVERSION After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<S> <C> <C>
Shares issued: On Shares issued: Upon
reinvestment of exchange from another
Shares issued: At dividends and Smith Barney fund
initial purchase distributions
Eight years after the In same proportion On the date the
date of purchase as the number of shares originally
Class B shares acquired would have
convert-ing is to converted into Class
total Class B shares A shares
you own (excluding
shares issued as
dividends)
</TABLE>
Smith Barney Mutual Funds 13
<PAGE>
CLASS L SHARES
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund and/or other Smith
Barney mutual funds on June 12, 1998, you will not pay an initial sales charge
on Class L shares you buy before June 22, 2001.
CLASS Y SHARES
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 13-month period. To qualify, you
must initially invest $5,000,000.
14 Pennsylvania Portfolio
<PAGE>
MORE ABOUT DEFERRED SALES CHARGES
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.
In addition, you do not pay a deferred sales charge on:
- Shares exchanged for shares of another Smith Barney fund
- Shares representing reinvested distributions and dividends
- Shares no longer subject to the deferred sales charge
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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 each share class will generally be waived:
- On payments made through certain systematic withdrawal plans
- For involuntary redemptions of small account balances
- For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
Smith Barney Mutual Funds 15
<PAGE>
BUYING SHARES
<TABLE>
<C> <S>
Through a You should contact your Salomon Smith Barney
Salomon Smith Financial Consultant or dealer representative to
Barney Financial open a brokerage account and make arrangements
representative to buy shares.
If you do not provide the following information,
your order will be rejected:
- 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.
-----------------------------------------------------------------------
Through the Certain investors who are clients of the selling
fund's sub-transfer group are eligible to buy shares directly from
agent the fund.
- Write the sub-transfer agent at the following
address:
SMITH BARNEY PENNSYLVANIA PORTFOLIO
SMITH BARNEY MUNI FUNDS
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02940-9699
- Enclose a check made payable to the fund 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.
-----------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your
systematic dealer representative or the sub-transfer agent
investment plan to transfer funds automatically from a regular
bank account, cash held in a Salomon Smith
Barney brokerage account or Smith Barney money
market fund to buy shares on a regular basis.
- 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
sub-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>
16 Pennsylvania Portfolio
<PAGE>
EXCHANGING SHARES
<TABLE>
<C> <S>
Smith Barney offers You should contact your Salomon Smith Barney
a distinctive Financial Consultant or dealer representative
family of funds to exchange into other Smith Barney funds. Be
tailored to help sure to read the prospectus of the Smith
meet the varying Barney fund you are exchanging into. An
needs of both exchange is a taxable transaction.
large and small
investors - You may exchange shares only for shares of
the same class of another Smith Barney fund.
Not all Smith Barney funds offer all
classes.
- Not all Smith Barney funds may be offered
in your state of residence. Contact your
Salomon Smith Barney Financial Consultant,
dealer representative or the transfer
agent.
- You must meet the minimum investment amount
for each fund (except for systematic
exchanges).
- If you hold share certificates, the
sub-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.
--------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial
additional sales charge at the time of the exchange.
sales charges
Your deferred sales charge (if any) will
continue to be measured from the date of your
original purchase. If the fund you exchange
into has a higher deferred sales charge, you
will be subject to that charge. If you
exchange at any time into a fund with a lower
charge, the sales charge will not be reduced.
--------------------------------------------------------------------
</TABLE>
Smith Barney Mutual Funds 17
<PAGE>
<TABLE>
<C> <S>
By telephone If you do not have a brokerage account, you
may be eligible to exchange 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
4:00 p.m. (Eastern time).
You can make telephone exchanges only between
accounts that have identical registrations.
--------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney
brokerage account, contact your dealer
representative or write to the sub-transfer
agent at the address on the following page.
</TABLE>
18 Pennsylvania Portfolio
<PAGE>
REDEEMING SHARES
<TABLE>
<C> <S>
Generally Contact your Salomon Smith Barney Financial
Consultant or dealer representative to redeem
shares of the fund.
If you hold share certificates, the
sub-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.
--------------------------------------------------------------------
By mail For accounts held directly at the fund, send
written requests to the sub-transfer agent at
the following address:
SMITH BARNEY PENNSYLVANIA PORTFOLIO
SMITH BARNEY MUNI FUNDS
(SPECIFY CLASS OF SHARES)
C/O PFPC GLOBAL FUND SERVICES
P.O. BOX 9699
PROVIDENCE, RI 02940-9699
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
--------------------------------------------------------------------
</TABLE>
Smith Barney Mutual Funds 19
<PAGE>
<TABLE>
<C> <S>
By telephone If you do not have a brokerage account, you
may be eligible to redeem 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 4:00
p.m. (Eastern time).
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.
--------------------------------------------------------------------
Automatic You can arrange for the automatic redemption
cash of a portion of your shares on a monthly or
withdrawal quarterly basis. To qualify you must own
plans shares of the fund with a value of at least
$10,000 and each automatic 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>
20 Pennsylvania Portfolio
<PAGE>
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
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 sub-transfer
agent
- Instruct the sub-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.
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
Smith Barney Mutual Funds 21
<PAGE>
- 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 sub-transfer agent. If
you hold share certificates it will take longer to exchange or redeem shares.
22 Pennsylvania Portfolio
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS The fund pays dividends each month from its net investment income.
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>
PENNSYLVANIA
TRANSACTION FEDERAL TAX STATUS TAX STATUS
<S> <C> <C>
Redemption or Usually capital gain Usually capital gain
exchange of shares or loss; long-term or loss
only if shares owned
more than one year
Long-term capital Taxable gain Taxable gain
gain distributions
Short-term capital Ordinary income Ordinary income
gain distributions
Dividends Excluded from gross Exempt from personal
income if from income taxes if from
interest on interest on
tax-exempt Pennsylvania
securities, otherwise municipal securities,
ordinary income otherwise ordinary
income
</TABLE>
Smith Barney Mutual Funds 23
<PAGE>
Any taxable dividends and capital gain distributions are taxable whether
received in cash or reinvested in fund shares. Long-term capital gain
distributions are taxable to you as long-term capital gain regardless of how
long you have owned your shares. You may want to avoid buying shares when the
fund is about to declare a capital gain distribution or a taxable dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
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 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.
24 Pennsylvania Portfolio
<PAGE>
SHARE PRICE
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).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. A fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
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.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years. Certain information reflects
financial results for a single share. Total return represents the rate that a
shareholder would have earned (or lost) on a fund share assuming reinvestment of
all dividends and distributions. The information in the following tables was
audited by KPMG LLP, independent auditors, whose report, along with the fund's
financial statements, is included in the annual report (available upon request).
No information is presented for Class Y shares because no shares were
outstanding during these fiscal years.
Smith Barney Mutual Funds 25
<PAGE>
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------
Net asset value, beginning of
year $13.44 $13.54 $12.66 $12.62 $12.40
----------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(2) 0.67 0.66 0.73 0.71 0.70
Net realized and unrealized
gain (loss) (1.25) 0.08 0.95 0.04 0.29
----------------------------------------------------------------------------------
Total income (loss) from
operations (0.58) 0.74 1.68 0.75 0.99
----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.66) (0.69) (0.69) (0.71) (0.72)
Net realized gains (0.02) (0.15) (0.11) -- (0.05)
----------------------------------------------------------------------------------
Total distributions (0.68) (0.84) (0.80) (0.71) (0.77)
----------------------------------------------------------------------------------
Net asset value, end of year $12.18 $13.44 $13.54 $12.66 $12.62
----------------------------------------------------------------------------------
Total return (4.31)% 5.61% 13.52% 6.11% 8.08%
----------------------------------------------------------------------------------
Net assets, end of year (000s) $27,978 $31,718 $15,955 $15,152 $11,847
----------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2)(3) 0.63% 0.50% 0.37% 0.37% 0.38%
Net investment income 5.29 4.94 5.46 5.66 5.57
----------------------------------------------------------------------------------
Portfolio turnover rate 54% 49% 81% 122% 88%
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) The manager has waived all or a portion of its fees for the
years ended March 31, 2000, 1999, 1998, 1997 and 1996. In
addition, the manager reimbursed expenses of $23,433 for the
year ended March 31, 1996. If such fees were not waived and
expenses not reimbursed, the effect on net investment income
and expense ratios would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
EXPENSE RATIOS
NET INVESTMENT INCOME PER WITHOUT FEE WAIVERS AND/OR
SHARE DECREASES EXPENSE REIMBURSEMENTS
2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.01 $0.03 $0.05 $0.06 $0.07 0.75% 0.75% 0.79% 0.82% 0.93%
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(3) As a result of voluntary expense limitations, expense ratios
will not exceed 0.80% for Class A shares.
</TABLE>
26 Pennsylvania Portfolio
<PAGE>
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996(1)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------
Net asset value, beginning of
year $13.42 $13.52 $12.64 $12.61 $12.39
----------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(2) 0.60 0.60 0.65 0.65 0.64
Net realized and unrealized
gain (loss) (1.24) 0.07 0.96 0.03 0.29
----------------------------------------------------------------------------------
Total income (loss) from
operations (0.64) 0.67 1.61 0.68 0.93
----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.59) (0.62) (0.62) (0.65) (0.66)
Net realized gains (0.02) (0.15) (0.11) -- (0.05)
----------------------------------------------------------------------------------
Total distributions (0.61) (0.77) (0.73) (0.65) (0.71)
----------------------------------------------------------------------------------
Net asset value, end of year $12.17 $13.42 $13.52 $12.64 $12.61
----------------------------------------------------------------------------------
Total return (4.78)% 5.07% 12.97% 5.56% 7.61%
----------------------------------------------------------------------------------
Net assets, end of year (000s) $26,296 $25,234 $19,268 $15,559 $13,131
----------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2)(3) 1.15% 1.01% 0.89% 0.88% 0.88%
Net investment income 4.79 4.45 4.94 5.15 5.07
----------------------------------------------------------------------------------
Portfolio turnover rate 54% 49% 81% 122% 88%
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) Per share amounts have been calculated using the monthly
average shares method.
(2) The manager has waived all or a portion of its fees for the
years ended March 31, 2000, 1999, 1998, 1997 and 1996. In
addition, the manager reimbursed expenses of $23,433 for the
year ended March 31, 1996. If such fees were not waived and
expenses not reimbursed, the effect on net investment income
and expense ratios would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
EXPENSE RATIOS
NET INVESTMENT INCOME PER WITHOUT FEE WAIVERS AND/OR
SHARE DECREASES EXPENSE REIMBURSEMENTS
2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $0.01 $0.03 0.05 0.06 0.07 1.26% 1.26% 1.31% 1.33% 1.44%
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(3) As a result of voluntary expense limitations, expense ratios
will not exceed 1.30% for Class B shares.
</TABLE>
Smith Barney Mutual Funds 27
<PAGE>
FOR A CLASS L SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT EACH YEAR ENDED MARCH 31:
<TABLE>
<CAPTION>
2000(2) 1999(1)(2) 1998 1997 1996(2)
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
Net asset value, beginning of
year $13.41 $13.51 $12.64 $12.61 $12.39
-----------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(3) 0.59 0.60 0.64 0.64 0.64
Net realized and unrealized
gain (loss) (1.24) 0.06 0.96 0.04 0.29
-----------------------------------------------------------------------------------
Total income (loss) from
operations (0.65) 0.66 1.60 0.68 0.93
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.58) (0.61) (0.62) (0.65) (0.66)
Net realized gains (0.02) (0.15) (0.11) -- (0.05)
-----------------------------------------------------------------------------------
Total distributions (0.60) (0.76) (0.73) (0.65) (0.71)
-----------------------------------------------------------------------------------
Net assets value, end of year $12.16 $13.41 $13.51 $12.64 $12.61
-----------------------------------------------------------------------------------
Total return (4.83)% 5.02% 12.84% 5.51% 7.56%
-----------------------------------------------------------------------------------
Net assets, end of year (000s) $8,635 $10,490 $7,729 $5,731 $4,682
-----------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(3)(4) 1.20% 1.07% 0.94% 0.94% 0.94%
Net investment income 4.70 4.40 4.89 5.09 5.00
-----------------------------------------------------------------------------------
Portfolio turnover rate 54% 49% 81% 122% 88%
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(1) On June 12, 1998, Class C shares were renamed Class L
shares.
(2) Per share amounts have been calculated using the monthly
average shares method.
(3) The manager has waived all or a portion of its fees for the
years ended March 31, 2000, 1999, 1998, 1997 and 1996. In
addition, the manager reimbursed expenses of $23,433 for the
year ended March 31,1996. If such fees were not waived and
expenses not reimbursed, the effect on net investment income
and expense ratios would have been as follows:
</TABLE>
<TABLE>
<CAPTION>
EXPENSE RATIOS
NET INVESTMENT INCOME PER WITHOUT FEE WAIVERS AND/OR
SHARE DECREASES EXPENSE REIMBURSEMENTS
2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class L $0.01 $0.03 $0.05 $0.06 $0.07 1.32% 1.32% 1.36% 1.39% 1.49%
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S>
(4) As a result of voluntary expense limitations, expense ratios
will not exceed 1.35% for Class L shares.
</TABLE>
28 Pennsylvania Portfolio
<PAGE>
(This page intentionally left blank)
<PAGE>
[SALOMON SMITH BARNEY LOGO]
PENNSYLVANIA 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
Information about the fund (including the SAI) can be reviewed and copied at the
Securities and Exchange Commission's (the "Commission") Public Reference Room in
Washington, D.C. In addition, information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Database
on the Commission's Internet site at HTTP://WWW.SEC.GOV. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act
file no. 811-04395)
FD0772 7/00
Smith Barney Muni Funds
388 Greenwich Street
New York, NY 10013
(800) 451-2010
Statement of Additional
Information
July 28, 2000
This Statement of Additional Information (the "SAI") expands
upon and supplements the information contained in the current
prospectuses of the Smith Barney Muni Funds (the "Trust") dated July
28, 2000, each as amended or supplemented from time to time, and
should be read in conjunction with the prospectuses. Shares of Smith
Barney Muni Funds 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 New
York Money Market Portfolio and the Massachusetts Money Market
Portfolio (collectively referred to as "funds" and individually as a
"fund"). Additional information about a fund's investments is
available in the fund's annual and semi-annual reports to
shareholders. Each fund's prospectus may be obtained free of charge
from your Salomon Smith Barney Financial Consultant. The New York
Portfolio's prospectus may also be obtained free of charge from a
registered representative of PFS Investments Inc. ("PFSI"), or by
writing or calling the Trust 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 14
Distribution 18
Purchase of Shares 22
PFSI Accounts 27
Redemption of Shares 29
Valuation of Shares 30
Exchange Privilege 31
Performance Data 33
The Funds 35
Voting Rights 37
Taxes 38
Additional Information 43
Financial Statements 45
Other Information.............................................................
........................................45
Appendix A - Ratings Definitions A-1
Appendix B - Special Considerations Relating to California Municipal
Obligations B-1
Appendix C - Special Considerations Relating to Florida Municipal
Obligations C-1
Appendix D - Special Considerations Relating to Georgia Municipal
Obligations D-1
Appendix E - Special Considerations Relating to New York Municipal
Obligations E-1
Appendix F - Special Considerations Relating to Pennsylvania Municipal
Obligations F-1
Appendix G - Special Considerations Relating to Massachusetts
Municipal Obligations G-1
Appendix H - Special Considerations Relating to Municipal Obligations
of the
U.S. Virgin Islands and Guam H-1
Appendix I - Special Considerations Relating to Municipal Obligations
of Puerto Rico I-1
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Each prospectus discusses a specific fund's investment objective
and policies. The following discussion supplements the description of
each fund's investment policies in its prospectus. SSB Citi Fund
Management LLC, successor to SSBC Fund Management Inc. ("SSB Citi" or
the "Manager") serves as investment manager and administrator to each
fund.
National Portfolio. The National Portfolio seeks as high a
level of income exempt from federal income taxes as is consistent with
prudent investing. The National Portfolio has a fundamental policy
that, under normal market conditions, it will seek to invest 100% of
its total assets - and the fund will invest not less than 80% of its
total assets - in municipal obligations the interest on which is
exempt from federal income taxes (other than the alternative minimum
tax ("AMT"). The fund may also invest up to 20% of its assets in
taxable fixed income securities issued or guaranteed by the full faith
and credit of the United States.
Limited Term Portfolio seeks as high a level of income exempt
from federal income taxes as is consistent with prudent investing.
The Limited Term Portfolio has a fundamental policy that, under normal
market conditions, it will seek to invest 100% of its total assets -
and the fund will invest not less than 80% of its total assets - in
municipal obligations the interest on which is exempt from federal
income taxes (other than the AMT). The fund normally invests in
securities that have remaining maturities of 20 years or less and
maintains an average effective maturity of between three and 10
years. The fund may invest up to 20% of its assets in taxable fixed
income securities issued or guaranteed by the full faith and credit of
the United States.
Florida Portfolio seeks to pay its shareholders as high a level
of income exempt from federal income taxes as is consistent with
prudent investing, and generally selects investments that will enable
its shares to be exempt from the Florida intangibles tax. The Florida
Portfolio has a fundamental policy that, under normal market
conditions, it will seek to invest 100% of its total assets - and the
fund will invest not less than 80% of its total assets - in municipal
obligations the interest on which is exempt from federal income taxes
(other than the AMT). It is also a fundamental policy that under
normal market conditions the fund will invest at least 65% of its net
assets in municipal obligations issued by the State of Florida, its
political subdivisions and their agencies and instrumentalities and in
other municipal obligations which are exempt from Florida intangibles
tax. The fund may invest up to 20% of its assets in taxable fixed
income securities, but only in obligations issued or guaranteed by the
full faith and credit of the United States.
Georgia Portfolio seeks to provide as high a level of income
exempt from federal income taxes and from Georgia personal income
taxes as is consistent with prudent investing. The Georgia Portfolio
has a fundamental policy that, under normal market conditions, it will
seek to invest 100% of its total assets - and the fund will invest not
less than 80% of its total assets - in municipal obligations the
interest on which is exempt from federal income taxes (other than the
AMT). It is also a fundamental policy that, under normal market
conditions, the fund will invest at least 65% of its total assets in
municipal obligations, the interest on which is also exempt from the
personal income taxes of the State of Georgia in the opinion of bond
counsel to issuers. The fund may invest up to 20% of its assets in
taxable fixed income securities, but only in obligations issued or
guaranteed by the full faith and credit of the United States.
New York Portfolio seeks to provide as high a level of income
exempt from federal income taxes and from New York State and New York
City personal income taxes as is consistent with prudent investing.
The New York Portfolio has a fundamental policy that, under normal
market conditions, it will seek to invest 100% of its total assets -
the fund will invest not less than 80% of its total assets - in
municipal obligations the interest on which is exempt from federal
income taxes (other than the AMT) and not less than 65% of its total
assets in municipal obligations the interest on which is also exempt
from personal income taxes of New York State in the opinion of bond
counsel to issuers. The fund may invest up to 20% of its total assets
in taxable fixed income securities, but only in obligations issued or
guaranteed by the full faith and credit of the United States.
Pennsylvania Portfolio seeks to pay its shareholders as high a
level of income exempt from both federal income taxes and Pennsylvania
personal income taxes as is consistent with prudent investing. The
Pennsylvania Portfolio has a fundamental policy that, under normal
market conditions, it will seek to invest 100% of its total assets -
and the fund will invest not less than 80% of its total assets - in
municipal obligations the interest on which is exempt from federal
income taxes (other than the AMT). It is also a fundamental policy
that under normal market conditions, the fund will invest at least 65%
of its assets in municipal obligations the interest on which is also
exempt from personal income taxes of the Commonwealth of Pennsylvania
in the opinion of bond counsel to the issuers. The fund may invest up
to 20% of its assets in taxable fixed income securities, but only in
obligations issued or guaranteed by the full faith and credit of the
United States.
California Money Market Portfolio seeks to provide income exempt
from federal income taxes and from California personal income taxes
from a fund of high quality short-term municipal obligations selected
for liquidity and stability. The California 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 AMT) and from California personal income taxes in the opinion of
bond counsel for the various issuers.
New York Money Market Portfolio seeks to provide its
shareholders with income exempt from both federal income taxes and New
York State and New York City personal income taxes from a fund of high
quality short-term New York municipal obligations selected for
liquidity and stability. The New York 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 AMT) and from
New York State and City personal income taxes in the opinion of bond
counsel for the various issuers.
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 each 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 of 1986, as amended (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 of 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.
Each 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
each of the fund's portfolios may be less liquid than that for taxable
fixed-income securities. Accordingly, the ability of a 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.
Ratings. Municipal bonds purchased for the funds (except
California Money Market, New York Money Market and Massachusetts Money
Market Portfolios) must, at the time of purchase, be investment-grade
municipal bonds, and at least two-thirds of a fund's municipal bonds
must be rated within the three highest ratings categories by NRSRO.
Investment-grade bonds are rated within the four highest categories by
an NRSRO, such as those rated Aaa, Aa, A and Baa by Moody's or AAA,
AA, A and BBB by S&P or, if unrated, determined to be of comparable
quality by the manager; pre-refunded bonds escrowed by U.S. Treasury
obligations are considered AAA rated (the highest rating) even though
the issuer does not obtain a new rating. Up to one-third of assets of
a fund may be invested in municipal bonds rated in the fourth highest
category (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics) or in unrated municipal
bonds if, based upon credit analysis by the manager, it is believed
that such securities are at least of comparable quality to those
securities in which the fund may invest. In determining the
suitability of an investment in an unrated municipal bond, the manager
will take into consideration debt service coverage, the purpose of the
financing, history of the issuer, existence of other rated securities
of the issuer and other general conditions as may be relevant,
including comparability to other issues. After a fund purchases a
municipal bond, the issue may cease to be rated or its rating may be
reduced below the minimum required for purchase. Such an event would
not require the elimination of the issue from the fund but the manager
will consider such an event in determining whether the fund should
continue to hold the security.
Each fund's (except California Money Market, New York Money
Market and Massachusetts Money Market Portfolios) short-term municipal
obligations will be limited to high-grade obligations (obligations
that are secured by the full faith and credit of the United States or
are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or Prime-1 or Aa or better
by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have
a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the manager to be
comparable).
Short-Term Instruments. Among the types of short-term
instruments in which each fund may invest are floating- or variable-
rate demand instruments, tax-exempt commercial paper (generally having
a maturity of less than nine months), and other types of notes
generally having maturities of less than three years, such as Tax
Anticipation Notes, Revenue Anticipation Notes, Tax and Revenue
Anticipation Notes and Bond Anticipation Notes. Demand instruments
usually have an indicated maturity of more than one year, but contain
a demand feature that enables the holder to redeem the investment on
no more than 30 days' notice; variable-rate demand instruments provide
for automatic establishment of a new interest rate on set dates;
floating-rate demand instruments provide for automatic adjustment of
their interest rates whenever some other specified interest rate
changes (e.g., the prime rate). Each fund may purchase participation
interests in variable-rate tax-exempt securities (such as Industrial
Development Bonds) owned by banks. Participations are frequently
backed by an irrevocable letter of credit or guarantee of a bank that
the manager has determined meets the prescribed quality standards for
the fund. Participation interests will be purchased only; if
management believes interest income on such interests will be tax-
exempt when distributed as dividends to shareholders.
Investments in participation interests in variable-rate tax-
exempt securities (such as IDBs) purchased from banks give the
purchaser an undivided interest in the tax-exempt security in the
proportion that the fund participation interest bears to the total
principal amount of the tax-exempt security with a demand repurchase
feature. Participation interests are frequently backed by an
irrevocable letter of credit or guarantee of a bank that the manager,
under the supervision of the Trustees, has determined meets the
prescribed quality standards for the fund. A fund has the right to
sell the instrument back to the bank and draw on the letter of credit
on demand on seven days' notice or less, for all or any part of the
fund's participation interest in the tax-exempt security, plus accrued
interest. Each fund intends to exercise the demand under the letter
of credit only (1) upon a default under the terms of the documents of
the tax-exempt security, (2) as needed to provide liquidity in order
to meet redemptions, or (3) to maintain a high quality investment
fund. Banks will retain a service and letter of credit fee and a fee
for issuing repurchase commitments in an amount equal to the excess of
the interest paid on the tax-exempt securities over the negotiated
yield at which the instruments were purchased by a fund. The manager
will monitor the pricing, quality and liquidity of the variable-rate
demand instruments held by each fund, including the IDBs supported by
bank letters of credit or guarantees, on the basis of published
financial information, reports of rating agencies and other bank
analytical services to which the manager may subscribe.
Limited Term Portfolio. The Limited Term Portfolio tries to
reduce the volatility of its share prices by seeking to maintain an
average effective portfolio maturity of between 3 and 10 years. It
measures the "average" maturity of all of its securities on a "dollar-
weighted" basis, meaning that larger securities holdings have a
greater effect on overall portfolio maturity than smaller holdings.
The "effective" maturity of a security is not always the same as
the stated maturity date. A number of factors may cause the
"effective" maturity to be shorter than the stated maturity. For
example, a bond's effective maturity might be deemed to be shorter
(for pricing and trading purposes) than its stated maturity if its
coupon interest rate or rate of accretion of discount on the bond, is
higher than current market interest rates when the bond is callable
(that means the issuer can pay off the bond prior to its stated
maturity) in addition to other factors such as mandatory put
provisions and scheduled sinking fund payments. When interest rates
change, securities that have an effective maturity that is shorter
than their stated maturity tend to behave like securities having those
shorter maturity dates.
Money Market Instruments. The California Money Market Portfolio,
New York Money Market Portfolio and Massachusetts Money Market
Portfolio each operate as a money market fund, and utilize 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, none of these funds will purchase a security which, after
giving effect to any demand features, has a remaining maturity of
greater than 397 days, or maintain a dollar-weighted average fund
maturity in excess of 90 days.
The California Money Market, New York Money Market and
Massachusetts Money Market Portfolios' 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
Securities and Exchange Commission ("SEC") are Standard & Poor's
("S&P"), Moody's, Duff and Phelps Inc., Fitch IBCA, Inc. ("Fitch") and
Thomson BankWatch.
The California Money Market, New York Money Market and
Massachusetts Money Market Portfolios' may each invest up to 20% of
the value of their 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 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 a 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 Internal Revenue Service (the "IRS") to
take a contrary position, there is a risk that the interest paid on
such derivative products would be deemed taxable.
The funds intend to limit the risk of derivative products by
purchasing only those derivative products that are consistent with the
funds' investment objective and policies. The funds will not use such
instruments to leverage securities. Hence, derivative products'
contributions to the overall market risk characteristics of a fund
will not materially alter its risk profile and will be fully
representative of the fund's maturity guidelines.
Stand-By Commitments. The California Money Market, New York
Money Market and Massachusetts Money Market Portfolios may acquire
"stand-by commitments" with respect to municipal obligations held in
their respective funds. Under a stand-by commitment a dealer agrees
to purchase, at the fund's option, specified municipal obligations at
a specified price. The funds intend 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 a
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 affect its share price. The funds 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 California Money Market,
New York Money Market and Massachusetts Money Market Portfolios
anticipate being as fully invested as practicable in tax-exempt
securities. The funds 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 funds generally expect 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 funds' net assets be invested in
taxable investments except when the manager has determined that market
conditions warrant a fund adopting a temporary defensive investment
posture. To the extent a fund's assets are invested for temporary
defensive purposes, such assets will not be invested in a manner
designed to achieve a 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 a fund's investments would be
affected. The fund's Board of Directors would then reevaluate the
fund's investment objective and policies.
Municipal Bond Index Futures Contracts. The funds (except
California Money Market, New York Money Market and Massachusetts Money
Market Portfolios) may each invest in municipal bond futures contracts
(currently traded on the Chicago Board of Trade). Municipal bond
futures contracts are listed contracts based on U.S. government
securities and are used by each fund as a hedging policy in pursuit of
its investment objective; provided that immediately thereafter not
more than 33 1/3% of the fund's net assets would be hedged or the
amount of margin deposits on the fund's existing futures contracts
would not exceed 5% on the value of its total assets. A municipal
bond index futures contract is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specific dollar amount multiplied by the difference between the value
of the index at the close of the last trading day of the contract and
the price at which the index contract was originally written. No
physical delivery of the underlying municipal bonds in the index is
made. Municipal bond index futures contracts based on an index of 40
tax-exempt, long-term municipal bonds with an original issue size of
at least $50 million and a rating of A- or higher by S&P or A or
higher by Moody's began trading in mid-1985. The purpose of the
acquisition or sale of a municipal bond index futures contract by the
fund, as the holder of long-term municipal securities, is to protect a
fund from fluctuations in interest rates on tax-exempt securities
without actually buying or selling long-term municipal securities.
There are several risks in connection with the use of futures
contracts as a hedging device. Successful use of futures contracts by
a fund is subject to the manager's ability to predict correctly
movements in the direction of interest rates. Such predictions involve
skills and techniques which may be different from those involved in
the management of a long-term municipal bond fund. In addition, there
can be no assurance that there will be a correlation between movements
in the price of the municipal bond index and movements in the price of
the Municipal Bonds which are the subject of the hedge. The degree of
imperfection of correlation depends upon various circumstances, such
as variations in speculative market demand for futures contracts and
municipal securities, technical influences on futures trading, and
differences between the municipal securities being hedged and the
municipal securities underlying the futures contracts, in such
respects as interest rate levels, maturities and creditworthiness of
issuers. A decision of whether, when and how to hedge involves the
exercise of skill and judgment and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected
trends in interest rates.
Although a fund intends to purchase or sell futures contracts
only if there is an active market for such contracts, there is no
assurance that a liquid market will exist for the contracts at any
particular time. Most domestic futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices
during a single trading day. The daily limit establishes the maximum
amount the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular contract, no
trades may be made that day at a price beyond that limit. The daily
limit governs only price movement during a particular trading day and,
therefore, does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. It is possible that
futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. In such event, it will not be possible
to close a futures position and, in the event of adverse price
movements, the fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of
the portion of the fund being hedged, if any, may partially or
completely offset losses on the futures contract. As described above,
however, there is no guarantee that the price of Municipal Bonds will,
in fact, correlate with the price movements in the municipal bond
index futures contract and thus provide an offset to losses on a
futures contract.
If a fund has hedged against the possibility of an increase in
interest rates adversely affecting the value of the Municipal Bonds
held in its fund and rates decrease instead, the fund will lose part
or all of the benefit of the increased value of the Municipal Bonds it
has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the decline in
interest rates. The fund may have to sell securities at a time when it
may be disadvantageous to do so.
When a fund purchases municipal bond index futures contracts, an
amount of cash and U.S. government securities or other high grade debt
securities equal to the market value of the futures contracts will be
deposited in a segregated account with the fund's custodian or in the
fund's records to collateralize the positions and thereby insure that
the use of such futures contracts is not leveraged. In addition, the
ability of a fund to trade in municipal bond index futures contracts
and options on interest rate futures contracts may be materially
limited by the requirements of the Code applicable to a regulated
investment company. See "Taxes."
Interest Rate Futures Contracts. A fund may purchase and sell
interest rate futures contracts as a hedge against changes in interest
rates. An interest rate futures contract is an agreement between two
parties to buy and sell a security for a set price on a future date.
Interest rate futures contracts are traded on designated "contracts
markets" which, through their clearing corporations, guarantee
performance of the contracts. Currently, there are interest rate
futures contracts based on securities such as long-term Treasury
bonds, Treasury notes, GNMA certificates and three-month Treasury
bills.
Generally, if market interest rates increase, the value of
outstanding debt securities declines (and vice versa). Entering into
an interest rate futures contract for the sale of securities has an
effect similar to the actual sale of securities, although sale of the
interest rate futures contract might be accomplished more easily and
quickly. For example, if a fund holds long-term U.S. government
securities and SSB Citi anticipates a rise in long-term interest
rates, the fund could, in lieu of disposing of its portfolio
securities, enter into interest rate futures contracts for the sale of
similar long-term securities. If interest rates increased and the
value of the fund's securities declined, the value of the fund's
interest rate futures contracts would increase, thereby protecting the
fund by preventing the net asset value from declining as much as it
otherwise would have declined. Similarly, entering into interest rate
futures contracts for the purchase of securities has an effect similar
to the actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities.
For example, if SSB Citi expects long-term interest rates to decline,
the fund might enter into interest rate futures contracts for the
purchase of long-term securities, so that it could gain rapid market
exposure that may offset anticipated increases in the cost of
securities that it intends to purchase, while continuing to hold
higher-yielding short-term securities or waiting for the long-term
market to stabilize.
Municipal Leases. Each fund (except California Money Market,
New York Money Market and Massachusetts Money Market Portfolios) may
invest without limit in "municipal leases," which generally are
participations in intermediate-and short-term debt obligations issued
by municipalities consisting of leases or installment purchase
contracts for property or equipment. Although lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In addition to the
"non-appropriation" risk, these securities represent a relatively new
type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although "non-
appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure
might prove difficult. There is no limitation on the percentage of
the fund's assets that may be invested in municipal lease obligations.
In evaluating municipal lease obligations, the manager will consider
such factors as it deems appropriate, which may include: (a) whether
the lease can be canceled; (b) the ability of the lease obligee to
direct the sale of the underlying assets; (c) the general
creditworthiness of the lease obligor; (d) the likelihood that the
municipality will discontinue appropriating funding for the leased
property in the event such property is no longer considered essential
by the municipality; (e) the legal recourse of the lease obligee in
the event of such a failure to appropriate funding; (f) whether the
security is backed by a credit enhancement such as insurance; and (g)
any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services rather than those covered by
the lease obligation.
Private Activity Bonds. Each 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. Dividends derived from interest
income on tax-exempt municipal obligations are a component of the
"current earnings" adjustment item for purposes of the federal
corporate alternative minimum tax.
Zero Coupon or Deferred Interest Securities. Each fund (except
California Money Market, New York Money Market and Massachusetts Money
Market Portfolios) may invest in zero coupon or deferred interest
bonds. Zero coupon or deferred interest securities are debt
obligations which do not entitle the holder to any periodic payments
of interest prior to maturity or a specified cash payment date when
the securities begin paying current interest (the "cash payment date")
and therefore are issued and traded at a discount from their face
amounts or par values. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security and the perceived credit quality of
the issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity or cash payment date of
the security approaches. The market prices of zero coupon or deferred
interest securities generally are more volatile than the market prices
of other debt securities that pay interest periodically and are likely
to respond to changes in interest rates to a greater degree than do
debt securities having similar maturities and credit quality. The
credit risk factors pertaining to low-rated securities also apply to
low-rated zero coupon or deferred interest bonds. Such zero coupon or
deferred interest bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the fund will
realize no cash until the cash payment date unless a portion of such
securities is sold and, if the issuer defaults, the fund may obtain no
return at all on its investment.
Current federal income tax laws may require the holder of a zero
coupon or deferred interest security to accrue income with respect to
that security prior to the receipt of cash payments. To maintain its
qualification as a regulated investment company and avoid liability
for federal income taxes, a fund may be required to distribute income
accrued with respect to zero coupon or deferred interest securities
and may have to dispose of fund securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
When-Issued Securities. Each 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 a 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 a 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 each fund's objective in relation to
anticipated movements in the general level of interest rates, but each
fund may also engage in short-term trading consistent with its
objective.
Short-Term Borrowing. The funds 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.
Diversified Status. The Florida Portfolio, Georgia Portfolio,
New York Portfolio and Pennsylvania Portfolio and the Massachusetts
Money Market, New York Money Market and California Money Market
Portfolios are each registered as a non-diversified investment company
under the 1940 Act, which means that the funds are not limited by the
1940 Act in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the California, New York and
Massachusetts Money Market Portfolios intend to comply with the
diversification requirements under Rule 2a-7 of the 1940 Act. Each
fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the the Code, which
will relieve each fund of any liability for federal income tax and
California and New York state, respectively, franchise tax to the
extent its earnings are distributed to shareholders. To so qualify,
among other requirements, the funds will limit their investments so
that, at the close of each quarter of the taxable year, (a) not more
than 25% of the market value of the fund's total assets will be
invested in the securities of a single issuer and (b) with respect to
50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of
a single issuer and the fund will not own more than 10% of the
outstanding voting securities of a single issuer. The funds'
assumption of large positions in the obligations of a small number of
issuers may cause a fund's share price to fluctuate to a greater
extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
Illiquid Securities. Each fund (except California Money Market,
New York Money Market and Massachusetts Money Market Portfolios) will
not invest more than 15% of the value of its net assets in illiquid
securities, including those for which there is no established market.
The New York Money Market, California Money Market and Massachusetts
Money Market Portfolios will not invest more than 10% of the value of
their 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. Each 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.
Special Considerations Relating to California Municipal
Securities. See Appendix B for a discussion of the considerations
relating to California Municipal Securities.
Special Considerations Relating to Florida Municipal Securities.
See Appendix C for a discussion of the considerations relating to
Florida Municipal Securities.
Special Considerations Relating to Georgia Municipal Securities.
See Appendix D for a discussion of the considerations relating to
Georgia Municipal Securities.
Special Considerations Relating to New York Municipal
Securities. See Appendix E for a discussion of the considerations
relating to New York Municipal Securities.
Special Considerations Relating to Pennsylvania Municipal
Securities. See Appendix F for a discussion of the considerations
relating to Pennsylvania Municipal Securities.
Special Considerations Relating to Massachusetts Municipal
Securities. See Appendix G for a discussion of the considerations
relating to Massachusetts Municipal Securities.
Investment Restrictions
Each of the funds 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 funds are 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 - All funds. Without the approval of a majority
of its outstanding voting securities, no fund may:
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) 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, ("the 1933 Act") 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).
Additional Fundamental Policies. Without the approval of a majority
of its outstanding voting securities, neither the National Portfolio
nor the Limited Term Portfolio may:
1. Invest in a manner that would cause the fund to fail to be a
"diversified company" under the 1940 Act and the rules, regulations
and orders thereunder.
Nonfundamental Policies. As a nonfundamental policy, no fund may:
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 15% of its net assets would be invested in securities that are
illiquid.
3. Write or purchase put, call, straddle or spread options.
4. Invest more than 5% of its assets in unseasoned issuers with
less than three years of continuous operations (including that of
predecessors).
5. Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that each
fund may invest in the securities of issuers which operate, invest in,
or sponsor such programs.
Additional Nonfundamental Policies. As a nonfundamental policy,
1. Neither the National Portfolio nor the New York Portfolio may
invest in securities of another investment company except as permitted
by Section 12(d)(1) of the 1940 Act or as part of a merger,
consolidation, or acquisition.
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.
LEE ABRAHAM, Trustee (Age 72).
Retired; Director/Trustee of 12 investment companies associated with
Citigroup Inc. ("Citigroup"); Director of R.G. Barry Corp., a footwear
manufacturer, Signet Group plc, a specialty retailer, and eNote.com,
Inc., a computer hardware company; 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 70).
President of Allan J. Bloostein Associates, a consulting firm;
Director/Trustee of 19 investment companies associated with Citigroup;
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 50).
Investment Officer of Korsant Partners, a family investment company.
Director/Trustee of 12 investment companies associated with Citigroup.
Prior to 1997, an Independent Financial Consultant; Her address is
283 Greenwich Avenue, Greenwich, Conntecticut 06830.
DONALD R. FOLEY, Trustee (Age 77).
Retired; Director/Trustee of 12 investment companies associated with
Citigroup; Formerly Vice President of Edwin Bird Wilson, Incorporated
(an advertising agency); His address is 3668 Freshwater Drive,
Jupiter, Florida 33477.
RICHARD E. HANSON, Jr., Trustee (Age 58).
Retired; Formerly Head of School, New Atlanta Jewish Community High
School, Atlanta, Georgia; Director/Trustee of 14 investment companies
associated with Citigroup; Formerly Headmaster, The Peck School,
Morristown, New Jersey; His address is 58 Ivy Chase, Atlanta, GA
30342.
PAUL HARDIN, Trustee (Age 69).
Professor of Law at University of North Carolina at Chapel Hill;
Director/Trustee of 14 investment companies associated with Citigroup;
Director of The Summit Bancorporation. Formerly, Chancellor of the
University of North Carolina at Chapel Hill; His address is 12083
Morehead, Chapel Hill, North Carolina 27514.
*HEATH B. MCLENDON, Chairman of the Board, President and Chief
Executive Officer (Age 67).
Managing Director of Salomon Smith Barney; Chairman, Co-Chairman or
Trustee of 78 investment companies affiliated with Citigroup.;
President of SSB Citi and Travelers Investment Advisors ("TIA");
former Chairman of Smith Barney Strategy Advisors Inc. His address is
7 World Trade Center, New York, New York, 10048.
RODERICK C. RASMUSSEN, Trustee (Age 73).
Investment Counselor; Director/Trustee of 12 investment companies
associated with Citigroup. Formerly, Vice President of Dresdner and
Company Inc. (investment counselors); His address is 9 Cadence Court,
Morristown, NJ 07960.
JOHN P. TOOLAN, Trustee (Age 69).
Retired; Director/Trustee of 12 investment companies associated with
Smith Barney. Trustee of John Hancock Funds; 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. His
address is 13 Chadwell Place, Morristown, New Jersey, 07960.
LEWIS E. DAIDONE, Senior Vice President and Treasurer (Age 42).
Managing Director of Salomon Smith Barney; Senior Vice President or
Executive Vice President and Treasurer of 61 investment companies
affiliated with Citigroup, and Director and Senior Vice President of
the manager and TIA. His address is 125 Broad Street, New York, New
York 10004.
PETER M. COFFEY, Vice President and Investment Officer (Age 56).
Managing Director of Salomon Smith Barney; Vice President of the
Manager and of five investment companies associated with Salomon Smith
Barney. His address is 388 Greenwich Street, New York, NY 10013.
JOSEPH DEANE, Vice President and Investment Officer (Age 51).
Managing Director of Salomon Smith Barney and Investment Officer of
SSB Citi. His address is 388 Greenwich Street, New York, NY 10013.
JOSEPH BENEVENTO, Vice President and Investment Officer (Age 31).
Vice President of Smith Barney and Vice President of the fund and four
investment companies associated with Salomon Smith Barney. His
address is 388 Greenwich Street, New York, NY 10013.
ANTHONY PACE, Controller (Florida, Georgia, Limited Term, National,
New York, Pennsylvania Portfolios (Age 35).
Director of Salomon Smith Barney; Controller or Assistant Treasurer of
various investment companies affiliated with Citigroup since 1999.
His address is 125 Broad Street, New York, New York 10004.
IRVING DAVID, Controller (California Money Market, New York Money
Market and Massachusetts Money Market Portfolios) (Age 38).
Director of Salomon Smith Barney. Controller or Assistant Treasurer
of 43 investment companies affiliated with Citigroup. His address is
125 Broad Street, New York, New York 10004.
CHRISTINA T. SYDOR, Secretary (Age 49).
Managing Director of Salomon Smith Barney and Secretary of 61
investment companies affiliated with Salomon Smith Barney; Secretary
and General Counsel of the Manager and TIA. Her address is 388
Greenwich Street, New York, NY 10013.
*Designates a Trustee that is an "interested person" as defined in the
1940 Act. Such persons compensated by Smith Barney and are not
separately compensated by the fund for serving as a fund officer or
Trustee.
The following table shows the compensation paid by the fund to
each person who was a Trustee during the fund's last fiscal year.
None of the officers of the fund received any compensation from the
fund for such period. Officers and interested Trustees of the fund
are compensated by Salomon Smith Barney.
COMPENSATION TABLE
Name of Person
Aggregate
Compensation
from Fund
For Fiscal
Year
Ended
03/31/00
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensation
from Fund
Complex for
Calendar Year
Ended 12/31/99
Number of
Funds for
Which Person
Serves within
Fund Complex
Lee Abraham
$3,395
$0
$71,133
12
Allan J. Bloostein
3,395
0
112,483
19
Jane F. Dasher
4,584
0
65,733
12
Donald R. Foley+
4,584
0
71,300
12
Richard E. Hanson
3,414
0
68,233
14
Paul Hardin
4,584
0
90,450
14
Heath B. McLendon*
0
0
0
78
Roderick C.
Rasmussen
4,584
0
71,200
12
John P. Toolan+
4,448
0
69,100
12
_________________________
* 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 Trust: Donald R. Foley - $1,274, Roderick
C. Rasmussen - $398 and John P. Toolan - $4,448, and the
following amounts of their compensation from the fund Complex:
Donald R. Foley: $21,600, and John P. Toolan: $69,100.
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 fund's
Trustees, together with reasonable out-of-pocket expenses for
each meeting attended. For the last fiscal year, the total paid
to Emeritus Trustees by the Trust was $2621.
On July 10, 2000, the Trustees and officers owned in the
aggregate less than 1% of the outstanding shares of each fund of the
Trust.
Investment Manager and Administrator
SSB Citi is investment manager to each of the funds pursuant to
a written agreement (the "Advisory Agreement"). The services provided
by the manager under each Advisory Agreement are described in the
prospectuses under "Management." The manager pays the salary of any
officer and employee who is employed by both it and the funds. The
manager bears all expenses in connection with the performance of its
services. The Manager is a wholly owned subsidiary of Citigroup.
The Advisory Agreements for the National Portfolio, the Georgia
Portfolio and Pennsylvania Portfolio provides for a management fee at
the annual rate of 0.45% of the fund's average net assets. The
management fee for the Limited Term Portfolio, the Florida Portfolio
and the New York Portfolio is an annual rate of 0.50% of the fund's
average net assets.
At a Meeting of Shareholders of the Limited Term Portfolio, the
Florida Portfolio and the New York Portfolio held on December 15,
1995, the shareholders of each of these funds approved a new Advisory
Agreement that increases the effective management fee paid by Smith
Barney Muni Funds on behalf of each of these funds from 0.45% to 0.50%
of each of these funds' average daily net assets.
The Advisory Agreements for the California Money Market
Portfolio, the New York Money Market Portfolio and the Massachusetts
Money Market Portfolio provide for the payment of a management fee at
an annual rate based on each Money Market Portfolio's average daily
net assets in accordance with the following schedule:
0.500% on the first $2.5 billion of net assets;
0.475% on the next $2.5 billion; and
0.450% on net assets in excess of $5 billion.
0.400 on net assets in excess of $7.5 billion
Based on the current asset levels of each Money Market
Portfolio, except California Money Market, the effective rate of the
management fee for each of the money market funds is 0.50%. The
effective rate of the management fee for California Money Market
Portfolio is 49.7%.
For the fiscal years or period ended March 31, 2000, 1999 and
1998, the management fee paid by each fund was as follows:
PORTFOLIO
2000
1999
1998
National
$1,990,02
4
$1,976,56
2
$1,754,11
6
Limited Term
1,755,970
1,625,157
1,416,637
New York
3,530,004
3,811,463
3,734,185
Florida
1,132,816
1,109,500
974,400
California Money
11,636,11
1
9,619,316
7,817,640
New York Money
7,182,349
6,110,859
5,154,859
Georgia (a)
249,390
200,616
35,458
Pennsylvania (b)
310,437
235,522
13,969
Massachusetts Money
(c)
457,792
--
--
(a) The manager waived its management fee in excess of 0.33% of the
portfolio's average daily net assets for the fiscal year ended
March 31, 1998 and in excess of 0.35% of the portfolio's average
daily net assets for the fiscal year ended March 31, 1999.
(b) The manager waived its management fee in excess of 0.33% of the
portfolio's average daily net assets for the fiscal year ended
March 31, 1998, in excess of 0.25% of the portfolio's average
daily net assets for the fiscal year ended March 31, 1999 and in
excess of 0.25% of the portfolio's average daily net assets for
the fiscal year ended March 31, 2000.
(c) Massachusetts Money Market Portfolio commenced operations on
September 14, 1999.The manager waived a portion of its fees for
the period ended March 31, 2000.
The Advisory Agreements further provide that all other expenses
not specifically assumed by the manager under the Advisory Agreement
on behalf of each 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 portfolio of the fund, 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 following
funds, exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed the indicated
percentage of such fund's average net assets for that fiscal year:
National
0.65%
Limited Term
0.70%
New York
0.70%
Florida
0.70%
California Money Market
0.70%
New York Money Market
0.70%
Georgia
0.65%
Pennsylvania
0.65%
Massachusetts Money Market
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. Effective June 5, 2000, Salomon Smith Barney, Inc.,
located at 388 Greenwich Street, New York, New York 10013 and PFS
Distributors, Inc. ("PFS Distributors") serve as the fund's co-
distributors pursuant to a written agreements dated June 5, 2000 (the
"Distribution Agreements") which was approved by the fund's Board of
Directors, including a majority of the independent directors, on March
15, 2000. Prior to and up to June 5, 2000, CFBDS, Inc. served as
each Fund's Distributor.
The Distributor may be deemed to be an underwriter for purposes
of the 1933 Act. From time to time, the Distributor, or PFS
Distributors or its affiliates may also pay for certain non-cash sales
incentives provided to PFSI Registered Representatives. Such
incentives do not have any effect on the net amount invested. In
addition to the reallowances from the applicable public offering price
described above, PFS Distributors may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash
or other compensation to PFSI Registered Representatives that sell
shares of each portfolio.
The Distributor has entered into a selling agreement with PFS
Distributors and PFS Distributors has entered into an agreement with
PFSI giving PFSI the right to sell shares of each portfolio of the
fund on behalf of the Distributor. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is
required to take and pay only for such shares of each portfolio as may
be sold to the public. The Distributor is not obligated to sell any
stated number of shares. The Distribution Agreements are renewable
from year to year if approved (a) by the directors or by a vote of a
majority of the fund's outstanding voting securities, and (b) by the
affirmative vote of a majority of directors who are not parties to the
Distribution Agreements or interested persons of any party by votes
cast in person at a meeting called for such purpose. The Distribution
Agreements provide that they will terminate if assigned, and that they
may be terminated without penalty by either party on 60 days' written
notice.
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 and PFSI in
connection with shareholder service expenses. The only Classes of
shares being offered for sale through PFSI are Classes A and B shares.
Under the Plan, Salomon Smith Barney is paid a fee with respect to
shares of each portfolio sold through Salomon Smith Barney and PFSI is
paid a fee with respect to shares or each portfolio sold through PFS
Distributors. Under the Plan, the fund pays Salomon Smith Barney, or
PFSI (who pays its Registered Representative), as the case may be, a
service fee equal to 0.15% of the average daily net assets of each
class (the service fee payable by the Class A shares of the California
Money Market, New York Money Market and Massachusetts Money Market
Portfolios is 0.10%). The service fee, is primarily used to pay
Salomon Smith Barney Financial Consultants (and PFSI Registered
Representatives) for servicing shareholder accounts. In addition,
each fund pays Salomon Smith Barney a distribution fee with respect to
Class B and Class L shares (except California Money Market Portfolio,
New York Money Market Portfolio and Massachusetts Money Market
Portfolio which do not offer Class B or L shares and Limited Term
Portfolio which does not offer Class B shares and has a different rate
for its Class L shares), calculated at the annual rates of 0.50% and
0.55%, respectively, and 0.20% for Limited Term Portfolio Class L
shares, of the value of the fund's average daily net assets
attributable to those classes (and pays PFSI with respect to Class A
and B ) to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payment
to and expenses of Salomon Smith Barney Financial Consultants, PFSI
Registered Representatives, and other persons who provide support
services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Salomon
Smith Barney and PFSI associated with the sale of portfolio shares,
including lease, utility, communications and sales promotion expenses.
Class B shares that automatically convert to Class A shares eight
years after the date of original purchase will no longer be subject to
a distribution fee.
For the year ended March 31, 2000, the table below represents
the fees which have been accrued and/or paid to Salomon Smith Barney
pursuant to Rule 12b-1 for each of the fund's portfolios:
PORTFOLIO
Class A
Class B
Class L
Class Y
Total
California Money Market
$2,326,2
76
N/A
N/A
--
$2,326,2
76
National
$575,400
$257,153
$133,459
--
$966,012
Limited Term
$422,895
N/A
$137,063
--
$559,958
Florida
$227,824
$404,396
$87,262
--
$719,482
Georgia
$53,885
$81,307
$48,914
--
$184,106
New York
$773,742
$1,116,3
37
$129,002
--
$2,019,0
81
New York Money Market
$1,436,4
70
N/A
N/A
--
$1,436,4
70
Pennsylvania
$48,736
$172,681
$69,503
--
$290,920
Massachusetts Money
Market*
$91,214
N/A
N/A
--
$91,214
*Massachusetts Money Market Portfolio commenced operations on
September 14, 1999.
+
Commissions on Class A Shares. For the 1998 fiscal year, the
aggregate dollar amount of commissions on Class A shares, all of which
were paid to Salomon Smith Barney, is as follows:
Name of Fund
Fiscal Year
Ended 03/31/98
California Money Market
n/a
National
$345,000
Limited Term
$315,000
Florida
$319,000
Georgia
$75,000
New York
$489,000
New York Money Market
n/a
Pennsylvania
$40,000
Massachusetts Money Market
n/a
For the periods April 1, 1998 through October 7, 1998 and October 8,
1998 through March 31, 1999, and for the 2000 fiscal year the
aggregate dollar amounts of commissions on Class A shares, are as
follows:
Class A
Name of Fund
04/01/98
through
10/07/98*
10/08/98
through
03/31/99**
Fiscal Year
Ended
03/31/00***
California Money Market
n/a
n/a
n/a
National
$336,000
$355,000
$343,000
Limited Term
$294,000
$573,000
$259,000
Florida
$201,000
$268,000
$235,000
Georgia
$77,000
$91,000
$61,000
New York
$268,000
$350,000
$358,000
New York Money Market
n/a
n/a
n/a
Pennsylvania
$75,000
$132,000
$93,000
Massachusetts Money Market
n/a
n/a
n/a
*The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney: $319,500,
$515,700, $241,200, $81,900, $315,000, and $118,800, for the National,
Limited Term, Florida, Georgia, New York, and Pennsylvania Portfolios.
*** The following amounts were paid to Salomon Smith Barney:
$308,700, $233,100, $211,500, $54,900, $322,200, and $83,700, for the
National, Limited Term, Florida, Georgia, New York, and Pennsylvania
Portfolios.
Commissions on Class L Shares. For the periods June 12, 1998 through
October 7, 1998 and October 8, 1998 through March 31, 1999, and for
the 2000 fiscal year the aggregate dollar amounts of commissions on
Class L shares are as follows:
Class L
(On June 12, 1998, Class C
shares were renamed Class L
shares)
Name of Fund
06/12/98
through
10/07/98*
10/08/98
through
03/31/99**
Fiscal Year
Ended
03/31/00***
California Money Market
n/a
n/a
n/a
National
$18,000
$6,000
$19,000
Limited Term
$26,000
$91,000
$45,000
Florida
$9,000
$14,000
$13,000
Georgia
$7,000
$13,000
$9,000
New York
$17,000
$48,000
$44,000
New York Money Market
n/a
n/a
n/a
Pennsylvania
$6,000
$9,000
$18,000
Massachusetts Money Market
n/a
n/a
n/a
* The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney: $5,400,
$81,900, $12,600, $11,700, $43,200 and $8,100 for the National,
Limited Term, Florida, Georgia, New York, and Pennsylvania Portfolios,
respectively.
***The following amounts were paid to Salomon Smith Barney: $17,100,
$40,500, $11,700, $8,100, $39,600 and $16,200 for the National,
Limited Term, Florida, Georgia, New York, and Pennsylvania Portfolios,
respectively.
As set forth in the prospectuses, a contingent deferred sales
charge ("CDSC") may be imposed on certain redemptions of Class A,
Class B and Class L shares. The amount of the CDSC will depend on the
number of years since the shareholder made the purchase payment from
which the amount is being redeemed. See "Deferred Sales Charge
Provisions" below.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, the fund, its investment
advisers and principal underwriter have adopted codes of ethics that
permit personnel to invest in securities for their own accounts,
including securities that may be purchased or held by the fund. All
personnel must place the interests of clients first and avoid
activities, interests and relationships that might interfere with the
duty to make decisions in the best interests of the clients. All
personal securities transactions by employees must adhere to the
requirements of the codes and must be conducted in such a manner as to
avoid any actual or potential conflict of interest, the appearance of
such a conflict, or the abuse of an employee's position of trust and
responsibility.
A copy of the fund's code of ethics is on file with the SEC.
Custodian
All fund securities and cash owned by the funds will be held in
the custody of PNC Bank, National Association, 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York
10019, serves as counsel to the funds.
Sullivan & Cromwell, 125 Broad Street, New York, New York 10004,
serves as counsel to the directors who are not "interested persons" of
the funds.
Auditors
KPMG LLP, 757 Third Avenue, New York, New York 10017, has been
selected to serve as independent auditors of the funds and to render
an opinion on the funds' financial statements for the fiscal year
ending March 31, 2001.
PURCHASE OF SHARES
The National Portfolio, Georgia Portfolio, New York Portfolio
and Pennsylvania Portfolio each offer four classes ("Classes") of
shares: Class A, Class B, Class L and Class Y. The Limited Term
Portfolio offers three classes of shares: Class A, Class L and Class
Y. Class A shares are sold to investors with an initial sales charge
and Class B shares are sold without an initial sales charge but with
higher ongoing expenses and a Contingent Deferred Sales Charge
("CDSC") payable upon certain redemption's. Class L shares are sold
with a lower initial sales charge than Class A shares but with higher
ongoing expenses and a CDSC. Class Y shares are sold without an
initial sales charge and are available only to investors investing a
minimum of $15,000,000. The California Money Market Portfolio, the
New York Money Market Portfolio, and the Massachusetts Money Market
Portfolio each offer two classes of shares: Class A and Class Y.
Class A shares of each of the California Money Market, New York Money
Market and Massachusetts Money Market Portfolios 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 of California Money Market, New York
Money Market and Massachusetts Money Market Portfolios are sold
without sales charges. Class A shares of Limited Term Portfolio have
an initial sales charge of 2.00% of the transaction (2.04% of amount
invested) of the first $499,999 invested; and no initial sales charge
for investments of $500,000 and over.*
Class A shares of each fund except California Money Market, New York
Money Market, Massachusetts Money Market and Limited Term Portfolios
are sold to investors at the public offering price, which is the net
asset value plus an initial sales charge as follows:
Amount of
Investment
Sales Charge as
a %
Of Transaction
Sales Charge as
a %
of Amount
Invested
Dealers'
Reallowance as %
Of Offering Price
Less than $25,000
4.00%
4.17%
3.60%
$ 25,000 - 49,999
3.50
3.63
3.15
50,000 - 99,999
3.00
3.09
2.70
100,000 - 249,999
2.50
2.56
2.25
250,000 - 499,999
1.50
1.52
1.35
500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to
a deferred sales charge of 1.00% on redemptions made within 12 months
of purchase. The deferred sales charge on Class A shares is payable
to Salomon Smith Barney, which compensates Salomon Smith Barney
Financial Consultants and other dealers whose clients make purchases
of $500,000 or more. The deferred sales charge is waived in the same
circumstances in which the deferred sales charge applicable to Class
B and Class L shares is waived. See "Purchase of Shares-Deferred
Sales Charge Alternatives" and "Purchase of Shares-Waivers of
Deferred Sales Charge."
Members of a selling group may receive up to 90% of the sales charge
and may be deemed to be underwriters of a fund as defined in the 1933
Act. The reduced sales charges shown above apply to the aggregate of
purchases of Class A shares of a fund made at one time by "any
person," which includes an individual and his or her immediate family,
or a trustee or other fiduciary of a single trust estate or single
fiduciary account.
Class B Shares. Class B shares are sold without an initial sales
charge but are subject to a deferred sales charge payable upon certain
redemptions. See "Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge
of 1.00% (which is equal to 1.01% of the amount invested) and are
subject to a deferred sales charge payable upon certain redemptions.
See "Deferred Sales Charge Provisions" below. Until June 22, 2001
purchases of Class L shares by investors who were holders of Class C
shares of the fund on June 12, 1998 will not be subject to the 1%
initial sales charge.
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 broker that clears through Salomon Smith Barney
("Dealer Representative"). In addition, certain investors purchasing
through certain Dealer Representatives, may purchase shares directly
from a fund. When purchasing shares of a 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 PFPC
Global Fund Services, Inc ("PFPC" or "sub-transfer agent") are not
subject to a maintenance fee.
Investors in Class A, Class B and Class L 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, Class B and Class L shares and subsequent investment requirement
for all Classes is $25. For shareholders purchasing shares of a fund
through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment required for Class A, Class B and Class L
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. A 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 the sub-transfer agent. Share
certificates are issued only upon a shareholder's written request to
the sub-transfer agent.
Purchase orders received by a fund or a Salomon Smith Barney Financial
Consultant prior to the close of regular trading on the New York Stock
Exchange (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 a fund
calculates its net asset value, are priced according to the net asset
value determined on that day, provided the order is received by a 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 the sub-transfer agent 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 the sub-transfer agent.. 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.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A shares may be made
at net asset value without a sales charge in the following
circumstances: (a) sales to (i) Board Members and employees of
Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board
Members and employees); the immediate families of such persons
(including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for
such persons and (ii) employees of members of the National Association
of Securities Dealers, Inc., provided such sales are made upon the
assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through
redemption or repurchase; (b) offers of Class A shares to any other
investment company to effect the combination of such company with the
fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Salomon Smith Barney
Financial Consultant (for a period up to 90 days from the commencement
of the Financial Consultant's employment with Salomon Smith Barney),
on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was
sponsored by the Financial Consultant's prior employer, (ii) was sold
to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) purchases by shareholders who have redeemed Class A
shares in the fund (or Class A shares of another Smith Barney Mutual
Fund that is offered with a sales charge) and who wish to reinvest
their redemption proceeds in the fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory subsidiaries of
Citigroup; (f) direct rollovers by plan participants of distributions
from a 401(k) plan offered to employees of Citigroup or its
subsidiaries or a 401(k) plan enrolled in the Smith Barney 401(k)
Program (Note: subsequent investments will be subject to the
applicable sales charge); (g) purchases by a separate account used to
fund certain unregistered variable annuity contracts; (h) investments
of distributions from or proceeds from a sale of a UIT sponsored by
Salomon Smith Barney; (i) purchases by investors participating in a
Salomon Smith Barney fee-based arrangement; and (j) accounts
associated with "k" Choice and Collective Choice. In order to obtain
such discounts, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.
Right of Accumulation. Class A shares of the fund may be purchased by
"any person" (as defined above) at a reduced sales charge or at net
asset value determined by aggregating the dollar amount of the new
purchase and the total net asset value of all Class A shares of the
fund and of other Smith Barney Mutual Funds that are offered with a
sales charge as currently listed under "Exchange Privilege" then held
by such person and applying the sales charge applicable to such
aggregate. In order to obtain such discount, the purchaser must
provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge.
The right of accumulation is subject to modification or discontinuance
at any time with respect to all shares purchased thereafter.
Letter of Intent - Class A Shares. A Letter of Intent for an amount
of $50,000 or more provides an opportunity for an investor to obtain a
reduced sales charge by aggregating investments over a 13 month
period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table
includes (i) all Class A shares of the fund and other Smith Barney
Mutual Funds offered with a sales charge acquired during the term of
the letter plus (ii) the value of all Class A shares previously
purchased and still owned. Each investment made during the period
receives the reduced sales charge applicable to the total amount of
the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or
an appropriate number of escrowed shares will be redeemed. The term
of the Letter will commence upon the date the Letter is signed, or at
the option of the investor, up to 90 days before such date. Please
contact a Salomon Smith Barney Financial Consultant or the Transfer
Agent to obtain a Letter of Intent application.
Letter of Intent - Class Y Shares. A Letter of Intent may also be
used as a way for investors to meet the minimum investment requirement
for Class Y shares (except purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase
amount). Such investors must make an initial minimum purchase of
$5,000,000 in Class Y shares of the fund and agree to purchase a total
of $15,000,000 of Class Y shares of the fund within 13 months from the
date of the Letter. If a total investment of $15,000,000 is not made
within the 13-month period, all Class Y shares purchased to date will
be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.25%) and expenses applicable to the
fund's Class A shares, which may include a deferred sales charge of
1.00%. Please contact a Salomon Smith Barney Financial Consultant or
the Transfer Agent for further information.
Deferred Sales Charge Provisions
"Deferred Sales Charge Shares" are: (a) Class B shares; (b) Class L
shares; and (c) Class A shares that were purchased without an initial
sales charge but are subject to a deferred sales charge. A deferred
sales charge may be imposed on certain redemptions of these shares.
Any applicable deferred sales charge will be assessed on an amount
equal to the lesser of the original cost of the shares being redeemed
or their net asset value at the time of redemption. Deferred Sales
Charge Shares that are redeemed will not be subject to a deferred
sales charge to the extent the value of such shares represents: (a)
capital appreciation of fund assets; (b) reinvestment of dividends or
capital gain distributions; (c) with respect to Class B shares, shares
redeemed more than five years after their purchase; or (d) with
respect to Class L shares and Class A shares that are Deferred Sales
Charge Shares, shares redeemed more than 12 months after their
purchase.
Class L shares and Class A shares that are Deferred Sales Charge
Shares are subject to a 1.00% deferred sales charge if redeemed within
12 months of purchase. In circumstances in which the deferred sales
charge is imposed on Class B shares, the amount of the charge will
depend on the number of years since the shareholder made the purchase
payment from which the amount is being redeemed. Solely for purposes
of determining the number of years since a purchase payment, all
purchase payments made during a month will be aggregated and deemed to
have been made on the last day of the preceding Salomon Smith Barney
statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders.
Year Since Purchase Payment Was
Made
Deferred sales charge
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A shares eight
years after the date on which they were purchased and thereafter will
no longer be subject to any distribution fees. There will also be
converted at that time such proportion of Class B Dividend Shares
(Class B shares that were acquired through the reinvestment of
dividends and distributions) owned by the shareholders as the total
number of his or her Class B shares converting at the time bears to
the total number of outstanding Class B shares (other than Class B
Dividend Shares) owned by the shareholder.
In determining the applicability of any CDSC, it will be assumed that
a redemption is made first of shares representing capital
appreciation, next of shares representing the reinvestment of
dividends and capital gains distributions and finally of other shares
held by the shareholder for the longest period of time. The length of
time that Deferred Sales Charge Shares acquired through an exchange
have been held will be calculated from the date the shares exchanged
were initially acquired in one of the other Smith Barney Mutual Funds,
and fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax
purposes, the amount of the deferred sales charge will reduce the gain
or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any deferred sales charge will be paid to
Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares
of the fund at $10 per share for a cost of $1,000. Subsequently, the
investor acquired 5 additional shares of the fund through dividend
reinvestment. During the fifteenth month after the purchase, the
investor decided to redeem $500 of his or her investment. Assuming at
the time of the redemption the net asset value had appreciated to $12
per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The deferred sales charge would not be
applied to the amount which represents appreciation ($200) and the
value of the reinvested dividend shares ($60). Therefore, $240 of the
$500 redemption proceeds ($500 minus $260) would be charged at a rate
of 4.00% (the applicable rate for Class B shares) for a total deferred
sales charge of $9.60.
Waivers of Deferred Sales Charge
The deferred sales charge will be waived on: (a) exchanges (see
"Exchange Privilege"); (b) automatic cash withdrawals in amounts equal
to or less than 1.00% per month of the value of the shareholder's
shares at the time the withdrawal plan commences (see "Automatic Cash
Withdrawal Plan") (however, automatic cash withdrawals in amounts
equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans
established prior to November 7, 1994); (c) redemptions of shares
within 12 months following the death or disability of the shareholder;
(d) redemptions of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age
591/2; (e) involuntary redemptions; and (f) redemptions of shares to
effect a combination of the fund with any investment company by
merger, acquisition of assets or otherwise. In addition, a shareholder
who has redeemed shares from other Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any deferred
sales charge imposed on the prior redemption.
Deferred sales charge waivers will be granted subject to confirmation
(by Salomon Smith Barney in the case of shareholders who are also
Salomon Smith Barney clients or by the Transfer Agent in the case of
all other shareholders) of the shareholder's status or holdings, as
the case may be.
Volume Discounts
The schedule of sales charges on Class A shares described in the
prospectus applies to purchases made by any "purchaser," which is
defined to include the following: (a) an individual; (b) an
individual's spouse and his or her children purchasing shares for
their own account; (c) a trustee or other fiduciary purchasing shares
for a single trust estate or single fiduciary account; and (d) a
trustee or other professional fiduciary (including a bank, or an
investment adviser registered with the SEC under the Investment
Advisers Act of 1940, as amended) purchasing shares of the fund for
one or more trust estates or fiduciary accounts. Purchasers who wish
to combine purchase orders to take advantage of volume discounts on
Class A shares should contact a Salomon Smith Barney Financial
Consultant.
Determination of Public Offering Price
Each fund offers its shares to the public on a continuous basis. The
public offering price for a Class A, Class L (effective June 12, 1998
the former Class C shares were renamed Class L shares) and Class Y
share of a fund is equal to the net asset value per share at the time
of purchase, plus for Class A and Class L shares an initial sales
charge based on the aggregate amount of the investment. The public
offering price for a Class B share (and Class A share purchases,
including applicable rights of accumulation, equaling or exceeding
$500,000) is equal to the net asset value per share at the time of
purchase and no sales charge is imposed at the time of purchase. A
contingent deferred sales charge ("CDSC"), however, is imposed on
certain redemptions of Class B and Class L shares, and Class A shares
when purchased in amounts equaling or exceeding $500,000. The method
of computation of the public offering price is shown in the fund's
financial statements, incorporated by reference in their entirety into
this SAI.
PFSI Accounts
Initial purchase of shares of the fund must be made through a PFSI
Registered Representative by completing the appropriate application.
The completed application should be forwarded to PFS Shareholder
Services, P.O. Box 105033, Atlanta, GA 30348. Checks drawn on foreign
banks must be payable in U.S. dollars and have the routing number of
the U.S. bank encoded on the check. Subsequent investments may be sent
directly to PFS Shareholder Services. In processing applications and
investments, PFS Shareholder Services acts as agent for the investor
and for PFSI and also as agent for the distributor, in accordance with
the terms of the prospectus. If the transfer agent ceases to act as
such, a successor company named by the fund will act in the same
capacity so long as the account remains open.
Shares purchased will be held in the shareholder's account by PFS
Shareholder Services. Share certificates are issued only upon a
shareholder's written request to the sub-transfer agent. A shareholder
that has insufficient funds to complete any purchase will be charged a
fee of up to $30 per returned purchase by PFS Shareholder Services.
Investors in Class A and Class B shares may open an account by making
an initial investment of at least $1,000 for each account in each
Class (except for Systematic Investment Plan accounts). Subsequent
investments of at least $50 may be made for each Class. For the fund's
Systematic Investment Plan, the minimum initial investment requirement
for Class A and Class B shares and the subsequent investment
requirement for each Class is $25. There are no minimum investment
requirements in Class A shares for employees of Citigroup and its
subsidiaries, including Salomon Smith Barney, Directors or 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. Purchase orders received by the transfer agent or
sub-transfer agent 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.
Initial purchases of fund shares may be made by wire. The minimum
investment that can be made by wire is $10,000. Before sending the
wire, the PFS Investments Registered Representative must contact the
PFS Shareholder Services at (800) 665-8677 to obtain proper wire
instructions. Once an account is open, a shareholder may make
additional investments by wire. The shareholder should contact PFS
Shareholder Services at (800) 544-5445 to obtain proper wire
instructions.
Shareholders who establish telephone transaction authority on their
account and supply bank account information may make additions to
their accounts at any time. Shareholders should contact PFS
Shareholder Services at (800) 544-5445 between 8:00 a.m. and 8:00 p.m.
eastern time any day that the NYSE is open. If a shareholder does not
wish to allow telephone subsequent investments by any person in his
account, he should decline the telephone transaction option on the
account application. The minimum telephone subsequent investment is
$250 and can be up to a maximum of $10,000. By requesting a
subsequent purchase by telephone, you authorize PFS Shareholder
Services to transfer funds from the bank account provided for the
amount of the purchase. A shareholder that has insufficient funds to
complete the transfer will be charged a fee of up to $30 by PFS
Shareholder Services. A shareholder who places a stop payment on a
transfer or the transfer is returned because the account has been
closed, will also be charged a fee of up to $30 by PFS Shareholder
Services. Subsequent investments by telephone may not be available if
the shareholder cannot reach PFS Shareholder Services whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the fund's regular subsequent investment
procedure described above.
Redemption proceeds can be sent by check to the address of record, or
deposited into your bank account designated on the application via the
Automated Clearinghouse (ACH). A shareholder will be charged a $25
service fee for wire transfers and a nominal service fee for transfers
made directly to the shareholder's bank by the ACH. Wire transfers
are not available on phone redemptions. PFS Shareholder Services will
process and mail a shareholder's redemption check usually within two
to three business days after receiving the redemption request in good
order. The shareholder may request the proceeds to be mailed by two-
day air express for an $8 fee that will be deducted from the
shareholder's account or by one-day air express for a $15 fee that
will be deducted from the shareholder's account.
An Account Transcript is available at a shareholder's request, which
identifies every financial transaction in an account since it has
opened. To defray administrative expenses involved with providing
multiple years worth of information, there is a $15 charge for each
Account Transcript requested. Additional copies of tax forms are
available at the shareholder's request. A $10 fee for each tax form
will be assessed.
Additional information regarding PFS Shareholder Services may be
obtained by contacting the Client Services Department at (800)
544-5445.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the 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 the sub-transfer
agent 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. The
Transfer Agent 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 PFPC receives all required documents in proper form.
Redemption proceeds will be mailed to the shareholder's address of
record.
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 instructions
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 fifteen days or more.
Distributions in Kind
If the Board of Trustees 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, each 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. Any applicable
CDSC will not be waived on amounts withdrawn by shareholders that
exceed 1.00% per month of the value of a shareholder's shares at the
time the Withdrawal Plan commences. (With respect to Withdrawal Plans
in effect prior to November 7, 1994, any applicable CDSC will be
waived on amounts withdrawn that do not exceed 2.00% per month of the
value of the shareholder's shares that are subject to a CDSC). 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 sub-transfer
agent may continue to do so and applications for participation in the
Withdrawal Plan must be received by the sub-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 each fund's
Classes of shares will be determined on any date that the 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 California Money Market Portfolio, the New York Money Market
Portfolio and the Massachusetts Money Market Portfolio use 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 a 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 each 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 a 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 a 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 each such 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 397 days 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
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:
Florida, Georgia, New York, Pennsylvania and National Portfolios.
A. Class A and Class Y shareholders of the fund who wish to
exchange all or a portion of their shares for shares of the respective
Class in any of the funds of the Smith Barney Mutual Fund Complex may
do so without imposition of any charge.
B. Class B shares of the fund exchanged for Class B shares of
another fund will be subject to the higher applicable CDSC of the two
funds. Upon an exchange, the new Class B shares will be deemed to
have been purchased on the same date as the Class B shares of the fund
that have been exchanged.
C. Upon exchange, the new Class L shares will be deemed to
have been purchased on the same date as the Class L shares of the fund
that have been exchanged.
Limited Term Portfolio.
A. Class A and Class Y shareholders of the fund who wish to
exchange all or a portion of their shares for shares of the respective
Class in any of the funds of the Smith Barney Mutual Fund Complex may
do so without imposition of any charge.
B. Upon exchange, the new Class L shares will be deemed to
have been purchased on the same date as the Class L shares of the fund
that have been exchanged.
California Money Market, New York Money Market and Massachusetts
Money Market Portfolios.
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.
Additional Information Regarding the Exchange Privilege.
Although the exchange privilege is an important benefit, excessive
exchange transactions can be detrimental to a 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, each 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.
The exchange privilege enables shareholders to acquire shares of
the same Class in a 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 each 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.
As stated in the prospectus for shares distributed through PFS
Distributors, the exchange privilege is limited.
Additional Information Regarding Telephone Redemption and Exchange
Program.
Neither the Trust nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to
be genuine. The Trust 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). Each 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 seven (7) days prior notice to shareholders.
The exchange privilege enables shareholders to acquire shares of the
same class in a 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 each fund into which an exchange is being
considered. Prospectuses may be obtained from a Salomon Smith Barney
Financial Consultant or a PFS Investments Registered Representative.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-
current net asset value and the proceeds are immediately invested at a
price as described above in shares of the portfolio being acquired.
Salomon Smith Barney and PFS Distributors reserve the right to reject
any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, in advertisements and other types of sales
literature, each 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.
Each fund, other than the California Money Market Portfolio, New
York Money Market Portfolio and Massachusetts Money Market Portfolio,
computes the average annual total return during specified periods that
would equate the initial amount invested to the ending redeemable
value of such investment by adding one to the computed average annual
total return, raising the sum to a power equal to the number of years
covered by the computation and multiplying the result by one thousand
dollars which represents the hypothetical initial investment. The
calculation assumes deduction of the maximum sales charge from the
initial amount invested and reinvestment of all income dividends and
capital gains distributions on the reinvestment dates at prices
calculated as stated in the prospectus. The ending redeemable value
is determined by assuming a complete redemption at the end of the
period(s) covered by the average annual total return computation.
Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in
the same manner but without annualizing the total return or taking
sales charges into account.
Each fund's average annual total return with respect to its
Class A shares for the one-year period, five- and ten-year periods, if
any, and for the life of the fund ended March 31, 2000 is as follows:
Average Annual Total Return
PORTFOLIO
1-Year
5-Years
10-Years
Life of
Fund
Inception
Date
National
(5.94)%
4.87%
6.77%
6.91%
8/20/86
Limited
Term
(3.45)%
4.22%
5.62%
5.84%
11/28/88
New York
(5.54)%
5.03%
6.87%
6.46%
1/16/87
Florida
(6.16)%
4.75%
N/A
6.19%
4/2/91
Georgia
(7.60)%
5.42%
N/A
5.56%
4/4/94
Pennsylvani
a
(8.87)%
4.78%
N/A
5.45%
4/4/94
Each fund's average annual total return with respect to its
Class B shares for the one-year period and for the life of the fund
ended March 31, 2000 is as follows:
PORTFOLIO
1-Year
5-Year
Life of
Fund
Inceptio
n Date
National
(6.73)%
5.02%
6.67%
11/7/94
New York
(6.29)%
5.17%
6.78%
11/11/94
Florida
(6.88)%
4.92%
6.73%
11/16/94
Georgia
(5.43)%
5.56%
5.43%
6/15/94
Pennsylvani
a
(6.71)%
4.96%
5.21%
6/20/94
Each fund's average annual total return with respect to its
Class L shares for a one-year period, five-year period, if any, and
for the life of the fund's Class L shares through March 31, 2000 is as
follows:
PORTFOLIO
1-Year
5-Years
Life of
Fund
Inceptio
n
Date
National
(4.46)%
4.89%
5.06%
1/5/93
Limited
Term
(3.62)%
4.17%
4.40%
1/5/93
New York
(4.06)%
5.08%
5.13%
1/8/93
Florida
(4.68)%
4.79%
5.01%
1/5/93
Georgia
(7.60)%
5.47%
5.44%
4/14/94
Pennsylvani
a
(8.87)%
4.84%
5.40%
4/5/94
The fund's average annual total return with respect to its Class
Y shares for the life of the fund's Class Y shares through March 31,
2000 is as follows:
PORTFOLIO
1-Year
Life of
Fund
Inception
Date
Limited
Term
(1.31)%
0.09%
11/12/98
Each fund's yield, other than for the California Money Market
Portfolio, the New York Money Market Portfolio and the Massachusetts
Money Market Portfolio, is computed by dividing the net investment
income per share earned during a specified 30-day period ending at
month end by the maximum offering price per share on the last day of
such period and annualizing the result. For purposes of yield
calculation, interest income is determined based on a yield to
maturity percentage for each long-term debt obligation in the fund;
income from short-term obligations is based on the current payment
rate. Yield information may be accompanied with information on tax
equivalent yield computed in the same manner, with adjustment for
assumed Federal income tax rates. No taxable instruments are
presently held by any of the funds.
Each fund's distribution rate, other than those of the
California Money Market Portfolio, the New York Money Market Portfolio
and the Massachusetts Money Market Portfolio, is calculated by
analyzing the latest income distribution and dividing the result by
the maximum offering price per share as of the end of the period to
which the distribution relates. The distribution rate is not computed
in the same manner as, and therefore can be significantly different
from, the above-described yield which will be computed in accordance
with applicable regulations. A fund may quote its distribution rate
together with the above-described standard total return and yield
information in its supplemental sales literature. The use of such
distribution rates would be subject to an appropriate explanation of,
among other matters, how the components of the distribution rate
differ from the above described yield.
California Money Market Portfolio's yield with respect to its
Class A shares for the seven-day period ended March 31, 2000 was 2.62%
(the effective yield was 2.65%) with an average dollar-weighted fund
maturity of 31 days; the New York Money Market Portfolio's yield with
respect to its Class A shares for the seven-day period ended March 31,
2000 was 3.05% (the effective yield was 3.09%) with an average dollar-
weighted fund maturity of 38 days; the Massachusetts Money Market
Portfolio yield with respect to its Class A shares for the seven-day
period ended March 31, 2000 was 3.16% (the effective yield was 3.21%)
with an average dollar-weighted fund maturity of 34 days. From time
to time the California Money Market Portfolio, the New York Money
Market Portfolio and the Massachusetts Money Market Portfolio may
advertise their yields, effective yields and taxable equivalent
yields. These yield figures are based on historical earnings and are
not intended to indicate future performance. The yield of each fund
refers to the net investment income generated by an investment in each
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 each 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 each fund.
Performance information may be useful in evaluating a fund and
for providing a basis for comparison with other financial
alternatives. Since the performance of each 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 FUNDS
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 fund or of the Trust, shares of a 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 Trust are designed to make the Trust 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 Trust provides that shareholders shall
not be subject to any personal liability for the acts or obligations
of the Trust and that every written obligation, contract, instrument
or undertaking made by the Trust shall contain a provision to the
effect that the shareholders are not personally liable thereunder.
Special counsel for the Trust 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
Trust; however, upon payment of any such liability the shareholder
will be entitled to reimbursement from the general assets of the
Trust. The Board of Trustees intends to conduct the operations of the
Trust, 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 Trust.
The Declaration of Trust further provides that no Trustee,
officer or employee of the Trust is liable to the Trust 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 Trust. It also provides that all third persons shall
look solely to the Trust property or the property of the appropriate
portfolio of the Trust for satisfaction of claims arising in
connection with the affairs of the Trust 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 Trust.
The Trust 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 Trust,
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 Trust may elect all
of the Trustees irrespective of the votes of other shareholders.
Class A, Class B, Class L and Class Y shares of a portfolio of the
Trust, if any, 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 a fund would be voted upon only by
shareholders of the fund involved. Additionally, approval of each
fund's Advisory 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. As of July 17, 1999 the following shareholders
beneficially owned 5% or more of a class of shares of a portfolio of
the Trust:
Georgia Portfolio Class A % of shares
MLPF&S for the Sole Benefit of its Customers 9.471%
Attn.: Fund Administration
4800 Deer Lake Drive, East 3rd Floor
Jacksonsville, FL 32246
Gwyn H. Gordon 7.5486%
Helaine Sugarman, TTEES
Rosalie H. Alterman Rev Trust
DTD 5/7/1997
774 W. Sussex Road
Altanta, GA 30306
Georgia Portfolio Class L
E.K. Gandy 6.3237%
164 Country Club Road
Macon, GA 31210-4747
Pennsylvania Portfolio Class A
Abraham L. Morris 7.6534%
906 Frog Hollow Terrace
Rydal, PA 19046-2403
SB Private Trust Co. of N.J. 6.8231%
#138018738151 D. D'Arienzo
Trustee of CE Minerals Exec.
Deferral/Retention Plan
153 East 53rd Street, 23rd Floor
New York, NY 10043-0001
Murray L. Katz and 5.1475%
Harriet L. Katz JTWROS
186 Commadore Drive
Jupiter, FL 33477-4004
Massachusetts Money Market Portfolio Class A
Mr. Michael J. Zak 5.5496%
74 Musterfield Road
Concord, MA 01742-1613
TAXES
The following is a summary of certain material tax
considerations affecting each fund and its shareholders. Please refer
to the applicable prospectus for further discussion. In addition to
the considerations described below and in the applicable prospectus,
there may be other federal, state, local or foreign tax implications
to consider. Because taxes are a complex matter, shareholders and
prospective shareholders are urged to consult their tax advisors for
more detailed information with respect to the tax consequences of an
investment.
Capital gain distributions, if any, are taxable to shareholders,
and are declared and paid at least annually. On March 31, 2000, the
unused capital loss carryovers, by fund, were approximately as
follows: Limited Term portfolio, $11,508,000; California Money Market
portfolio, $50,600, New York Money Market portfolio, $29,300; New York
portfolio, $9,400,000; Georgia portfolio, $1,015,300; Pennsylvania
portfolio, $668,000; Florida portfolio, $2,430,000; National
portfolio, $4,176,000. For Federal income tax purposes, these amounts
are available to be applied against future capital gains of the fund
that has the carryovers, if any, that are realized prior to the
expiration of the applicable carryover. The carryovers expire as
follows:
PORTFOLIO
March
31,
(in thousands)
2003
2004
2005
2006
2007
2008
Limited Term
$273
$1,740
-
-
-
$9,495
CA Money
-
$1
-
-
-
$49.6
NY Money
-
-
-
-
-
$29.3
New York
-
-
-
-
-
$9,400
Georgia
-
-
-
-
$32
$983.3
Pennsylvania
-
-
-
-
-
$668
Florida
-
-
-
-
-
$2,430
National
-
-
-
-
-
$4,176
Mass Money
-
-
-
-
-
-
As described above and in the Prospectuses, each fund is
designed to provide investors with current income, in the form of
"exempt-interest dividends," which is excluded from gross income for
Federal income tax purposes and, except for the Limited Term Portfolio
and the National Portfolio, exempt from otherwise applicable state
and/or local personal income taxes in a particular state. No fund is
intended to be a balanced investment program, and the funds are not
designed for investors seeking capital gains or maximum tax-exempt
income irrespective of fluctuations in principal. Investment in any
fund 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.
Each fund has qualified and intends to continue to qualify each
year as a "regulated investment company" under the Code. Provided
that a 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 a fund would reduce the amount
of income and gains available for distribution to shareholders.
Because each fund will distribute exempt-interest dividends,
interest on indebtedness incurred by a shareholder to purchase or
carry shares of a fund is not deductible for federal income tax
purposes. If a shareholder receives exempt-interest dividends with
respect to any share of a 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 a 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 such bonds, or a "related
person" of the substantial user. Moreover, some or all of a 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. In addition, the
receipt of a 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 "branch profits" tax, or the federal or California "excess net
passive income" tax.
As a general rule, a 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. Shareholders of each fund will receive 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 a 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.
Dividends paid by any fund from interest income on taxable
investments, net realized short-term capital gains and all or a portion
of any gains realized from the sale or other disposition of certain
market discount bonds are subject to federal income tax as ordinary
income. Distributions, if any, from net realized long-term capital
gains ("capital gain dividends") are taxable as long-term capital gains
regardless of the length of time a shareholder has owned fund shares.
If, in any taxable year, a fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders would not be
deductible by the fund in computing its taxable income. In addition,
in the event of a failure to qualify, the fund's distributions, to the
extent derived from the fund's current or accumulated earnings and
profits would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at
least in part) have been treated in the shareholders' hands as tax-
exempt interest. If such fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again as a
regulated investment company. In addition, if a fund failed to qualify
as a regulated investment company for a period greater than one
taxable year, such fund may be required to recognize any net built-in
gains with respect to certain o fits assets (the excess of the
aggregate gains, including items of income, over aggregate losses that
would have been realized if the fund had been liquidated) in order to
qualify as a regulated investment company in a subsequent year.
Shareholders are required to pay tax on all taxable
distributions even if those distributions are automatically reinvested
in additional shares. None of the dividends paid by any fund will
qualify for the corporate dividends-received deduction. Certain
distributions paid in January may be treated as if received on December
31 for federal income tax purposes. Each fund will inform shareholders
of the source and tax status of all distributions promptly after the
close of each calendar year.
Some of the funds may invest in exchange-traded municipal bond
index futures contracts. As a general rule, these investment
activities will increase or decrease the amount of long-term and short-
term capital gains or losses realized by a fund and, accordingly, will
affect the amount of capital gains distributed to the fund's
shareholders. For federal income tax purposes, gain or loss on these
futures contracts (referred to herein as "section 1256 contracts") is
taxed pursuant to a special "mark-to-market" system. Under the mark-
to-market system, these instruments are treated as if sold at a fund's
fiscal year end for their fair market value. As a result, the fund may
be recognizing gains or losses before they are actually realized. As a
general rule, gain or loss on section 1256 contracts is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss.
Marking-to-market and the application of this 60/40 rule to unrealized
gains and losses on section 1256 contracts generally will affect the
amount and timing of capital gains or losses of a fund and of
distributions taxable to a shareholder. Moreover, if a fund invests in
both section 1256 contracts and offsetting positions to such contracts,
which together constitute a straddle, then the fund may be required to
defer certain realized losses.
A shareholder's gain or loss, if any, on the disposition of
shares of a fund that are held as capital assets (whether by
redemption, sale or exchange) generally will be a long-term or short-
term capital gain or loss depending on whether the shares had been held
for tax purposes for more than one year, or one year or less,
respectively. If a shareholder receives a capital gain dividend with
respect to any share and redeems or otherwise sells the share before it
has been held by the shareholder for more than six months, then any
loss (to the extent not disallowed pursuant to the other six-month rule
described above relating to exempt-interest dividends) on the sale or
other disposition of such share will be treated as long-term capital
loss to the extent of the capital gain dividend.
If a shareholder incurs a sales charge when acquiring shares of
a fund, disposes of those shares within 90 days and then acquires
shares in a mutual fund for which the otherwise applicable sales charge
is reduced by reason of a reinvestment right (e.g., an exchange
privilege), the original sales charge will not be taken into account
when computing gain or loss on the original shares to the extent the
subsequent sales charge is reduced. The portion of the original sales
charge that does not increase the shareholder's tax basis in the
original shares will be treated as incurred with respect to the second
acquisition and, as a general rule, will increase the shareholder's tax
basis in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired shares made within 90
days of the second acquisition. This provision prevents a shareholder
from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Investors considering buying shares of a fund just prior to a
record date for a capital gain distribution should be aware that,
regardless of whether the price of the fund shares to be purchased
reflects the amount of the forthcoming distribution payment, any such
payment will be a taxable distribution payment.
Each fund may be required to withhold (as "backup withholding")
31% of all taxable dividends, capital gain distributions, and (except
for California Money Market Portfolio, New York Money Market Portfolio
and Massachusetts Money Market Portfolio) the proceeds of any
redemption, regardless of whether gain or loss is realized upon the
redemption, for shareholders who do not provide the fund with their
correct taxpayer identification number (social security or employer
identification number) and any required certifications. Withhholding
from taxable dividends and capital gain distributions also is required
for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an
additional tax, and may be claimed as a credit on the shareholders'
federal income tax returns.
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 a 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.
State Tax Information
California State Taxes California shareholders will not be subject to
California state personal income tax on dividends they receive from
the California Money Market Portfolio to the extent that such
distributions qualify as exempt-interest dividends under the Code and
California law and provided that, at the close of each quarter of the
Portfolio's taxable year, at least 50% of the Portfolio's total assets
are invested in municipal obligations of California issuers. To the
extent that distributions are derived from taxable income, including
long or short-term capital gains, such distributions will not be
exempt from California state personal income tax. Dividends on the
California Portfolio are not excluded in determining California state
franchise taxes on corporations and financial institutions.
Florida Taxes Florida currently does not impose a personal income tax
on individuals. Thus, individual shareholders of the Florida
Portfolio will not be subject to any Florida state income tax on
distributions received from the Florida Portfolio. However, certain
distributions will be taxable to corporate shareholders that are
subject to Florida corporate income tax.
Florida currently imposes an "intangibles tax" on certain
securities and other intangible assets owned by Florida residents.
Certain types of municipal obligations of Florida issuers, U.S.
Treasury securities and municipal obligations issued by certain U.S.
territories and possessions are exempt from this intangibles tax. The
Florida Portfolio seeks generally to select investments that will
enable its shares to be exempt from the Florida intangibles tax and
attempts to ensure that all of its assets held on the annual
assessment date are exempt from this tax. Additionally, the Florida
Department of Revenue has ruled that, if on the annual assessment date
of any year the Florida Portfolio consists solely of such exempt
assets, then the Florida Portfolio's shares will be exempt from the
Florida intangibles tax. The Florida Portfolio intends to provide
shareholders annually with information relating to its assets
necessary to permit shareholders to determine whether the value of
Florida Portfolio shares held is exempt from the Florida intangibles
tax.
Investors purchasing municipal obligations of their state of
residence, or a fund comprised of such obligations, should recognize
that the benefits of the exemption from local taxes, in addition to
the exemption from federal taxes, necessarily limits the fund's
ability to diversify geographically. The Florida Portfolio will make
available annually to its shareholders information concerning the tax
status of its distributions, including the amount of its dividends
designated as exempt-interest dividends and as capital gain dividends.
The foregoing is only a brief summary of the tax considerations
generally affecting the Florida Portfolio and its shareholders who are
Florida residents. Investors are urged to consult their tax advisers
with specific reference to their own tax situation.
Georgia Taxes Exempt-interest dividends and distributions by the
Georgia Portfolio to a Georgia resident that are attributable to
interest on Georgia municipal obligations or direct obligations of the
United States and its territories and possessions will not be subject
to the State of Georgia personal income tax. Dividends or other
distributions by the Georgia Portfolio which are attributable to other
sources, including all distributions that qualify as capital gains
dividends for federal income tax purposes, will be subject to the
State of Georgia personal income tax at the applicable rate.
Investors purchasing municipal obligations of their state of
residence, or a fund comprised of such obligations, should recognize
that the benefits of the exemption from local taxes, in addition to
the exemption from federal taxes, necessarily limits the fund's
ability to diversify geographically. The Georgia Portfolio will make
available annually to its shareholders information concerning the tax
status of its distributions, including the amount of its dividends
designated as exempt-interest dividends and as capital gain dividends.
The foregoing is only a brief summary of the tax considerations
generally affecting the Georgia Portfolio and its shareholders who are
Georgia residents. Investors are urged to consult their tax advisers
with specific reference to their own tax situation.
Massachusetts Taxes Individual shareholders who are otherwise subject
to Massachusetts personal income tax will not be subject to
Massachusetts personal income tax on exempt-interest dividends
received from the fund to the extent the dividends are attributable to
interest on obligations of the Commonwealth of Massachusetts and its
political subdivisions, agencies and public authorities (or on
obligations of certain other governmental issuers such as Puerto Rico,
the Virgin Islands and Guam) that pay interest which is excluded from
gross income for federal income tax purposes and exempt from
Massachusetts personal income taxes. Other distributions from
Massachusetts Money Market Portfolio, including those related to long-
and short-term capital gains, other than certain gains from certain
Massachusetts Municipal Securities identified by the Massachusetts
Department of revenue, generally will not be exempt from Massachusetts
personal income tax. Businesses should note that Massachusetts Money
Market Portfolio's distributions derived from Massachusetts Municipal
Securities are not exempt from Massachusetts corporate excise tax.
The foregoing is only a brief summary of the tax considerations
generally affecting the Massachusetts Money Market Portfolio and its
shareholders who are Massachusetts residents. Shareholders are urged
to consult their own tax advisers with specific reference to their own
tax situation.
New York State and City Taxes New York resident shareholders of the
New York Portfolio or the New York Money Market Portfolio will not be
subject to New York State and New York City personal income taxes on
exempt-interest dividends attributable to interest on tax-exempt
obligations of the State of New York and its political subdivisions,
as well as certain other obligations the interest on which is
considered exempt for New York State and New York City purposes. The
New York Money Market Portfolio is required to report annually the
source, tax status and recipient information related to its exempt-
interest dividends distributed within the State of New York. Exempt-
interest dividends are not excluded in determining New York State
franchise or New York City business taxes on corporations and
financial institutions.
The foregoing is only a brief summary of some of the tax
considerations generally affecting the New York Portfolio, the New
York Money Market Portfolio and their shareholders who are New York
residents. Investors are urged to consult their tax advisors with
specific reference to their own tax situation.
Pennsylvania Taxes Exempt-interest dividends distributed by the
Pennsylvania Portfolio will not be subject to the Pennsylvania
personal income tax, the corporate net income tax or to the
Philadelphia school district investment income tax to the extent that
the dividends are attributable to interest received by the Portfolio
from its investments in Pennsylvania municipal obligations and U.S.
Government obligations, including obligations issued by U.S.
possessions. For Pennsylvania personal income tax purposes, capital
gain distributions are treated as ordinary dividends and are taxed at
ordinary income tax rates.
Investors purchasing municipal obligations of their state of
residence, or a fund comprised of such obligations, should recognize
that the benefits of the exemption from local taxes, in addition to
the exemption from federal taxes, necessarily limits the fund's
ability to diversify geographically. The Pennsylvania Portfolio will
make available annually to its shareholders information concerning the
tax status of its distributions, including the amount of its dividends
designated as exempt-interest dividends and as capital gain dividends.
The foregoing is only a brief summary of some of the tax
considerations generally affecting the Pennsylvania Portfolio and its
shareholders who are Pennsylvania residents. Investors are urged to
consult their tax advisors with specific reference to their own tax
situation.
ADDITIONAL INFORMATION
The Trust, an open-end management investment company, is
organized as a "Massachusetts business trust" pursuant to a
Declaration of Trust dated August 14, 1985. 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 each fund are segregated and separately
managed. Each share of a 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 Trust sends to each of its fund's 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 each fund's printing and mailing
costs, each 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
each fund. Under the custody agreement with the trust, PNC holds each
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 each fund are
held under bank custodianship in compliance with the 1940 Act.
Citi Fiduciary Trust Company, located at 125 Broad Street, New York,
New York 10004, serves as the fund's transfer and dividend-paying
agent. Under the transfer agency agreement, the transfer agent
maintains the shareholder account records for the fund, handles
certain communications between shareholders and the fund, distributes
dividends and distributions payable by the fund and produces
statements with respect to account activity for the fund and its
shareholders. For these services, the transfer agent receives fees
from the fund computed on the basis of the number of shareholder
accounts that the transfer agent maintains for the fund during the
month and is reimbursed for out-of-pocket expenses.
PFPC Global Fund Services, located at P.O. Box 9699, Providence, RI
02940-9699, serves as the fund's sub-transfer agent. Under the
transfer agency agreement, PFPC 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, PFPC 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 out-of-
pocket expenses.
FINANCIAL STATEMENTS
The funds' financial information is incorporated by reference to the
funds' Annual Reports to Shareholders for the fiscal year ended March
31, 2000 which were filed with the SEC on June 8, 2000, accession
number 950130-00-003314.
OTHER INFORMATION
In an industry where the average portfolio manager has seven years of
experience (source: ICI, 1998), the portfolio managers of Smith Barney
Mutual Funds average 21 years in the industry and 15 years with the
firm.
Smith Barney Mutual Funds offers more than 60 mutual funds. We
understand that many investors prefer an active role in allocating the
mix of funds in their portfolio, while others want the asset
allocation decisions to be made by experienced managers.
That's why we offer four "styles" of fund management that can be
tailored to suit each investor's unique financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested within their
asset class and investment style, enabling investors to make
asset allocation decisions in conjunction with their Salomon
Smith Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range of equity and
fixed income strategies that seek to capture opportunities
across asset classes and investment styles using disciplined
investment approaches.
The Concert Allocation Series
As a fund of funds, investors can select a Concert Portfolio
that may help their investment needs. As needs change,
investors can easily choose another long-term, diversified
investment from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed for
investors who are looking beyond more traditional market categories:
from natural resources to a roster of state-specific municipal funds.
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.
Appendices B-I - Special Note:
The following information (set forth in Appendices B-I) is a summary
of special factors available at the time of the preparation of this
SAI affecting municipal obligations for state-specific portfolios
(California, New York and Massachusetts Money Markets, Florida,
Georgia, New York and Pennsylvania Portfolios). Also included (set
forth in Appendices H-I) is a summary of specific factors, available
at the time of preparation of this SAI, affecting municipal
obligations for certain U.S. territories including Puerto Rico, the
U.S. Virgin Islands and Guam for both state specific portfolios and
the National and Limited Term Portfolios. For any such state and
territory, 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 and territory. The manager has
not independently verified any such information. The respective states
and territories typically indicate 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, territory 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 California Municipal Obligations.
See Special Note prior to Appendix B.
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations, and voter initiatives,
as discussed below, could adversely affect the market values and
marketability of, or result in default of, existing obligations,
including obligations that may be held by a fund. Obligations of the
state or local governments may also be affected by budgetary pressures
affecting the State of California (the State) and economic conditions
in the State. Interest income to a fund could also be adversely
affected. The following discussion highlights only some of the more
significant financial trends and problems, and is based on information
drawn from official statements and prospectuses relating to securities
offerings of the State, its agencies, or instrumentalities, as
available as of the date of this SAI. The Manager has not
independently verified any of the information contained in such
official statements and other publicly available documents, but is not
aware of any fact, which would render such information inaccurate.
Alternative Minimum Tax
As long as a fund continues to qualify as a regulated investment
company under the federal Internal Revenue Code, it will incur no
California income or franchise tax liability on income and capital
gains distributed to shareholders. California personal income tax law
provides that exempt-interest dividends paid by a regulated investment
company, or series thereof, from interest on obligations that are
exempt from California personal income tax are excludable from gross
income. For a fund to qualify to pay exempt-interest dividends under
California law, at least 50% of the value of its assets must consist
of such obligations at the close of each quarter of its fiscal year.
For purposes of California personal income taxation, distributions to
individual shareholders derived from interest on other types of
obligations and short-term capital gains will be taxed as dividends,
and long-term capital gain distributions will be taxed as long-term
capital gains. California has an alternative minimum tax similar to
the federal AMT described above. However, the California AMT does not
include interest from private activity municipal obligations as an
item of tax preference. Interest on indebtedness incurred or continued
by a shareholder in connection with the purchase of shares of a fund
will not be deductible for California personal income tax purposes.
Corporate taxpayers should note that dividends will not be exempt from
California corporate income or franchise tax.
General
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's
finances have improved significantly since 1994, with ratings
increases since 1996. The ratings of certain related debt of other
issuers for which California has an outstanding lease purchase,
guarantee or other contractual obligation (such as for state-insured
hospital bonds) are generally linked directly to California's rating.
Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and
marketability of all outstanding notes and bonds issued by California,
its public authorities or local governments could be adversely
affected.
Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 34 million
represents about 12-1/2% of the total United States population and
grew by 26% in the 1980s, more than double the national rate.
Population growth slowed to less than 1% annually in 1994 and 1995,
but rose to almost 2% in the final years of the 1990's. During the
early 1990's, net population growth in the State was due to births and
foreign immigration, but in recent years, in-migration from the other
states has increased and once more represents net positive growth.
Total personal income in the State, at an estimated $964 billion in
1999, accounts for almost 13% of all personal income in the nation.
Total employment is over 15 million, the majority of which is in the
service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, were all severely affected, particularly in
Southern California. Recovery did not begin in California until 1994,
later than the rest of the nation, but since that time California's
economy has outpaced the national average. By the end of 1999,
unemployment in the State was at its lowest level in three decades.
Economic indicators show a steady and strong recovery underway in
California since the start of 1994 particularly in high technology
manufacturing and services, including computer software, electronic
manufacturing and motion picture/television production, and other
services, entertainment and tourism, and both residential and
commercial construction. International economic problems starting in
1997 had some moderating impact on California's economy, but negative
impacts, such as a sharp drop in exports to Asia which hurt the
manufacturing and agricultural sectors, were offset by increased
exports to Latin American and other nations, and a greater strength in
services, computer software and construction. With economic conditions
in many Asian countries recovering in 1999, that year had the
strongest economic growth in the State for the entire decade. Current
forecasts predict continued strong growth of the State's economy in
2000, with slower growth predicted in 2001 and beyond. Any delay or
reversal of the recovery may create new shortfalls in State revenues.
Constitutional Limitations On Taxes, Other Charges and Appropriations
Certain California municipal obligations may be obligations of issuers
which rely in whole or in part, directly or indirectly, on AD VALOREM
property taxes as a source of revenue. The taxing powers of California
local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value of the rate of AD VALOREM property taxes on real property
and generally restricts the reassessment of property to 2% per year,
except under new construction or change of ownership (subject to a
number of exemptions). Taxing entities may, however, raise AD VALOREM
taxes above the 1% limit to pay debt service on voter-approved bonded
indebtedness. Under Article XIIIA, the basic 1% AD VALOREM tax levy
is applied against the assessed value of property as of the owner's
date of acquisition (or as of March 1, 1975, if acquired earlier),
subject to certain adjustments. This system has resulted in widely
varying amounts of tax on similarly situated properties. Several
lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, but the U.S. Supreme Court upheld it in
1992. Article XIIIA prohibits local governments from raising revenues
through AD VALOREM taxes above the 1% limit; it also requires voters
of any governmental unit to give two-thirds approval to levy any
"special tax." Court decisions, however, allowed a non-voter approved
levy of "general taxes" which were not dedicated to a specific use.
On November 5, 1996, the voters of the State approved Proposition 218,
called the "Right to Vote on Taxes Act." Proposition 218 added
Articles XIIIC and XIIID to the State Constitution, which contain a
number of provisions affecting the ability of local agencies to levy
and collect both existing and future taxes, assessments, fees and
charges. Article XIIIC requires that all new or increased local taxes
be submitted to the electorate before they become effective. Taxes for
general governmental purposes require a majority vote and taxes for
specific purposes require a two-thirds vote. Further, any general
purpose tax which was imposed, extended or increased without voter
approval after December 31, 1994 must be approved by a majority vote
within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for
municipal services and programs. Article XIIID also contains several
new provisions affecting "fees" and "charges," defined for purposes of
Article XIIID to mean "any levy other than an ad valorem tax, a
special tax, or an assessment, imposed by a [local government] upon a
parcel or upon a person as an incident of property ownership,
including a user fee or charge for a property related service." All
new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which
generate revenues exceeding the funds required to provide the property
related service or are used for unrelated purposes. There are new
notice, hearing and protest procedures for levying or increasing
property related fees and charges, and, except for fees or charges for
sewer, water and refuse collection services (or fees for electrical
and gas service, which are not treated as "property related" for
purposes of Article XIIID), no property related fee or charge may be
imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency,
two-thirds voter approval by the electorate residing in the affected
area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes,
assessments, fees and charges. Consequently, local voters could, by
future initiative, repeal, reduce or prohibit the future imposition or
increase of any local tax, assessment, fee or charge. It is unclear
how this right of local initiative may be used in cases where taxes or
charges have been or will be specifically pledged to secure debt
issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and
it is not possible at this time to predict with certainly the outcome
of such determinations. Proposition 218 is generally viewed as
restricting the fiscal flexibility of local governments, and for this
reason, some ratings of California cities and counties have been, and
others may be, reduced.
The State and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article
XIIIB prohibits the State or any covered local government from
spending "appropriations subject to limitation" in excess of the
appropriations limit imposed. "Appropriations subject to limitation"
are authorizations to spend "proceeds of taxes," which consist of tax
revenues and certain other funds, including proceeds from regulatory
licenses, user charges or other fees, to the extent that such proceeds
exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit
is imposed on appropriations of funds, which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other
non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or
authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared
by the Governor, (3) appropriations for certain capital outlay
projects, (4) appropriations by the State of post-1989 increases in
gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency. The appropriations limit for each year is
adjusted annually to reflect changes in cost of living and population,
and any transfers of service responsibilities between government
units. The definitions for such adjustments were liberalized in 1990
to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions.
The State must refund 50% of any excess, with the other 50% paid to
schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues since 1990 because of the
recession, few governments are currently operating near their spending
limits, but this condition may change over time. Local governments may
by voter approval exceed their spending limits for up to four years.
For at least the last ten years, appropriations subject to limitation
have been under the State's limit. State appropriations are estimated
to be $3.8 billion under the limit for fiscal year 1999-2000.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting
future appropriations or changes in population and cost of living, and
the probability of continuing legal challenges, it is not currently
possible to determine fully the impact of these Articles on California
municipal obligations or on the ability of the State or local
governments to pay debt service on such California municipal
obligations. It is not possible, at the present time, to predict the
outcome of any pending litigation with respect to the ultimate scope,
impact or constitutionality of these Articles or the impact of any
such determinations upon State agencies or local governments, or upon
their ability to pay debt service on their obligations. Further
initiatives or legislative changes in laws or the California
Constitution may also affect the ability of the State or local issuers
to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after
support of the public school system and public institutions of higher
education. As of January 1, 2000, the State had outstanding
approximately $20.5 billion of long-term general obligation bonds,
plus $681 million of general obligation commercial paper which will be
refunded by long-term bonds in the future, and $6.7 billion of lease-
purchase debt supported by the State General Fund. The State also had
about $13.7 billion of authorized and unissued long-term general
obligation bonds and lease-purchase debt. In FY 1998-99, debt service
on general obligation bonds and lease purchase debt was approximately
4.4% of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1998-1999 were the
California personal income tax (53 percent of total revenues), the
sales tax (32 percent), bank and corporation taxes (10 percent), and
the gross premium tax on insurance (2 percent). An estimated 20% of
personal income tax receipts (10% of total General Fund) is derived
from capital gains realizations and stock option income. While these
sources have been extraordinarily strong in the past few years, they
are particularly volatile; any sustained drop in stock market levels
could have a significant impact on these revenues. The State
maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of
the General Fund, but which is required to be replenished as soon as
sufficient revenues are available. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance.
Because of the recession and an accumulated budget deficit, no reserve
was budgeted in the SFEU from 1992-93 to 1995-96.
A a result of the severe economic recession from 1990-94 and other
factors, during this period the State experienced substantial revenue
shortfalls, and greater than anticipated social service costs. The
State accumulated and sustained a budget deficit in the budget
reserve, the SFEU, approaching $2.8 billion at its peak at June 30,
1993. The Legislature and Governor responded to these deficits by
enacting a series of fiscal steps between FY1991-92 and FY1994-95,
including significant cuts in health and welfare and other program
expenditures, tax increases, transfers of program responsibilities and
some funding sources from the State to local governments, and transfer
of about $3.6 billion in annual local property tax revenues primarily
from cities and counties to local school districts, thereby reducing
State funding for schools. The budget deficits also led to cash flow
shortfalls which led the State to use external cash flow borrowing
over the end of the fiscal year for several years to fund the deficit.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.1 billion in
1997-98, and $1.6 billion in 1998-99) than were initially planned when
the budgets were enacted. These additional funds were largely directed
to school spending as mandated by Proposition 98, and to make up
shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was
finally eliminated. The Department of Finance estimates that the
State's budget reserve (the SFEU) totaled about $1.8 billion at June
30, 1998 and $3.1 billion at June 30, 1999.
The growth in General Fund revenues since the end of the recession
resulted in significant increases in State funding for local school
districts under Proposition 98. From the recession level of about
$4,300 per pupil, annual State funding has increased to over $6,000
per pupil in FY 1999-2000. A significant amount of the new moneys have
been directed to specific educational reforms, including reduction of
class sizes in many grade levels. The improved budget condition also
allowed annual increases in support for higher education in the State,
permitting increased enrollment and reduction of student fees. Part
of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new
State program, called "CalWORKs," became effective January 1, 1998,
and emphasizes programs to bring aid recipients into the workforce. As
required by federal law, new time limits are placed on receipt of
welfare aid. Generally, health and welfare costs have been contained
even during the recent period of economic recovery, with the first
real increases (after inflation) in welfare support levels occurring
in 1999-2000.
One of the most important elements of the 1998-99 Budget Act was
agreement on substantial tax cuts. The largest of these was a phased-
in cut in the Vehicle License Fee (an annual tax on the value of cars
registered in the State, the "VLF"). Starting on January 1, 1999, the
VLF has been reduced by 25 percent. Under pre-existing law, VLF funds
are automatically transferred to cities and counties, so the new
legislation provided for the General Fund to make up the reductions.
If State General Fund revenues continue to grow above certain targeted
levels in future years, the cut could reach as much as 67.5 percent by
the year 2003. The initial 25 percent VLF cut will be offset by about
$500 million in General Fund money in FY 1998-99, and $1 billion
annually for future years. Other tax cuts in FY 1998-99 included an
increase in the dependent credit exemption for personal income tax
filers, restoration of a renter's tax credit for taxpayers, and a
variety of business tax relief measures. The total cost of these tax
cuts was estimated at $1.4 billion for FY 1998-99.
1999-2000 Budget.
The 1999-00 Budget Act was signed on June 29, 1999, only the second
time in the decade the budget was in place at the start of the fiscal
year. After the Governor used his line-item veto power to reduce
expenditures by about $581 million, the final spending plan called for
about $63.7 billion of General Fund expenditures, $16.1 billion of
Special Fund expenditures, and $1.5 billion in bond funded
expenditures. The Governor's final budget actions left the SFEU with
an estimated balance of $881 million at June 30, 2000, but the
Governor also reduced spending to set aside $300 million for future
appropriation for either employee pay raises or potential litigation
costs. The final Budget Act generally provided increased funding for
a wide range of programs. Education spending under Proposition 98
received the largest increase (over $2.3 billion above 1998-99), with
other significant increases for higher education, health and welfare,
natural resources and capital outlay. The budget provides several
hundred million dollars in direct new aid to cities and counties.
The final spending plan includes several targeted tax cuts for
businesses, totaling under $100 million in 1999-00. The plan also
includes a one-time, one-year additional cut of 10 percent in the
Vehicle License Fee for calendar year 2000. This cut will cost the
General Fund about $500 million in each of 1999-00 and 2000-01 to make
up lost funds for local governments. Under the 1998 law, the VLF cut
to 35 percent would become permanent in the year 2001 if General Fund
revenues reach a certain specified level in 2000-01. Current estimates
indicate this level will be reached.
In January, 2000, the Governor released his proposed budget for fiscal
year 2000-01 (the "2000 Governor's Budget"), which also included
updated revenue and expenditure projections for 1999-2000. Reflecting
the continued strong economy in the State, the Administration revised
its revenue estimates upward by $2.1 billion to $65.2 billion;
expenditures were also projected to increase by a like amount. The
Administration's projected balance in the SFEU at June 30, 2000
increased from about $880 million to over $2.4 billion. In February,
2000 the State Legislative Analyst's Office ("LAO") released a report
with more recent revenue estimates, based in part on actual revenues
for December, 1999 and January, 2000, which were not available for the
2000 Governor's Budget. In the fourth quarter of 1999, personal income
tax revenues were 17% higher than the year-earlier period. The LAO
Report indicated revenues in 1999-2000 could be as much as $2.1
billion higher than the 2000 Governor's Budget estimate.
Although, as noted, the Administration projected a budget reserve in
the SFEU of about $2.4 billion on June 30, 1999, the General Fund fund
balance on that date also reflects $1.0 billion of "loans" which the
General Fund made to local schools in the recession years,
representing cash outlays above the mandatory minimum funding level.
Settlement of litigation over these transactions in July 1996 calls
for repayment of these loans over the period ending in 2001-02, about
equally split between outlays from the General Fund and from schools'
entitlements. The 1999-2000 Budget Act contained a $350 million
appropriation from the General Fund toward this settlement.
Proposed 2000-01 Budget
In the 2000 Governor's Budget, the Administration proposed General
Fund expenditures of $68.8 billion, based on expected revenues of
$68.2 billion (including $390 million from the tobacco litigation
settlement and sale of assets). The proposal included a balance in the
SFEU at June 30, 2001 of $1.2 billion, plus set-aside of an additional
$600 million for legal contingencies and legislative initiatives. The
Governor proposed substantial additional funding for K-12 schools,
higher education, capital outlay and other programs. The February,
2000 LAO Report indicated General Fund revenues for 2000-01 could be
as much as $2.1 billion higher than projected in the 2000 Governor's
Budget (in addition to the $2.1 billion additional revenue for 1999-
2000), assuming continued strong economic growth in the State and in
the stock market. Final decisions for the 2000-01 Budget will be made
by the Governor and Legislature by July, 2000. Although the State's
strong economy is producing record revenues to the State government,
the State's budget continues to be under stress from mandated spending
on education, a rising prison population, and social needs of a
growing population with many immigrants. These factors which limit
State spending growth also put pressure on local governments. There
can be no assurances that, if economic conditions weaken, or other
factors intercede, the State will not experience budget gaps in the
future.
Bond Rating
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels, which had existed prior
to the recession. After 1996, the three major rating agencies raised
their ratings of California's general obligation bonds, which as of
February, 2000 were assigned ratings of "AA-" from Standard & Poor's,
"Aa3" from Moody's and "AA" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations
issued by local California issuers may be unrelated to
creditworthiness of obligations issued by the State of California, and
that there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that if decided against the
State, may require the State to make significant future expenditures
or may substantially impair revenues. Trial courts have recently
entered tentative decisions or injunctions, which would overturn
several parts of the State's recent budget compromises. The matters
covered by these lawsuits include reductions in welfare payments and
the use of certain cigarette tax funds for health costs. All of these
cases are subject to further proceedings and appeals, and if
California eventually loses, the final remedies may not have to be
implemented in one year. The State recently lost cases involving a
smog impact fee on out-of-state automobiles (total liability of about
$560 million) and certain corporate tax credits ($100 million). The
Administration has proposed payment of the smog impact fee claims from
current revenues.
Other Issuers of California Municipal Obligations
There are a number of State agencies, instrumentalities and political
subdivisions of the State that issue municipal obligations, some of
which may be conduit revenue obligations payable from payments from
private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest
and principal on their obligations remains unclear. Furthermore, other
measures affecting the taxing or spending authority of California or
its political subdivisions may be approved or enacted in the future.
Legislation has been or may be introduced which would modify existing
taxes or other revenue-raising measures or which either would further
limit or, alternatively, would increase the abilities of state and
local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such
legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California municipal
obligations in which the Fund may invest, future allocations of state
revenues to local governments or the abilities of state or local
governments to pay the interest on, or repay the principal of, such
California municipal obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and
Southern California in 1994 experienced major earthquakes causing
billions of dollars in damages. The federal government provided more
than $13 billion in aid for both earthquakes, and neither event has
had any long-term negative economic impact. Any California municipal
obligation in the Fund could be affected by an interruption of
revenues because of damaged facilities, or, consequently, income tax
deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the
inability of (i) an issuer to have obtained earthquake insurance
coverage rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or
State government to appropriate sufficient funds within their
respective budget limitations.
APPENDIX C
Special Considerations Relating to Florida Municipal Obligations.
See Special Note prior to Appendix B.
General
Population. In 1980, Florida was the seventh most populous state in
the U.S. Florida has grown dramatically since then and as of April 1,
1998, ranks fourth with an estimated population of 15 million. In
1998, about 232,000 more new residents moved into Florida than moved
out. The U.S. average population increase since 1990 is about 1.0%
annually, while Florida's average increase is about 1.9% annually.
Florida continues to be one of the fastest growing of the largest
states.
Florida's strong population growth is one reason Florida's economy is
performing better than the U.S. as a whole. In addition to attracting
senior citizens to Florida as a place for retirement, Florida is also
recognized as attracting a significant number of individuals of
working age (18-64). In recent years, Florida's prime working age
population (18-44) has grown at an average annual rate of more than
2.0%. More than 60% of Florida's total population is at the working
age (18-64). This share is not expected to change appreciably into
the twenty-first century.
Income. According to the U.S. Department of Commerce and the Florida
Consensus Economic Estimating Conference, personal income in Florida
has been growing strongly the last several years and has generally
performed better than the U.S. as a whole and the southeast U.S. in
particular. This is due to the fact that Florida's population has been
growing at a very strong pace and, since the early 70's, its economy
has diversified providing a broader economic base.
Florida's real income per person has tracked closely with the U.S.
average and has tracked above the southeast. Florida has a
proportionately greater retirement age population than other states.
As a result, property, income (dividends, interest, and rent), and
transfer payments (Social Security and pension benefits, among other
sources of income) are relatively more important sources of income to
persons residing in Florida. Transfer payments (Social Security and
pension benefits, among other sources of income) are typically less
sensitive to the ups and downs of the economy than wages and salaries
and other employment income. Transfer payments (Social Security and
pension benefits, and other sources of income), therefore, act as a
stabilizing force in weak economic periods.
The personal income of residents of the various states in the U.S. is
frequently used to make comparisons among the various states. However,
using personal income to compare Florida to other states can be
misleading. Florida's personal income is systematically
underestimated. Contributions by employers to employees' pension,
profit sharing, and other retirement plans are included in personal
income of that employee while the employee is working and earning
wages and salary. When those same employees retire, to avoid double
accounting, retirement payments to them from those retirement plans
are excluded in computing personal income. Florida retirees are more
likely to be collecting retirement benefits that they earned in a
state other than Florida. As a result, Florida personal income is
underestimated.
Florida's personal income per person in 1998 was $25,852. The U.S.
average personal income per person was slightly higher at $26,412.
Personal income per person in the southeast United States was
significantly lower at $23,725. Total Florida real personal income is
forecasted to increase 4.9% in the fiscal year ended June 30, 1999,
and 3.5% in the fiscal year ending June 30, 2000. Florida real
personal income per person is projected to increase 3.1% in the fiscal
year ended June 30, 1999, and 1.8% in the fiscal year ending June 30,
2000.
The Florida economy appears to be growing in line with, but stronger
than, the U.S. economy; however, the Florida economy is expected to
grow more slowly in the fiscal year ending June 30, 2000, than in the
fiscal year ended June 30, 1999.
Employment
Since 1992, Florida's population has increased an estimated 11.7%,
while the number of employed persons in Florida increased 15.0%. In
the same period, Florida's total non-farm employment has grown
approximately 24.6%, while U.S. non-farm jobs increased 15.9%.
Florida is gradually becoming less dependent on employment related to
construction, agriculture, or manufacturing, and more dependent on
employment related to trade and services. This has also contributed
to Florida's strong economic performance.
Presently, services constitute 36% and trade 25.5% of Florida's total
non-farm jobs. The U.S., however, has a greater percentage of
manufacturing jobs than Florida. Manufacturing jobs tend to pay higher
wages, but service jobs can also pay well and tend to be less
sensitive to swings in the business cycle. Florida has a concentration
of manufacturing jobs in high-tech and high value-added sectors, such
as electrical and electronic equipment, as well as printing and
publishing. These type of manufacturing jobs tend to be less cyclical.
. Florida's unemployment rate throughout the 1980's was consistently
lower than that for the U.S. In the early 1990's Florida's
unemployment rate was higher than that of the U.S. In current years,
Florida's unemployment rate has again generally fallen below that of
the U.S. Florida's unemployment rate was 4.3% during 1998. The U.S.
unemployment rate was 4.5% during 1998. It is estimated that
Florida's unemployment rate will be 4.2% in the fiscal year ended June
30, 1999, and 4.4% in the fiscal year ending June 30, 2000.
Florida's economy is expected to grow at a moderate rate along with
the U.S., but is expected to out perform the U.S. as a whole. Total
non-farm employment in Florida is expected to increase 3.4% for the
fiscal year ended June 30, 1999 and 2.9% for the fiscal year ending
June 30, 2000. Trade and services, the two largest employment sectors,
account for more than half of the total non-farm employment in
Florida.
Employment in the service sectors should experience an increase of
5.5% for the fiscal year ended June 30, 1999, while growing 4.4% for
the fiscal year ending June 30, 2000. Trade is expected to expand 2.8%
for the fiscal year ended June 30, 1999, and 2.8% for the fiscal year
ending June 30, 2000. The service sector is now Florida's largest
employment category.
Construction
In the past, Florida's economy has been highly dependent on the
construction industry and construction related manufacturing. This
dependency has declined in recent years and continues to decline as a
result of continued diversification of Florida's economy. For example,
in 1973, total contract construction employment as a share of total
non-farm employment was about 10%, in the late 1980's, the share had
edged downward to 7.5%, and in 1998, the share was only 5.3%. This
trend is expected to continue as Florida's economy continues to
diversify. Florida, nevertheless, has a dynamic construction industry,
with the percentage of housing starts increasing in 1998 by 11.1%, and
construction jobs overall increasing by 5.1%, due to low interest
rates and favorable economic conditions.
A driving force behind Florida's construction industry has been
Florida's rapid rate of population growth. Although Florida currently
is the fourth most populous state, its annual population growth is now
projected to slow somewhat as the number of people moving into Florida
is expected to remain over 200,000 a year during the next decade. This
population trend should provide fuel for business and home builders to
keep construction activity lively in Florida in the next few years.
Moreover, recent federal tax reforms reducing capital gains realized
on the sale of homes may increase the purchases of second, pre-
retirement homes in Florida.
Single and multi-family housing starts in Florida for the fiscal year
ended June 30, 1999, are projected to reach a combined level of
144,000, decreasing slightly to 143,000 for the fiscal year ending
June 30, 2000. Total construction expenditures in Florida are
forecasted to increase 8.6% for the fiscal year ended June 30, 1999,
and increase 2.5% for the fiscal year ending June 30, 2000. Single
and multi-family housing starts in Florida are projected to account
for about 9% of all the housing starts in the U.S. for the fiscal year
ended June 30, 1999 and 9.53% of all housing starts in the U.S. for
the fiscal year ending June 30, 2000.
Tourism
Tourism is one of Florida's most important industries. Approximately
48.7 million tourists visited Florida in 1998, a 3.7% increase over
1997. Tourists in Florida are, in essence, additional residents for
purposes of determining Florida tax revenues. Florida's tourist
industry over the years has become more sophisticated, attracting
visitors year-round and, to a degree, reducing its seasonality.
Visitors to Florida tend to arrive slightly more by air than by auto.
Tourist arrivals to Florida are forecasted to increase by 2.0% for the
fiscal year endedJune 30, 1999, and 1.7% for the fiscal year ending
June 30, 2000. Tourist arrivals to Florida by air are expected to
increase by 3.2% for the fiscal year ended June 30, 1999, and increase
by 3.9% for the fiscal year ending June 30, 2000. Tourist arrivals by
car are expected to increase by 0.6% for the fiscal year ended June
30, 1999, and decrease 1.0% for the fiscal year ending June 30, 2000.
By June 30, 1999, 49.7 million domestic and international tourists are
expected to have visited Florida. For the fiscal year ending June 30,
2000, about 50.6 million tourists are expected to visit Florida.
Revenues and Expenses
Estimated General Revenue plus Working Capital and Budget
Stabilization funds available to Florida for the fiscal year ended
June 30, 1999, total $19,481.8 million, a 5.2% increase over the
fiscal year ended June 30, 1998. Of the total General Revenue plus
Working Capital and Budget Stabilization funds available to Florida,
$17,779.5 million of that is Estimated Revenues and represents an
increase of 5.0% over the previous year's Estimated Revenues. With
effective General Revenues plus Working Capital Fund and Budget
Stabilization appropriations at $18,220.0 million, including $100.9
million transferred to the Budget Stabilization Fund, unencumbered
reserves at the fiscal year ended June 30, 1999, are estimated at
$1,360.7 million. Estimated General Revenue plus Working Capital and
Budget Stabilization funds available to Florida for the fiscal year
ending June 30, 2000, total $20,133.9 million, a 3.3% increase over
the fiscal year ended June 30, 1999. The $18,555.2 million in
Estimated Resources represents an increase of 4.4% over the previous
year's Estimated Revenues.
General Revenues and Expenses
For the fiscal year ended June 30, 1997, approximately 67% of
Florida's total direct revenue to its four operating funds were
derived from Florida taxes and fees, with Federal grants and other
special revenue accounting for the balance. The large majority of
Florida General Revenue Funds available to Florida for the fiscal year
ended June 30, 1997, were made up of the following taxes:
Sales and use tax--68%
Corporate income tax--8%
Intangible personal property tax--4%
Beverage tax--3%
Estate tax--3%
During the same fiscal year ended June 30, 1997, the large majority of
expenditures from Florida's General Revenue Fund were as follows:
Education--53%
Health and welfare--26%
Public Safety--14%
Florida Sales and Use Tax
Florida's sales and use tax (6%) currently accounts for Florida's
single largest source of tax receipts. Slightly less than 10% of
Florida's sales and use tax is designated for local governments and is
distributed to the respective counties in which collected for use by
the counties, and the municipalities in such counties. In addition to
this money from the State of Florida, local governments may (by a vote
of the residents) assess a 0.5% or a 1.0% discretionary sales surtax
within their county. Proceeds from this local option sales tax are
used for funding local infrastructure programs and acquiring land for
public recreation or conservation or protection of natural resources
as provided under applicable Florida law. Certain charter counties
have other taxing powers in addition, and non-consolidated counties
with a population in excess of 800,000 may levy a local option sales
tax to fund indigent health care. The indigent health care tax alone
cannot exceed 0.5% and when combined with the infrastructure surtax
cannot exceed 1.0%.
For the fiscal year ended June 30, 1997, Florida sales and use tax
receipts (exclusive of the tax on gasoline and special fuels) totaled
$12,089 million, an increase of 5.5% over the fiscal year ended June
30, 1996, collections.
Alcoholic Beverage Tax
Florida imposes an alcoholic beverage, wholesale tax (excise tax) on
beer, wine, and liquor. This tax is one of Florida's major tax
sources. Ninety-eight percent of the revenues collected from this tax
are deposited into Florida's General Revenue Fund.
Alcoholic beverage tax totaled $447.2 million for the fiscal year
ended June 30, 1997.
Corporate Income Tax
Florida imposes an income tax on corporations. All receipts of the
corporate income tax are credited to the General Revenue Fund.
For the fiscal year ended June 30, 1997, corporate income tax totaled
$1,362.3 million, an increase of 17.2% from the fiscal year ended June
30, 1996.
Documentary Stamp Tax
Florida imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificate of
indebtedness, promissory notes, wage assignments, and retail charge
accounts. For the fiscal year ended June 30, 1997, 62.63% of these
taxes were deposited to the General Revenue Fund.
Documentary stamp tax collections totaled $844.2 million for the
fiscal year ended June 30, 1997, an 8.9% increase from the fiscal year
ended June 30, 1996.
Intangible Personal Property Tax
Florida imposes an annual intangible personal property tax on stocks,
bonds, including bonds secured by liens on Florida real property,
notes, governmental leaseholds, and certain other intangibles not
secured by a lien on Florida real property. The annual rate of tax is
currently 2 mills (a mill is $1.00 of tax per $1,000.00 of property
value). Effective January 1, 2000, the rate for the annual intangible
tax will decrease to 1.5 mills. Florida also imposes a non-recurring 2
mill tax on mortgages and other obligations secured by liens on
Florida real property. Of the net taxes imposed on intangible personal
property, 66.5% are distributed to the General Revenue Fund. For the
fiscal year ended June 30, 1997, total intangible personal property
tax collections were $952.4 million, a 6.3% increase from the fiscal
year ended June 30, 1996.
Estate Tax
Florida imposes an estate tax on the estate of a decedent for the
privilege of transferring property at death. All receipts of the
estate tax are credited to the General Revenue Fund.
For the fiscal year that ended June 30, 1997, receipts from this
source were $546.9 million, an increase of 30% over the fiscal year
ended June 30, 1996.
Lottery
Florida began its own lottery in 1988. Florida law requires that
lottery revenues be distributed 50% to the public in prizes, at least
38.0% for use in enhancing education, and no more than 12.0%, for
costs of administering the lottery.
Lottery ticket sales for the fiscal year ended June 30, 1997 totaled
$2.09 billion, providing education with approximately $792.3 million.
Debt-Balanced Budget Requirement
At the end of the fiscal year ended June 30, 1998, Florida had
outstanding about $8,703 million in principal amount of debt secured
by its full faith and credit. Since then, the State has issued about
$629 million in principal amount of full faith and credit bonds.
Florida's Constitution and statutes require that Florida not run a
deficit in its budget, as a whole, or in any separate fund within its
budget. Rather its budget and funds must be kept in balance from
currently available revenues each fiscal year. If the Governor or
Comptroller believes a deficit will occur in any fund, by statute, he
must certify his opinion to the Administrative Commission, which then
is authorized to reduce all Florida agency budgets and releases by a
sufficient amount to prevent a deficit in any fund. Additionally, the
Florida Constitution prohibits Florida from borrowing by issuing bonds
to fund its operations.
Litigation
Currently under litigation are several issues relating to Florida
actions or Florida taxes that put at risk a portion of General Revenue
Fund monies. There is no assurance that any of such matters,
individually or in the aggregate, will not have a material adverse
affect on Florida's financial position.
APPENDIX D
See special note prior to Appendix B.
Special Considerations Relating to Georgia Municipal Obligations.
General
The fund's concentration in the debt obligations of one state carries
a higher risk than a portfolio that is geographically diversified. In
addition to State of Georgia general obligations and state agency
issues, the fund will invest in local bond issues, lease obligations
and revenue bonds, the credit quality and risk of which will vary
according to each security's own structure and underlying economics.
Debt
The State of Georgia and its local governments issued $5.6 billion in
municipal bonds in 1999, a 7% decrease from the previous year. As of
May 8, 2000, the state was rated Aaa by Moody's and AAA by S&P and
Fitch. The State of Georgia currently has net direct obligations of
approximately $5.2 billion. Since 1973, when a Constitutional
Amendment authorizing the issuance of state general obligation (GO)
bonds was implemented, the state has funded most of its capital needs
through the issuance of GO bonds. Previously, capital requirements
were funded through the issuance of bonds by 10 separate authorities
and secured by lease rental agreements and annual state
appropriations. Its Constitution permits the state to issue bonds for
two types of public purposes: (1) general obligation debt and (2)
guaranteed revenue debt. The Constitution imposes certain debt limits
and controls. GO debt service cannot exceed 10% of total revenue
receipts less refunds of the state treasury. GO bonds have a maximum
maturity of 25 years and 67% of the state's debt is scheduled to be
retired in 10 years or less. Maximum GO debt service requirements are
well below the legal limit at 5.1% of fiscal year 1999 treasury
receipts. Georgia has also taken the step to establish "debt
affordability" limits which state that outstanding debt will not
exceed 2.7% of personal income or that maximum annual debt service
will not exceed 5% of prior years revenues. State debt issuance in the
next few years will be limited so that the state will decrease to
these levels.
In addition to the general obligation and lease-backed debt described
above, $318 million bonds have been issued and are outstanding by the
Georgia World Congress Authority and $754 million bonds have been
issued and are outstanding by the Georgia Housing and Finance
Authority, none of which represent direct obligations of the state.
Economy
The State of Georgia has a population of approximately 7.6 million,
making it the 10th largest state. Since the 1960s, the state's
population has grown at a rate exceeding the national average, with
the growth rate during the 1980s nearly twice that of the entire
country. Stable to strong economic growth during the 1980s was led by
the Atlanta metropolitan statistical area, where approximately 45% of
the state's population is located. This area includes the capital city
of Atlanta, and 18 surrounding counties. The next largest metropolitan
area is the Columbus-Muscogee area followed by the Macon area.
The state's economy is well diversified. The current labor force of 4
million is largely concentrated in service and wholesale/retail trade
jobs, followed by lesser amounts in manufacturing and government.
Employment gains have substantially exceeded the region and the U.S.
since 1980. Georgia's one year employment growth (February 1999 to
February 2000) stood at 4.6% compared to the national rate of 2.4%.
The state's economy continues to outperform the nation. Georgia's per
capita income has steadily improved against the national average since
the 1960s and currently is 94% of the U.S. and 105% of the Southeast
region.
Financial
To a large degree, the creditworthiness of the portfolio is dependent
on the financial strength of the State of Georgia and its localities.
During the 1980s, the state's strong economic performance translated
into solid financial performance and the accumulation of substantial
reserves.
During fiscal 1989 to 1991, the state's financial condition was
affected by three years of revenue shortfalls brought on by recession.
During these periods, the Governor called special legislative sessions
to enact sizable spending cuts to achieve budget balance. Economic
conditions improved in 1992, allowing the state to restore its
financial cushion. Results for fiscal 1998 showed a continuation of
this positive trend with a surplus of $685 million and an ending
general fund balance of $1.2 billion, or 9% of revenues.
A significant portion of the portfolio's assets is expected to be
invested in the debt obligations of local governments and public
authorities with investment-grade ratings of BBB or higher. While
local governments in Georgia are primarily reliant on independent
revenue sources, such as property taxes, they are not immune to budget
shortfalls caused by cutbacks in state aid. The fund may purchase
obligations issued by public authorities in Georgia which are not
backed by the full faith and credit of the state and may or may not be
subject to annual appropriations from the State's General Fund.
Likewise, certain enterprises such as water and sewer systems or
hospitals may be affected by changes in economic activity.
Sectors
Certain areas of potential investment concentration present unique
risks. A significant portion of the fund's assets may be invested in
health care issues. For over a decade, the hospital industry has been
under significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial health
of many hospitals. All hospitals are dependent on third-party
reimbursement sources such as the federal Medicare and state Medicaid
programs or private insurers. To the extent these payors reduce
reimbursement levels, the individual hospitals may be affected. In the
face of these pressures, the trend of hospital mergers and
acquisitions has accelerated in recent years. These organizational
changes present both risks and opportunities for the institutions
involved.
The fund may from time to time invest in electric revenue issues which
have exposure to or participate in nuclear power plants which could
affect the issuers' financial performance. Such risks include
unexpected outages or plant shutdowns, increased Nuclear Regulatory
Commission surveillance or inadequate rate relief. In addition, the
financial performance of electric utilities may be impacted by
increased competition and deregulation of the electric utility
industry.
The fund may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No governmental support is implied.
APPENDIX E
See Special Note prior to Appendix B.
Special Considerations Relating to New York Municipal Obligations.
Risk Factors
The information set forth below is derived from the Official
Statements and/or preliminary drafts of Official Statements prepared
in connection with the issuance of New York State and New York City
municipal bonds. The Sponsors have not independently verified this
information.
Economic Trends.
Over the long term, the State of New York (the "State") and the City
of New York (the "City") face serious potential economic problems. The
City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in
numerous ways. The State historically has been one of the wealthiest
states in the nation. For decades, however, the State has grown more
slowly than the nation as a whole, gradually eroding its relative
economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the
relative success that the South and the West have had in attracting
people and business. The City has also had to face greater competition
as other major cities have developed financial and business
capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The State and its localities have
used these taxes to develop and maintain their transportation
networks, public schools and colleges, public health systems, other
social services and recreational facilities. Despite these benefits,
the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, has contributed to the
decisions of some businesses and individuals to relocate outside, or
not locate within, the State.
Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced
budgets, reductions in Federal spending could materially and adversely
affect the financial condition and budget projections of the State and
its localities.
New York City
The City, with a population of approximately 7.4 million, is an
international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life
insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the
City's total employment earnings. Additionally, the City is the
nation's leading tourist destination. Manufacturing activity in the
City is conducted primarily in apparel and printing.
For each of the 1981 through 1999 fiscal years, the City had an
operating surplus, before discretionary transfers, and achieved
balanced operating results as reported in accordance with then
applicable generally accepted accounting principles ("GAAP"), after
discretionary transfers. The City has been required to close
substantial gaps between forecast revenues and forecast expenditures
in order to maintain balanced operating results. There can be no
assurance that the City will continue to maintain balanced operating
results as required by State law without tax or other revenue
increases or reductions in City services or entitlement programs,
which could adversely affect the City's economic base.
As required by law, the City prepares a four-year annual financial
plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and
outlines proposed gap- closing programs for years with projected
budget gaps. The City's current financial plan projects a surplus in
the 2000 and 2001 fiscal years, before discretionary transfers, and
budget gaps for each of the 2002, 2003 and 2004 fiscal years. This
pattern of current year surplus operating results and projected
subsequent year budget gaps has been consistent through the entire
period since 1982, during which the City has achieved surplus
operating results, before discretionary transfers, for each fiscal
year.
The City depends on aid from the State both to enable the City to
balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City
from amounts currently projected; that, in future years, State budgets
will be adopted by the April 1 statutory deadline, or interim
appropriations will be enacted; or that any such reductions or delays
will not have adverse effects on the City's cash flow or expenditures.
In addition, the Federal budget negotiation process could result in a
reduction in or a delay in the receipt of Federal grants which could
have additional adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's financial plan,
including the City's current financial plan for the 2000 through 2004
fiscal years (the "2000-2004 Financial Plan" or "Financial Plan"). The
City's projections set forth in the Financial Plan are based on
various assumptions and contingencies
which are uncertain and which may not materialize. Such assumptions
and contingencies include the condition of the regional and local
economies, the provision of State and Federal aid and the impact on
City revenues and expenditures of any future Federal or State policies
affecting the City.
Implementation of the Financial Plan is dependent upon the City's
ability to market its securities successfully. The City's program for
financing capital projects for fiscal years 2000 through 2004
contemplates the issuance of $8.22 billion of general obligation bonds
and $5.75 billion of bonds to be issued by the New York City
Transitional Finance Authority (the "Finance Authority"). The City's
financing program the passage of legislation by the State which was
proposed by the City to increase the financing capacity of the Finance
Authority by $4 billion and assumes the effectiveness in fiscal year
2002 of a proposed State Constitutional amendment to increase the
City's general obligation debt limit.
In addition, the Financial Plan anticipates access to approximately
$2.4 billion in financing capacity of Tobacco Settlement Asset
Securitization Corporation, Inc. ("TSASC"), which will issue debt
secured by revenues derived from the settlement of litigation with
tobacco companies selling cigarettes in the United States. The Finance
Authority and TSASC were created to assist the City in financing its
capital program while keeping the City's indebtedness within the
forecast level of the constitutional restrictions on the amount of
debt the City is authorized to incur. In addition, the City issues
revenue and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City,
New York City Municipal Water Finance Authority ("Water Authority"),
Finance Authority, TSASC and other bonds and notes will be subject to
prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation
debt, as well as debt of the Water Authority, Finance Authority and
TSASC. Future developments concerning the City and public discussion
of such developments, as well as prevailing market conditions, may
affect the market for outstanding City general obligation bonds and
notes.
The City Comptroller and other agencies and public officials, from
time to time, issue reports and make public statements which, among
other things, state that projected revenues and expenditures may be
different from those forecast in the City's financial plans.
For the 1999 fiscal year, the City had an operating surplus, before
discretionary and other transfers, and achieved balanced operating
results, after discretionary and other transfers, in accordance with
GAAP. The 1999 fiscal year is the nineteenth year that the City has
achieved an operating surplus, before discretionary and other
transfers, and balanced operating results, after discretionary and
other transfers.
On May 1, 2000, the City released the Financial Plan for the 2000
through 2004 fiscal years, which relates to the City and certain
entities which receive funds from the City, and which is based on the
Executive Budget and Budget Message for the City's 2001 fiscal year
(the "Executive Budget") which begins July 1, 2000. The Financial Plan
is a modification to the financial plan submitted to the Control Board
on June 14, 1999 (the "June Financial Plan"), which was subsequently
modified in November 1999 and January 2000. The Financial Plan
projects revenues and expenditures for the 2000 and 2001 fiscal years
balanced in accordance with GAAP, and projects gaps of $1.68 billion,
$1.95 billion and $1.84 billion for fiscal years 2002 through 2004,
respectively, after implementation of a gap-closing program.
Changes since the June Financial Plan include: (i) an increase in
projected revenues of $1.6 billion, $1.2 billion, $1.1 billion, $1.3
billion and $1.6 billion in fiscal years 2000 through 2004,
respectively, reflecting primarily increases in projected personal
income, business, sales, real estate transfer and mortgage recording
tax revenues; (ii) a delay in the assumed collection of $350 million
of projected rent payments for the City's airports from fiscal year
2001 to fiscal years 2002 through 2004; (iii) merit pay wage increases
for City employees of $30 million, $325 million, $750 million, $800
million and $800 million in fiscal years 2000 through 2004,
respectively, contingent upon productivity savings set forth in the
gap-closing program; and (iv) net expenditure savings of $518 million
in fiscal year 2000, and net expenditure increases of $555 million,
$798 million, $1.0 bilion and $742 million in fiscal years 2001
through 2004, respectively, reflecting, among other things, pension
fund savings of $524 million, $284 million and $49 million in fiscal
years 2000 through 2002, respectively (resulting primarily from a
market value restart which has been approved by the trustees of one
pension system but is subject to approval by the trustees of the
City's other pension systems and the State Legislature), increased
pension costs of $69 million and $7 million in fiscal years 2003 and
2004, respectively, and increased spending for education and other
agencies.
The Financial Plan reflects discretionary transfers, for budget
stabilization purposes, including a discretionary transfer of $2.6
billion from fiscal year1999 to fiscal year 2000 primarily to pay debt
service due in fiscal year 2000, a proposed discretionary transfer
from fiscal year 2000 to fiscal year 2001 primarily to pay debt
service due in fiscal year 2001 totaling $2.9 billion, a proposed
discretionary transfer from fiscal year 2001 to fiscal year 2002 to
pay debt service due in fiscal year 2002 totaling $1.2 billion and a
proposed discretionary transfer from fiscal year 2002 to fiscal year
2003 to pay debt service in fiscal year 2003 totaling $345 million.
In addition, the Financial Plan sets forth gap-closing actions to
eliminate a previously projected gap for the 2001 fiscal year and to
reduce projected gaps for fiscal years 2002 through 2004. The gap-
closing actions for the 2000 through 2004 fiscal years include: (i)
additional agency actions totaling $370 million, $466 million, $273
million, $273 million and $273 million for fiscal years 2000 through
2004, respectively; (ii) assumed additional Federal and State actions
of $100 million in each of fiscal years 2001 through 2004, which are
subject to Federal and State approval; and (iii) proposed productivity
savings and reducing fringe benefits costs totaling $250 million, $265
million, $280 million and $300 million in fiscal years 2001 through
2004, respectively, to partly offset the costs of the proposed merit
pay program. The Financial Plan also reflects a proposed tax reduction
program totaling $364 million, $678 million, $816 million and $1.1
billion in fiscal years 2001 through 2004, respectively, including
elimination of the commercial rent tax over three years commencing
June 1, 2000 at a cost of $97 million in fiscal year 2002, increasing
to $430 million in fiscal year 2004; a 50% reduction in the 14%
personal income tax surcharge on July 1, 2000 at a cost of $329
million in fiscal year 2001, increasing to $403 million in fiscal year
2004; the extension of current tax reductions for owners of
cooperative and condominium apartments at an annual cost of
approximately $200 million starting in fiscal year 2002; and repeal of
the $2 flat fee hotel occupancy tax effective December 1, 2000. It can
be expected that the Financial Plan will engender public debate which
will continue through the time the budget is scheduled to be adopted
in June 2000. The Financial Plan may be changed by the time the budget
for fiscal year 2001 is adopted.
Wage increases for City employees are provided for in the Financial
Plan through a merit pay plan for two years after their collective
bargaining agreements expire in fiscal years 2000 and 2001, contingent
upon productivity savings. The Financial Plan does not make any
provision for wage increases thereafter. In addition, the economic and
financial condition of the City may be affected by various financial,
social, economic and other factors which could have a material effect
on the City.
The Financial Plan is based on numerous assumptions, including the
condition of the City's and the region's economies and modest
employment growth and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The 2000-2004
Financial Plan is subject to various other uncertainties and
contingencies relating to, among other factors, the extent, if any, to
which wage increases for City employees exceed the annual wage costs
assumed for the 2000 through 2004 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets and
current assumptions with respect to wages for City employees affecting
the City's required pension fund contributions; the willingness and
ability of the State to provide the aid contemplated by the Financial
Plan and to take various other actions to assist the City; the ability
of City agencies to maintain balanced budgets; the willingness of the
Federal government to provide the amount of Federal aid contemplated
in the Financial Plan; the impact on City revenues and expenditures of
Federal and State welfare reform and any future legislation affecting
Medicare or other entitlement programs; adoption of the City's budgets
by the City Council in substantially the forms submitted by the Mayor;
the ability of the City to implement cost reduction initiatives, and
the success with which the City controls expenditures; the impact of
conditions in the real estate market on real estate tax revenues; the
City's ability to market its securities successfully in the public
credit markets; and unanticipated expenditures that may be incurred as
a result of the need to maintain the City's infrastructure.
On June 7, 1999, the City Council adopted a budget for fiscal year
2000. The adopted budget includes lower estimated debt service
expenditures in fiscal year 2000 resulting from a $456 million
increase, from $2.1 billion to $2.6 billion, in the proposed
discretionary transfer in the 1999 fiscal year to pay debt service due
in fiscal year 2000. The $456 million increase in the discretionary
transfer reflects increased tax revenues and decreased expenditures in
the 1999 fiscal year. The adopted budget also includes $220 million of
spending initiatives proposed by the City Council, other increased
spending and the net cost of revised tax reduction proposals, which
reflect the repeal of all of the City non-resident earnings tax and
the elimination of certain of the previously proposed tax reduction
initiatives.
On July 16, 1998, Standard & Poor's revised its rating of City bonds
upward from BBB+ to A-. Moody's rating of City bonds was revised in
February 1998 to A3 from Baa1. On March 8, 1999, Fitch revised its
rating of City bonds upward to A. Moody's, Standard & Poor's and Fitch
currently rate the City's outstanding general obligation bonds A3, A-
and A, respectively.
New York State and its Authorities
The State ended the 1999-2000 fiscal year in balance on a cash basis,
with a reported closing balance in the General Fund of $1.17 billion,
after reserving $3.97 billion in the tax refund reserve account.
The State adopted the debt service portion of the State budget for the
2000- 01 fiscal year on March 31, 2000. The remainder of the budget
for the State's 2000-01 fiscal year was adopted by the State
Legislature on May 5, 2000, 35 days after the statutory deadline of
April 1, 2000. The adopted budget projects total General Fund spending
of $38.9 billion, an increase of 4.7 percent. The State's adopted
budget assumes continued growth could adversely affect these
projections. There can be no assurance that actual results will not
differ materially and adversely from the projections set forth in the
State's adopted budget projections. The State expects to produce
revised financial plans and its Annual Information Statement in the
near future which will reflect the adopted budget and other changes to
its financial plan projections.
The State Financial Plan accompanying the Governor's 2000-01 Executive
Budget contained projections of potential imbalances in the 2001-02
fiscal year of $1.23 billion and in the 2002-03 fiscal year of $2.65
billion, assuming implementation of the 2000-01 Executive Budget
recommendations and application of tax reduction reserves used to
offset costs in each of the 2001-02 and 2002- 03 fiscal years,
respectively. Preliminary analysis of the 2001-02 projection after
adoption of the 2000-01 budget indicates that the State will have a
potential imbalance that is higher than the Executive Budget
projection.
Standard & Poor's rates the State's general obligation bonds A+, and
Moody's rates the State's general obligation bonds A2. On November 9,
1999, Standard & Poor's revised its rating on the State's general
obligation bonds from A to A+.
Litigation
A number of court actions have been brought involving State finances.
The court actions in which the State is a defendant generally involve
State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the
State of those proceedings and claims are not currently predictable,
adverse determinations in certain of them might have a material
adverse effect upon the State's ability to carry out the State
Financial Plan.
The City has estimated that its potential future liability on account
of outstanding claims against it as of June 30, 1999 amounted to
approximately $3.5 billion.
APPENDIX F
Special Considerations Regarding Pennsylvania
See Special Note Prior to Appendix B
The following highlights only some of the more significant financial
trends and problems affecting Pennsylvania, and is based on
information drawn from official statements and prospectuses relating
to securities offerings of the Commonwealth of Pennsylvania, its
agencies and instrumentalities, as available on the date of this
Statement of Additional Information. The funds have not independently
verified any of the information contained in such official statements
and other publicly available documents, but are not aware of any fact
which would render such information inaccurate.
Overview
Because the funds concentrate their investments in Pennsylvania, there
are risks associated with the funds that would not exist if the funds'
investments were more widely diversified. These risks include the
possible enactment of new legislation in Pennsylvania that could
affect obligations of the state or its political subdivisions,
municipalities or agencies, economic factors that could affect such
obligations, and varying levels of supply and demand for obligations
of the Commonwealth and its political subdivisions, municipalities,
and agencies.
Constitutional and Statutory Revenue Limitations
The Constitution of Pennsylvania requires that all taxes shall be
uniform, upon the same class of subjects, within the territorial
limits of the authority levying the tax, and shall be levied and
collected under the general laws of the Commonwealth of Pennsylvania.
The Constitution of Pennsylvania provides that the General Assembly
may exempt from taxation certain persons and property. For instance,
the General Assembly may establish exemption or special tax treatment
for classes based on age, disability, infirmity, or poverty.
Local taxes (other than Philadelphia) are generally authorized under
the Local Tax Enabling Act. This statute generally authorizes, and
imposes limits on, the ability of political subdivisions to impose
taxes. Pennsylvania's political subdivisions consist of counties,
municipalities, and school districts. The Local Tax Enabling Act does
not apply to counties whose taxing authority is limited for the most
part to real estate and personal property taxes, although the validity
of the personal property is the subject of litigation. Most
Philadelphia taxes (other than real estate and personal property
taxes) are imposed pursuant to the general authority of the Sterling
Act and the Little Sterling Act, applicable to the City and School
District, respectively. Each of these statutes grants broad taxing
powers, but generally prohibits taxing what the Commonwealth taxes.
The Philadelphia business privilege tax is imposed under the authority
of the First Class City Tax Reform Act.
The Pennsylvania Intergovernmental Cooperation Authority Act for
cities of the first class authorizes Philadelphia to enact a
combination of a sales tax, a realty transfer tax or a wage and net
profits tax for the benefit of the Pennsylvania Intergovernmental
Cooperation Authority ("PICA"). The PICA tax on wages and net profits
reduces the amount of wage and net profits taxes imposed under the
Sterling Act (prior to the imposition of the PICA tax), so that the
combined rate of tax remains the same. Other local taxes are specially
enacted or authorized for certain classes of localities, including
Philadelphia and Pittsburgh.
The Pennsylvania General Assembly has enacted legislation which gives
local governments the option of reducing property taxes and
simplifying their local tax system by collecting an earned income or
other type of tax. The General Assembly may, in the future,consider
other local tax reform measures.
Pennsylvania Taxes
The Commonwealth General Fund budgets for fiscal 1996 through 2000
included various tax reduction measures. Tax reductions included in
the enacted fiscal 1999 budget totaled an estimated $380.2 million.
The major components of the tax reductions are (i) a reduction in the
tax rate for the capital stock and franchise tax from 11.99 mils to
10.99 mils, (ii) a repeal of the gross receipts tax on regulated gas
utilities, (iii) a reduction of the minimum capital stock and
franchise tax from $300 to $200, (iv) raising the annual cap on net
operating loss carryovers from $1 million to $2 million, (v)
increasing the weighting of the sales factor of the corporate tax
apportionment formula from 50% to 60%, and (vi) a reduction of various
other miscellaneous items. Most of the major changes are effective
January 1, 1999.
In the fall of 1998, Pennsylvania enacted the Keystone Opportunity
Zone Act, which provides for the creation of 12 "keystone opportunity
zones" designed to spur economic development by foregoing state and
local taxes under certain circumstances. The legislation provides for
relief from, among other things, corporate net income taxes, capital
stock/foreign franchise taxes, personal income taxes and sales and use
taxes (on purchases used and consumed by businesses in the zone).
General Economic Conditions in Pennsylvania
Historically, the key industries in Pennsylvania were manufacturing
and mining, led by steel and coal industries of national importance.
Dependence upon these industries made Pennsylvania vulnerable not only
to cyclical economic fluctuations, but also to pronounced long-term
changes in the nation's economic structure. In recent years, the state
has experienced growth in the services sector, including trade,
medical and health services, education, and financial institutions.
Manufacturing has fallen behind both the services sector and the trade
sector as the largest single source of employment within the
Commonwealth.
The five-year period ending with fiscal 1998 was a time of economic
growth with modest rates of growth at the beginning of the period and
larger increases during the more recent years. Throughout the period,
inflation has remained low, helping to restrain expenditure growth.
Favorable economic conditions have helped total revenues and other
sources rise at an annual average of 4.2% during the five-year period.
The annual growth rate for taxes of 4.3% almost matched the total
revenue rate. License and fee revenues rose at a 7.9% annual rate,
largely because of various motor vehicle fee increases effective for
fiscal 1998. Other revenues, mostly charges for sales and services and
investment income, increased at an average annual rate of 17.6%.
Expenditure and other uses during the fiscal 1994 through fiscal 1998
period rose at a 3.8% average annual rate, led by a 10.2% average
annual increase for protection of person and property costs.
Operations during the 1998 fiscal year increased the unappropriated
balance of Commonwealth revenues by $86.4 million to $488.7 million at
June 30, 1998 (prior to transfers). Higher than estimated revenues,
offset in part by increased reserves for tax refunds, and slightly
lower expenditures than budgeted were responsible for the increase.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $18,123.2 million, $676.1 million (3.9%) above the estimate
made at the time the budget was enacted. Tax revenue in fiscal 1998
grew 4.8% over tax revenues during fiscal 1997. his rate of increase
includes the effect legislated tax reductions that affected receipts
during both fiscal years and therefore understates the actual
underlying rate of growth of tax revenue for fiscal 1998. Non-tax
revenues were $27.5 million (8.6%) over estimate, mostly due to
greater than anticipated interest earnings for the fiscal year.
Reserves established during fiscal 1998 for tax refunds totaled $910
million. This amount is a $370 million increase over tax refund
reserves for fiscal 1997 (representing a 68.5% increase). The fiscal
1998 amount includes a one-time addition intended to fund all fiscal
1998 tax refund liabilities, including that portion to be paid during
fiscal 1999.
Expenditures from all fiscal 1998 appropriations (including pooled
financing expenditures and net of current year lapses) totaled
$17,229.8 million. This represents an increase of 4.5% over fiscal
1997 appropriation expenditures. Lapses of appropriation authority
during the fiscal year totaled $161.8 million including $58.8 million
from fiscal 1998 appropriations. These appropriation lapses were used
to fund $120.5 million of supplemental fiscal 1998 appropriations.
For GAAP purposes, assets increased $705.1 million in fiscal 1998 and
liabilities rose by $111.1 million. These changes contributed to a
$310.3 million rise in the undesignated-unreserved balance for June
30, 1998 to $497.6 million, the highest level achieved since audited
GAAP reporting was instituted in 1984.
The 1999 fiscal year ended with an unappropriated surplus (prior to
the transfer to the Tax Stabilization Reserve Fund) of $702.9 million,
an increase of $214.2 million from June 30, 1998. Transfers to the Tax
Stabilization Reserve Fund total $225.4 million for fiscal year 1999
consisting of $105.4 million representing the statutory 15% of the
fiscal year-end unappropriated surplus and an additional $150 million
from the unappropriated surplus authorized by the General Assembly.
The $447.5 million balance of the unappropriated surplus was carried
over to fiscal year 2000. The higher unappropriated surplus was
generated by tax revenues that were $712.0 million (3.9%) above
estimate (after tax reductions enacted with the 1999 fiscal year
budget that were estimated to be $241.0 million) and $61.0 million of
non-tax revenue (18.4%) above estimate. Higher than anticipated
appropriation lapses also contributed to the higher surplus. A portion
of the higher revenues and appropriation lapses were used for
supplemental fiscal 1999 appropriations totaling $357.8 million.
Including the supplemental appropriations and net of appropriation
lapses, expenditures for fiscal 1999 totaled $18,144.9 million, a 5.9%
increase over expenditures during fiscal 1998.
The General Fund budget for the 2000 fiscal year was approved by the
General Assembly in May 1999. The adopted budget includes estimated
spending from Commonwealth revenues of $19,061.5 million and estimated
revenues (net of estimated tax refunds and enacted tax changes) of
$18,699.9 million. Funds to cover the $361.6 million difference
between estimated revenues and projected spending will be obtained
from a draw down of the projected fiscal 1999 year-end balance. The
level of proposed spending represents an increase of 3.8% over the
spending authorized for fiscal 1999 of $18,367.5 million. Enacted tax
changes effective for fiscal 2000 total a net reduction of $380.2
million for the General Fund.
The estimate of Commonwealth revenue for fiscal 1999 is based on an
economic forecast for real gross domestic product to grow at a 1.4%
rate from the second quarter of 1999 to the second quarter of 2000.
Growth of real gross domestic product is expected to be restrained by
a slowing of the rate of consumer spending to a level consistent with
personal income gains and by smaller gains in business investment in
response to falling capacity utilization and profits. Slowing economic
growth is expected to cause the unemployment rate to rise through the
fiscal year but inflation is expected to remain moderate. Trends for
the Pennsylvania economy are expected to maintain their close
association with national economic trends. Personal income growth is
anticipated to remain slightly below that of the U.S. while the
Pennsylvania unemployment rate is anticipated to be very close to the
national rate.
Commonwealth revenues (excluding the estimated cost of enacted tax
reductions) are projected to increase by 2.8% over fiscal 1999
receipts. Appropriations from Commonwealth funds increased by 3.8%
over fiscal 1999 appropriations. Enacted tax cuts for fiscal 2000
total an estimated $380.2 million to the General Fund. According to a
November 30, 1999 press release from the Pennsylvania Secretary of
Revenue, General Fund revenues for December, 1999 totaled $1.7
billion, which was $23.9 million, or 1.4% more than anticipated.
Fiscal year-to-date General Fund collections total $8.6 billion, which
is $177 million, or 2.1% above estimate.
The following table shows the average annual unemployment rate for
Pennsylvania and the nation for the periods indicated. This
information is drawn from official statements and prospectuses
relating to securities offerings of the state of Pennsylvania, its
agencies, and instrumentalities. No independent verification of the
information contained in such official statements and other publicly
available documents has been made.
Period
Pennsylvania
United States
1989
4.5%
5.3%
1990
5.4%
5.6%
1991
7.0%
6.8%
1992
7.6%
7.5%
1993
7.1%
6.9%
1994
6.2%
6.1%
1995
5.9%
5.6%
1996
5.3%
5.4%
1997
5.2%
4.9%
1998
4.6%
4.5%
1999
4.3%
4.3%
As of August 1999 , the seasonally adjusted unemployment rate for the
Commonwealth was 4.5 %, compared to 4.2 % for the United States.
From time to time, certain Pennsylvania municipalities and political
subdivisions have experienced economic downturns. For example, the
financial condition of the City of Philadelphia in the early 1990s
had impaired its ability to borrow and resulted in its obligations
being downgraded by the major rating services to below investment
grade. However, these obligations have since been upgraded.
The Pennsylvania Intergovernmental Cooperation Authority ("PICA") was
created by Commonwealth legislation in 1991 to assist Philadelphia in
remedying its fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual
findings and recommendations to Philadelphia concerning its budgetary
and fiscal affairs. At this time Philadelphia is operating under a
five-year fiscal plan approved by PICA on June 15, 1999.
No further bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales
expired December 31, 1994. PICA's authority to issue debt for the
purpose of financing a cash flow deficit expired on December 31, 1996.
Its ability to refund existing outstanding debt is unrestricted. PICA
had $1,014.1 million in special revenue bonds outstanding as of June
30, 1999. Neither the taxing power nor the credit of the Commonwealth
is pledged to pay debt service on PICA's bonds.
There is various litigation pending against the Commonwealth, its
officers, and employees. In 1978, the Pennsylvania General assembly
approved a limited waiver of sovereign immunity. Damages for any loss
are limited to $250,000 for each person and $1 million for each
accident. The Supreme Court held that this limitation is
constitutional. Approximately 3,500 suits against the Commonwealth are
pending, some of which, if decided adversely to the Commonwealth,
could have a material adverse impact on governmental operations. All
of the foregoing factors could affect the outstanding obligations of
the Commonwealth and its municipalities and political subdivisions,
including obligations held by the funds. Further, there can be no
assurance that the same factors that adversely affect the economy of
the Commonwealth generally will not also adversely affect the market
value or marketability of obligations issued by local units of
government or local authorities in the Commonwealth, or the ability of
the obligators to pay the principal of or interest on such
obligations. In October 1999, Pennsylvania General Obligation Bonds
were rated Aa3 by Moody's, AA by Fitch and AA by S&P.
APPENDIX G
Special Considerations Relating To Massachusetts Municipal Obligations
See Special Note Prior to Appendix B
Summary
The Commonwealth of Massachusetts and certain of its cities and towns
and public bodies have experienced financial difficulties in the past
that have adversely affected their credit standing. The recurrence of
such financial difficulties could adversely affect the market value of
the instruments held in the funds. The information summarized below
describes some of the more significant factors that could affect the
funds or the ability of the obligors to pay debt service. 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 information contained in such
statements and documents, but the funds are not aware of facts which
would render such information inaccurate.
Fiscal Matters
The Commonwealth's operating fund structure satisfies the requirements
of state finance law and is in accordance with generally accepted
accounting principles ("GAAP"), as defined by the Government
Accounting Standards Board. The General Fund and those special revenue
funds which are appropriated in the annual state budget receive most
of the non-bond and non-federal grant revenues of the Commonwealth.
These funds are referred to herein as the "budgeted operating funds"
of the Commonwealth. They do not include the capital projects funds of
the Commonwealth, into which the proceeds of Commonwealth bonds are
deposited. The three principal budgeted operating funds are the
General Fund, the Highway Fund and the Local Aid Fund. Expenditures
from these three funds generally account for approximately 93% of
total expenditures of the budgeted operating funds.
The Commonwealth's budgeted operating funds for fiscal 1996, 1997,
1998 and 1999 showed an excess (deficiency) of revenues and other
sources over expenditures and other uses of $446 million, $221
million, $798 million and ($80) million and positive fund balances
$1.172 billion, $1.394 billion, $2.192 billion and $2.112 billion,
respectively. Over the same period, budgeted expenditures and other
uses were approximately $16.881 billion for fiscal 1996, $17.949
billion for fiscal 1997, $19.002 billion for fiscal 1998 and $20.245
billion for fiscal 1999.
The Commonwealth's fiscal 2000 budget is based on numerous spending
and revenue estimates, the achievement of which cannot be assured. The
Executive Office of Administration and Finance estimates fiscal 2000
budgeted expenditures and other uses will total approximately $21.38
billion, while budgeted revenues and other sources will total
approximately $21.92 billion.
Limitations on Tax Revenues.
Chapter 62F, which was enacted by the voters in November 1986,
establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and
salaries in the Commonwealth, as reported by the federal government,
during the three calendar years immediately preceding the end of such
fiscal year. Chapter 62F also requires that allowable state tax
revenues be reduced by the aggregate amount received by local
government units from any newly authorized or increased local option
taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the
State Auditor, is to be applied as a credit against the then current
personal income tax liability of all taxpayers in the Commonwealth in
proportion to the personal income tax liability of all taxpayers in
the commonwealth for the immediately preceding tax year. The law does
not exclude principal and interest payments on Commonwealth debt
obligations from the scope of its tax limit. However, the preamble
contained in Chapter 62F provides that "although not specifically
required by anything contained in this chapter, it is assumed that
from allowable state tax revenues as defined herein the Commonwealth
will give priority attention to the funding of state financial
assistance to local governmental units, obligations under the state
governmental pension systems, and payment of principal and interest on
debt and other obligations of the Commonwealth."
Tax revenues in fiscal 1995 through fiscal 1999 were lower than the
limit set by Chapter 62F, and the Executive Office for Administration
and Finance currently estimates that state tax revenues in fiscal 2000
will not reach the limit imposed by either of these statutes. For
fiscal 1999, as calculated by the State Auditor pursuant to Chapter
62F, net state tax revenues were approximately $14.302 billion and
allowable state tax revenues were approximately $15.470 billion.
The fiscal 2000 budget contained several tax law changes, three of
which are anticipated to reduce tax revenues in fiscal 2000. The
budget reduced the income tax rate from 5.95% to 5.75% over three
years, with a 5.85% rate effective January 1, 2000, a 5.80% rate
effective January 1, 2001 and a 5.75% rate effective January 1, 2002.
The Department of Revenue estimates that the budgetary cost of these
provisions will be approximately $65 million in fiscal 2000, $166
million in fiscal 2001, $244 million in fiscal 2002 and $293 million
in fiscal 2003 and annually thereafter.
Local Aid Proposition 2 1/2
In November 1980, voters in the Commonwealth approved a statewide 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 governmental entities,
including county governments. Proposition 2 1/2 is not a provision of
the state constitution and accordingly is subject to amendment or
repeal by the legislature. Proposition 2 1/2, as amended to date,
limits the property taxes that may be levied by any city or town in
any fiscal year to the lesser of (i) 2.5% of the full and fair cash
valuation of the real estate and personal property therein, and (ii)
2.5% over the previous year's levy limit plus any growth in the tax
base from certain new construction and parcel subdivisions.
Proposition 2 1/2 also 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 at its option. The law contains
certain override provisions and, in addition, permits debt service on
specific bonds and notices and expenditures for identified capital
projects to be excluded from the limits by a majority vote at a
general or special election. At the time Proposition 2 1/2 was
enacted, many cities and towns had property tax levels in excess of
the limit and were therefore required to roll back property taxes with
a concurrent loss of revenues. Between fiscal 1981 and fiscal 1999,
the aggregate property tax levy grew from $3.346 billion to $6.753
billion, representing an increase of approximately 101.8%. By
contrast, according to the federal Bureau of Labor Statistics, the
consumer price index for all urban consumers in Boston grew during the
same period by approximately 107.9%.
Many communities have responded to the limitation imposed by
Proposition 2 1/2 through statutorily permitted overrides and
exclusions. There are three types of referenda questions (override of
levy limit, exclusion of debt service, or exclusion of capital
expenditures) which permit communities to exceed the limits of
Proposition 2 1/2. Override activity steadily increased throughout the
1980's before peaking in fiscal 1991 and decreasing thereafter. In
fiscal 1999, 24 communities had successful override referenda which
added $8.7 million to their levy limits. In fiscal 1999, the impact of
successful override referenda going back as far as fiscal 1993 was to
raise the levy limits of 125 communities by $67 million. Although
Proposition 2 1/2 will continue to constrain local property tax
revenues, significant capacity exists for overrides in nearly all
cities and towns.
In addition to overrides, Proposition 2 1/2 allows a community,
through voter approval, to assess taxes in excess of its levy limit
for the payment of certain capital projects (capital outlay
expenditure exclusions) and for the payment of specified debt service
costs (debt exclusions). Capital exclusions were passed by 20
communities in fiscal 1999 and totaled $4.6 million. In fiscal 1999,
the impact of successful debt exclusion votes going back as far as
fiscal 1993, was to raise the levy limits of 250 communities by $945.8
million.
Commonwealth Financial Support for Local Governments.
During the 1980s, the Commonwealth 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
2000, approximately 21.7% of the Commonwealth's budget is estimated to
be allocated to direct Local Aid. Local Aid payments to cities, towns
and regional school districts take the form of both direct and
indirect assistance. Direct Local Aid consists of general revenue
sharing funds and specific program funds sent directly to local
governments and regional school districts as reported on the so-called
"cherry sheet" prepared by the Department of Revenue, excluding
certain pension funds and nonappropriated funds.
As a result of comprehensive education reform legislation enacted
in June 1993, a large portion of general revenue sharing funds are
earmarked for public education and are distributed through a formula
designed to provide more aid to the Commonwealth's poorer communities.
The legislation established a fiscal 1993 state spending base of
approximately $1.288 billion for local education purposes and required
annual increases in state expenditures for such purposes above that
base, subject to appropriation, estimated to be approximately $2.803
billion in fiscal 2000. All of the budgets in fiscal years 1994
through 2000 have fully funded the requirements imposed by this
legislation.
Another component of general revenue sharing, the Lottery and
Additional Assistance programs, provides unrestricted funds for
municipal use. There are also several specific programs funded through
direct Local Aid, such as highway construction, school building
construction, and police education incentives.
In addition to direct Local Aid, the Commonwealth has provided
substantial indirect aid to local governments, including, for example,
payments for Massachusetts Bay Transportation Authority assistance and
debt service, pensions for teachers, housing subsidies and the costs
of courts and district attorneys that formerly had been paid by the
counties. Beginning July 1, 2000, Commonwealth support for the
Massachusetts Bay Transportation Authority will take the form of
dedicated tax revenues.
Initiative Law
A statute adopted by voter initiative petition at the November 1990
statewide election regulates the distribution of Local Aid to cities
and towns. This statute requires that, subject to annual
appropriation, no less than 40% of collections from personal income
taxes, sales and use taxes, corporate excise taxes, and lottery fund
proceeds be distributed to cities and towns. Under the law, the Local
Aid distribution to each city or town would equal no less than 100% of
the total Local Aid received for fiscal 1989. Distributions in excess
of fiscal 1989 levels would be based on new formulas that would
replace the current Local Aid distribution formulas. By its terms, the
new formula would have called for a substantial increase in direct
Local Aid in fiscal 1992 and subsequent years. Nonetheless, Local Aid
payments remain subject to annual appropriation by the legislature,
and appropriations for Local Aid since the enactment of the initiative
law have not met the levels set forth in the initiative law.
Commonwealth Expenditures.
Fiscal 1996 budgeted expenditures were $16.881 billion, an increase of
4.0% from fiscal 1995. Fiscal 1997 budgeted expenditures were $17.949
billion, an increase of 6.3% over fiscal 1996 levels. Fiscal 1998
budgeted expenditures were $19.002 billion, an increase of 5.9% over
fiscal 1997. Fiscal 1999 budgeted expenditures were $20.245 billion,
an increase of 6.5% over fiscal 1998. It is estimated that fiscal 2000
budgeted expenditures will be $21.382 billion, an increase of 5.6%
over fiscal 1999.
Commonwealth expenditures since 1996 largely reflect significant
growth in several programs and services provided by the Commonwealth,
principally direct Local Aid, Medicaid, higher education, and other
program expenditures.
The Commonwealth is responsible for the payment of pension benefits
for state employees and for school teachers throughout the state and
for certain cost-of-living increases payable to local government
retirees. The Commonwealth has adopted a funding schedule under which
it is required to fund future pension liabilities currently and to
amortize the accumulated unfunded liabilities by June 30, 2018. Since
the adoption of this schedule, the amount of the unfunded liability
has been reduced significantly. In fiscal 1999, the pension
expenditure was $990 million. In fiscal 1996, a number of reform
measures affecting pensions were enacted into law. Among the most
notable were a measure consolidating the assets of the state
employees' and teachers' retirement system into a single investment
fund and another that will reform the disability pension system.
Commonwealth Bond and Note Liabilities.
The Commonwealth is authorized to issue three types of debt: general
obligation debt, special obligation debt and federal grant
anticipation notes. General obligation debt is secured by a pledge of
the full faith and credit of the Commonwealth. Special obligation debt
may be secured either with a pledge of receipts credited to the
Highway Fund or with a pledge of receipts credited to the Boston
Convention and Exhibition Center Fund. Federal grant anticipation
notes are secured by a pledge of federal highway construction
reimbursements. In addition, 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. As of January 1, 2000, the
Commonwealth's total bond and note liabilities were $15.365 billion,
consisting of approximately $9.899 billion of general obligation debt,
$586 million of special obligation debt, $922 million of federal grant
anticipation notes, $3.744 billion of Commonwealth supported debt and
$215 million of Commonwealth guaranteed debt. Based on the United
States census resident population estimate for Massachusetts for 1999,
the per capita debt as of June 30, 1999 was $2,470.
Commonwealth Capital Spending
Since fiscal 1992, the Executive Office for Administration and Finance
has maintained a five-year capital spending plan, including an annual
administrative limit on the amount of bond-financed state capital
spending. Actual bond-financed capital expenditures during fiscal
years 1996, 1997, 1998 and 1999 were approximately $908 million, $955
million, $1.0 billion and $1.0 billion, respectively. Total capital
spending for the current five year plan is estimated to be $2.707
billion for fiscal 2000, $2.935 billion for fiscal 2001, $2.034
billion for fiscal 2002, $1.706 billion for fiscal 2003 and $1.577
billion for fiscal 2004. Capital spending for fiscal years 2000
through 2004 to be financed from debt issued by the Commonwealth is
forecast at $5 billion, which includes both general obligation bonds
and state gas tax bonds, and which is significantly below
legislatively authorized capital spending levels. The five-year
capital plan contemplates that the projected level of capital spending
will leverage approximately $2.301 billion of federal highway funding.
Due to the size and complexity of the Commonwealth's capital program,
and other factors, the timing and the amount of actual expenditures
and debt issuances over the period will likely vary somewhat from the
annual spending amounts contained in the five-year capital plan.
The largest single component of the Commonwealth's capital program
currently is the Central Artery/Ted Williams Tunnel project, a major
construction project that is part of the completion of the federal
interstate highway system. The project involves the depression of a
portion of Interstate 93 in downtown Boston (the Central Artery),
which is now an elevated highway, and the construction of a new tunnel
under Boston harbor (the Ted Williams Tunnel) to link the Boston
terminus of the Massachusetts turnpike (Interstate 90) to Logan
International Airport and points north. The magnitude of the Central
Artery/Ted Williams Tunnel project has resulted in the realignment of
certain transportation assets in the Commonwealth and the development
of additional financing mechanisms to support its completion,
including payments from the Massachusetts Turnpike Authority and the
Massachusetts Port Authority and state borrowings in anticipation of
future federal highway reimbursements. The completed project will be
owned and operated by the Massachusetts Turnpike authority as part of
the Metropolitan Highway System which was established in conjunction
with the project.
On February 1, 2000, the Massachusetts Turnpike Authority revised
upward by $1.398 billion its estimate of the total expenditures
expected to be required to complete the project. The Turnpike
Authority characterized this revision as preliminary and subject to
further review but expressed confidence that the estimate of total
expenditures should not be expected to increase further, so long as
unanticipated funding delays or other events beyond the scope of the
review do not occur. Cash outlays from fiscal 2000 through the
completion of the project are now projected to be approximately $5.388
billion rather than the previous project of approximately $3.990
billion. According to the revised estimate, by the time of the
project's completion, the project is expected to have required
expenditures totaling approximately $13.1 billion, excluding insurance
reimbursements and proceeds from real estate dispositions related to
the project that will be received after project completion. These
reimbursements are anticipated to be approximately $900 million,
resulting in a net project cost of approximately $12.2 billion.
As a consequence of the revised project cost estimate, the project
officials are developing a revised project financing plan to identify
the means of financing the $1.4 billion in current estimated
additional project costs. The Turnpike Authority has indicated that it
intends to use the revenue raising capacity and assets of the Turnpike
Authority to help meet the increased costs, and that it has under
consideration a variety of options and measures, including without
limitation the acceleration of planned toll increases, additional toll
increases, sale and/or lease of air rights and other assets,
development of real estate parcels that become available as a result
of the depression of the Central Artery and ancillary revenues
generated by telecommunication and fiber optic contracts. The Turnpike
Authority is in the process of reviewing these and other options to
fund the project's additional needs and expects to make
recommendations promptly over the next several months. The
Commonwealth's revised funding plan may require or include other
sources of revenue, on either a temporary or permanent basis,
including additional Commonwealth funds. The use of such other
financing sources may require legislative approval and certain
executive branch action.
Other Factors
Many factors affect the financial condition of the Commonwealth,
including many social environmental, and economic conditions, which
are beyond the control of the Commonwealth. As with most urban states,
the continuation of many of the Commonwealth's programs, particularly
its human service programs, is in significant part dependent upon
continuing federal reimbursements which have been declining.
APPENDIX H
Special Considerations Relating to Municipal Obligations of the U.S.
Virgin Islands and of Guam
U.S. Virgin Islands
The United States Virgin Islands ("USVI") is heavily reliant on the
tourism industry, with roughly 43% of non-agricultural employment in
tourist-related trade and services. The tourism industry is
economically sensitive and would likely be affected adversely by a
recession in either the United States or Europe.
An important component of the USVI revenue base is the federal excise
tax on rum exports. Tax revenues rebated by the federal government to
the USVI provide the primary security of many outstanding USVI bonds.
Since more than 90% of the rum distilled in the USVI is distilled at
one plant, any interruption in its operations (as occurred after
Hurricane Hugo in 1989) would adversely affect these revenues. The
last major hurricane to impact the USVI was Hurricane Marilyn on
September 15, 1995. Consequently, there can be no assurance that rum
exports to the United States and the rebate of tax revenues to the
USVI will continue at their present levels. The preferential tariff
treatment the USVI rum industry currently enjoys could be reduced
under NAFTA. Increased competition from Mexican rum producers could
reduce USVI rum imported to the U.S., decreasing excise tax revenues
generated. The USVI is periodically hit by hurricanes. Several
hurricanes have caused extensive damage, which has had a negative
impact on revenue collections. There is currently no rated, unenhanced
Virgin Islands debt outstanding (although there is unrated debt
outstanding).
Guam
The U.S. territory of Guam derives a substantial portion of its
economic base from Japanese tourism. With a reduced U.S. military
presence on the island, Guam has relied more heavily on tourism in the
past few years. During its 1997 fiscal year, the government was able
to make noticeable progress on its traditional budgetary problems
operating with a balanced budget for that fiscal year. However, during
1998, the Japanese recession combined with the impact of typhoon Paka
resulted in a budget deficit of $21 million. With hotels alone
accounting for 8.5% of Guam's employment and Japanese tourists
comprising 86% of total visitor arrivals, the Japanese recession and
depreciation of the yen versus the dollar in 1999 have had a negative
impact on the island's economy. Based on these factors, S&P downgraded
Guam's rating to BBB- from BBB with a negative outlook on May 26,
1999. There does seem to be some recent improvement in the Japanese
economy. However, Guam has not realized any economic benefit as
visitor arrivals are 0.8% below 1998 levels for the second quarter
ended June 30, 1999, driving General Fund revenues down 3.1%.
EXHIBIT I
Special Considerations Relating to Puerto Rico Municipal Obligation
See Special Note Prior to Appendix B
Fiscal Matters
The fiscal year of the Government of Puerto Rico begins each July 1.
The Governor is constitutionally required to submit to the Legislature
an annual balanced budget of capital improvements and operating
expenses of the central government for the ensuing fiscal year. The
annual budget is prepared by the Office of Management and Budget
("OMB"), working with the Planning Board, the Department of the
Treasury, and other government offices and agencies. Section 7 of
Article VI of the Constitution provides that "The appropriations made
for any fiscal year shall not exceed the total revenues, including
available surplus, estimated for said fiscal year unless the
imposition of taxes sufficient to cover said appropriations is
provided by law."
The annual budget, which is developed utilizing elements of program
budgeting and zero-base budgeting, includes an estimate of revenues
and other resources for the ensuing fiscal year under: (i) laws
existing at the time the budget is submitted; and (ii) legislative
measures proposed by the Governor and submitted with the proposed
budget, as well as the Governor's recommendations as to appropriations
that in his judgment are necessary, convenient, and in conformity with
the four - year investment plan prepared by the Planning Board.
A Budgetary Fund was created by Act No. 147 of June 18, 1980, as
amended (the "Budgetary Fund Act"), to cover the appropriations
approved in any fiscal year in which the revenues available for such
fiscal year are insufficient, honor the public debt, and provide for
unforeseen circumstances in the provision of public services. The
Budgetary Fund Act was amended in 1994 to require that an annual
legislative appropriation equal to one third of one percent (.33%) of
the total budgeted appropriations for each fiscal year be deposited in
the Budgetary Fund. In 1997, the Budgetary Fund Act was further
amended to increase the annual legislative appropriation required to
be deposited in the Budgetary Fund to one percent (1%) of the total
revenues of the preceding fiscal year, beginning in fiscal year 2000.
In addition, other income (not classified as revenues) that is not
assigned by law to a specific purpose is also required to be deposited
in the Budgetary Fund. The maximum balance of the Budgetary Fund may
not exceed six percent (6%) of the total appropriations included in
the budget for the preceding fiscal year.
In Puerto Rico, the central government has many functions which in the
fifty states are the responsibility of local government, such as
providing public education and police and fire protection. The central
government also makes large annual grants to the University of Puerto
Rico and to the municipalities. Debt service on Sugar Corporation
notes paid by the Government of Puerto Rico is included in current
expenses for economic development, and debt service on Urban Renewal
and Housing Corporation bonds and notes and on Housing Bank and
Finance Agency mortgage subsidy bonds paid by the Government of Puerto
Rico is included in current expenses for housing.
Approximately 25.2% of the General Fund is committed, including debt
service on direct debt of the Commonwealth and on the debt of the
Sugar Corporation, municipal subsidies, grants to the University of
Puerto Rico, contributions to Aqueduct and Sewer Authority, and rental
payments to Public Building Authority, among others.
In the fiscal 1999 budget revenues and other resources of all
budgetary funds total $10,308,078,000 excluding balances from the
previous fiscal year and general obligation bonds authorized. he
estimated net increase in General Fund revenues in fiscal 1999 are
accounted for by increases in personal income taxes (up $258,354,000),
retained non-resident income tax (up $176,921,000), general excise tax
of 5% (up $60,259,000), motor vehicles and accessories (up
$61,569,000), federal excise taxes on off-shore shipments (up
$33,033,000), special excise tax on certain petroleum products (up
$20,282,000), corporation income taxes (up $17,347,000), registration
and document certification fees (up $13,433,000), alcoholic beverages
(up $5,347,000), licenses (up $4,681,000), electronic lottery (up
$4,965,000) and decreases in property taxes (down $3,460,000), customs
(down $11,864,000) and tollgate taxes (down $56,420,000).
Current expenses and capital improvements of all budgetary funds total
$10,687,869,000, an increase of $951,255,000 from fiscal 1998. The
major changes in General Fund expenditures by program in fiscal 1999
are: public safety and protection (up $187,444,000), education (up
$165,661,000), health (up $160,256,000), general government (up
$77,714,000), other debts (up $69,721,000), welfare (up $24, 182,000),
economic development (up $15,865,000), special pension contributions
(up $6,115,000), and decreases in transportation and communications
(down $83,000), housing (down $620,000), debt service (down
$13,849,000), and contributions to municipalities (down $37,969,000).
The general obligation bond authorization for the fiscal 1999 budget
was $475,000,000.
In the fiscal 2000 budget proposal revenues and other resources of all
budgetary funds total $10,426,475,000 excluding balances from the
previous fiscal year and general obligation bonds authorized. The
estimated net increase in General Fund revenues in fiscal 2000 are
accounted for by increases in personal income taxes (up $199,000,000),
corporation income taxes (up $102,000,000), general excise tax of 5%
(up $65,000,000), income tax withheld from non-residents (up
$44,000,000), motor vehicles and accessories (up $22,000,000),
alcoholic beverages (up $13,000,000), registration and document
certification fees (up $10,000,000), and decreases in property taxes
(down $2,000,000), special excise tax on certain petroleum products
(down $3,000,000), cigarettes (down $6,000,000), federal excise taxes
on off-shore shipments (down $24,000,000), and tollgate taxes (down
$14,000,000).
Current expenses and capital improvements of all budgetary funds total
$11,012,166,000, an increase of $324,297,000 from fiscal 1999. The
major changes in General Fund expenditures by program in fiscal 2000
are: general government (up $157,265,000), health (up $83,310,000),
debt service (up $94,550,000), contributions to municipalities (up
$66,296,000), education (up $75,035,000), transportation and
communications (up $13,636,000), special pension contributions (up
$3,792,000), housing (down $4,645,000), economic development (down
$30,201,000), public safety and protection (down $26,999,000), and
other debts service (down $106,488,000).
The general obligation bond authorization for the fiscal 2000 budget
was $475,000,000.
The Government of Puerto Rico is required to contribute directly to
three retirement systems for public employees. The Government of
Puerto Rico is responsible for approximately 66% of total employer
contributions to Employees Retirement System and 100% and 99% of total
employer contributions to the Judiciary and Teachers Retirement
Systems, respectively. As of July 1, 1998 the total pension benefit
obligation for the Employees Retirement System and the Judiciary
Retirement System was $7,638,000,000 and $95,5000,000, respectively,
and the unfunded pension benefit obligation for the same period was
$5,963,000,000 and $28,400,000, respectively. As of June 30, 1998, the
accrued pension liability of the Teachers Retirement System was
$3,154,678,299, the value of assets amounted to $2,135,436,000, and
the resulting unfunded accrued liability was $1,019,242,299, an
increase of $48,437,260 from the prior valuation made as of June 30,
1997.
On February 1, 1990, the Legislature of Puerto Rico enacted Act No. 1
amending the organic act of the Employees Retirement System to reduce
the future pension liabilities of the Employees Retirement System.
Also, Act No. 305 of September 24, 1999, further amends the organic
act of the Employees Retirement System to change it, prospectively,
from a defined benefit system to a defined contribution system. Based
on actuarial studies conducted by the actuary of the Employees
Retirement System, it is expected that the implementation of the
defined contribution system will allow the Government of Puerto Rico
to reduce the current actuarial deficit of the Employees Retirement
System. Also, the law approving the sale of a controlling interest in
PRTC to a consortium led by GTE International Telecommunications
Incorporated provides that any future proceeds received by the
Government from the sale of its remaining stock ownership in PRTC will
be transferred to the Employees Retirement System to reduce its
accumulated unfunded pension benefit obligation. It is recognized that
it will be necessary to further strengthen the finances of the
Teachers Retirement System in order to assure that combined
contributions and investment income continue to exceed benefit
payments, avoiding the possible future drawdown of assets.
General Economic Conditions in Puerto Rico
The economy of Puerto Rico is fully integrated with that of the United
States. In fiscal 1998, trade with the United States accounted for
approximately 90% of Puerto Rico's exports and approximately 61% of
its imports. In this regard, in fiscal 1998 Puerto Rico experienced a
$8.5 billion positive adjusted merchandise trade balance.
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1998, aggregate
personal income was $33.7 billion ($30.8 billion in 1992 prices) and
personal per capita income was $8,817 ($8,063 in 1992 prices). Gross
product in fiscal 1995 was $28.4 billion ($25.9 billion in 1992
prices) and gross product in fiscal 1999 was $38.1 billion ($29.7
billion in 1992 prices). This represents an increase in gross product
of 34% from fiscal 1995 to 1999 (14.5% in 1992 prices).
Puerto Rico's economic expansion, which has lasted over ten years,
continued throughout the five year period from fiscal 1995 through
fiscal 1999. 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, low oil prices and the
relatively low cost of borrowing funds during the period.
Average employment increased from 1,051,000 in fiscal 1995, to
1,147,000 in fiscal 1999. Unemployment, although at relatively low
historical levels, remains above the U.S. average. Average
unemployment decreased from 13.8% in fiscal 1995, to 12.5% in fiscal
1999.
Manufacturing is the largest sector in the economy, accounting for
$23.0 billion or 42.8% of gross domestic product in fiscal 1998. The
manufacturing sector employed 141,068 workers as of March 1999.
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. While total employment in the manufacturing sector decreased
by 12,205 from March 1997 to March 1999, other indicators suggest that
manufacturing production did not decrease. Average weekly hours
worked increased 5.2%, industrial energy consumption increased 0.7%
and exports increased 45.7% from fiscal 1997 to fiscal 1999. Most of
the decreases in employment have been concentrated in the labor
intensive industries, particularly apparel, textile and tuna
manufacturing. The services 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 it is the sector that employs the greatest
number of people. In fiscal 1998, the service sector generated $19.6
billion in gross domestic product or 36.5% of the total. Employment
in this sector grew from 478,079 in fiscal 1994 to 572,765 in fiscal
1998, a cumulative increase of 19.8%. This increase was greater than
the 12.5% cumulative growth in employment over the same period. The
Government sector of the Commonwealth plays an important role in the
economy of the island. In fiscal year 1998, the Government accounted
for $5.2 billion of Puerto Rico's gross domestic product, or 9.8% of
the total, and provided 21.5% of the total employment. The
construction industry has experienced real growth since fiscal 1987.
In fiscal 1999, investment in construction rose to an unprecedented
$6.6 billion, an increase of 23.9% as compared to $5.4 billion for
fiscal 1998. Tourism also contributes significantly to the island
economy, accounting for 6.4% of the island's gross domestic product in
fiscal 1998.
New Economic Model
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 11,095 at the end of fiscal
1999 and to a projected 12,650 by the end of fiscal 2000.
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 Aqueducts and Sewer Authority executed a
construction and operating agreement with a private consortium for the
struction, 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; (iii) the Electric Power Authority executed
power purchase contracts with private power producers under which two
cogeneration plants (with a total capacity of approximately 874
megawatts), using fuels other than oil, will be constructed; (iv) the
Corrections Administration entered into operating agreements with two
private companies for the operation of three new correctional
facilities; (v) the Government entered into a definitive agreement to
sell certain assets of a pineapple juice processing business and sold
certain mango growing operations; (vi) the Government is in the
process of transferring to local sugar cane growers certain sugar
processing facilities; (vii) the Government sold three hotel
properties and is currently negotiating the sale of a complex
consisting of two hotels and a convention center; and (viii) the
Government sold a controlling interest in the Puerto Rico Telephone
Company, a subsidiary of the Telephone Authority, to a consortium led
by GTE International Telecommunications Incorporated.
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 77 municipalities out of a total of
78 on the island. It is expected that the last municipality will be
added in July 2000. 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 August 1, 1999, over 1.7 million persons were participating in the
program at an estimated annual cost to Puerto Rico for fiscal 2000 of
approximately $994 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 has sold forty-four
health facilities to private companies and is currently in the process
of closing the sale of fourteen additional health facilities to such
companies.
Tax Incentives
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 incentive
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 dividend 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 are 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 Bill 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 establish 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.
Section 30a
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 were operating
in Puerto Rico on October 13, 1995, and had elected 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, fiscal 1999 and fiscal
2000 budgets submitted by President Clinton to Congress 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. This proposal was not included in the
1998 or 1999 budgets approved by Congress. 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.
