Registration No. 33-11417
811-4994
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _X_
Pre-Effective Amendment No. ___
Post-Effective Amendment No. 17 _X_
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 _X_
Amendment No. 18 _X_
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
(Exact name of Registrant as specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
(212) 720-9218
Registrant's Telephone Number, including area code
Christina T. Sydor
Secretary
Smith Barney Massachusetts Municipals Fund
388 Greenwich Street,
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment becomes effective.
It is proposed that this filing becomes effective:
____ immediately upon filing pursuant to Rule 485(b)
_X__ on March 28, 1997, pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of
1940, as amended. Registrant's Rule 24f-2 Notice for the fiscal year ended
November 30, 1996 was filed on January 28, 1997 as Accession #91155-97-
000042.
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A.
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Condensed Financial Information
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and Management
Policies; Massachusetts Municipal
Securities; Additional Information
5. Management of the Fund
Management of the Fund;
Distributor; Additional Information
6. Capital Stock and Other
Securities
Investment Objective and Management
Policies; Dividends, Distributions
and Taxes; Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Redemption of Shares,
Exchange Privilege; Minimum Account
Size; Distributor; Additional
Information
8. Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Legal Proceedings
Not Applicable
Part B
Item No.
Statement of Additional Information
Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information
Distributor; Additional Information
13. Investment Objective and
Policies
Investment Objective and Management
Policies
14. Management of the Fund
Management of the Fund; Distributor
15. Control Persons and Principal
Holders of
Securities
Management of the Fund
16. Investment Advisory and other
Services
Management of the Fund; Distributor
17. Brokerage Allocation
Investment Objective and Management
Policies
18. Capital Stock and Other
Securities
Investment Objectives and
Management Policies, Purchase of
Shares; Redemption of Shares; Taxes
19. Purchase, Redemption and
Pricing of
Securities being Offered
Purchase of Shares; Redemption of
Shares; Distributor; Valuation of
Shares; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Massachusetts
Municipals
Fund
March 28, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
MARCH 28, 1997
Smith Barney Massachusetts Municipals Fund 388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Massachusetts Municipals Fund (the "Fund") is a non-diversified
municipal bond fund that seeks to provide Massachusetts investors with as high
a level of dividend income exempt from Federal income taxes and Massachusetts
state personal income taxes as is consistent with prudent investment manage-
ment and the preservation of capital.
This Prospectus concisely sets forth certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated March 28, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing a Smith Barney Financial Consultant. The Statement of Additional Informa-
tion has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- -------------------------------------------------
MASSACHUSETTS MUNICIPAL SECURITIES 19
- -------------------------------------------------
VALUATION OF SHARES 21
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 21
- -------------------------------------------------
PURCHASE OF SHARES 23
- -------------------------------------------------
EXCHANGE PRIVILEGE 30
- -------------------------------------------------
REDEMPTION OF SHARES 33
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 35
- -------------------------------------------------
PERFORMANCE 36
- -------------------------------------------------
MANAGEMENT OF THE FUND 37
- -------------------------------------------------
DISTRIBUTOR 38
- -------------------------------------------------
ADDITIONAL INFORMATION 39
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or representa-
tions must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securi-
ties offered hereby in any jurisdiction to any person to whom it is unlawful
to make such an offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, non-diversified management
investment company that seeks to provide Massachusetts investors with as high
a level of dividend income exempt from Federal and Massachusetts personal
income taxes as is consistent with prudent investment management and the pres-
ervation of capital. Its investments consist primarily of intermediate- and
long-term investment grade municipal securities issued by the Commonwealth of
Massachusetts and certain other municipal issuers, political subdivisions,
agencies and public authorities that pay interest which is exempt from Massa-
chusetts personal income taxes ("Massachusetts Municipal Securities"). Inter-
mediate- and long-term municipal securities have remaining maturities at the
time of purchase from three to in excess of twenty years. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made within 12 months
of purchase. See "Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and by 1.00% each year thereafter to zero. This CDSC may
be waived for certain redemptions. Class B shares are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.50% of the average
daily net assets of this Class. The Class B shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A
shares.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of this Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. This CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when combined
with current holdings of the Fund equal or exceed $500,000 in the aggregate,
should be made in Class A shares at net asset value with no sales charge, and
will be subject to a CDSC of 1.00% on redemptions made within 12 months of pur-
chase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates,
shareholders may qualify for reduced sales charges and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of these Classes. Because the Fund's future return can-
not be predicted, however, there can be no assurance that this would be the
case.
Finally, investors should consider the effect of the CDSC period and any con-
version rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Reduced or No Initial Sales Charge. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases,
which when combined with current holdings of Class A shares offered with a
sales charge equal or exceed $500,000 in the aggregate, will be made at net
asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares held in funds sponsored by Smith Barney Inc. ("Smith Barney")
listed under "Exchange Privilege." Other Class A share purchases may also be
eligible for a reduced initial sales charge. See "Purchases of Shares."
Smith Barney Financial Consultants may receive different compensation for sell-
ing different Classes of shares. See "Purchase of Shares" and "Management of
the Fund" for a complete description of the sales charges and service and dis-
tribution fees for each Class of shares and "Valuation of Shares," "Dividends,
Distributions and Taxes" and "Exchange Privilege" for other differences between
the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
There is no minimum investment requirement in Class A shares for unitholders
who invest distributions from a unit investment trust ("UIT") sponsored by
Smith Barney. The minimum investment requirements for purchases of fund shares
through the Systematic Investment Plan are described below. See "Purchase of
Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment require-
ment for Class A, Class B and Class C shares, and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the Sys-
tematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. See "Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid on
the last Friday of each calendar month to shareholders of record as of the pre-
ceding Tuesday. Distributions of net realized long- and short-term capital
gains, if any, are declared and paid annually after the end of the fiscal year
in which they were earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. Assets of the Fund may be invested in
the municipal securities of both Massachusetts and non-Massachusetts municipal
issuers. Dividends derived from interest on obligations of non-Massachusetts
munici- pal issuers, as a general rule, will be exempt from Federal income tax-
es, but may be subject to Massachusetts state personal income taxes. Dividends
derived from certain municipal securities (including Massachusetts Municipal
Securities), however, may be a specific tax preference item for Federal alter-
native minimum tax purposes. The Fund may invest without limit in securities
subject to the Federal alternative minimum tax. See "Investment Objective and
Management Policies" and "Dividends, Distributions and Taxes."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The Fund is more susceptible to factors adversely affecting issuers of Massa-
chusetts Municipal Securities than is a municipal bond fund that does not
emphasize these issuers. See "Massachusetts Municipal Securities" in the Pro-
spectus and "Special Considerations Relating to Massachusetts Municipal Secu-
rities" in the Statement of Additional Information for further details about
the risks of investing in Massachusetts obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that
it may invest in the obligations of a single issuer. The Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
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. See "Investment Objective and Management Policies."
The Fund generally will invest at least 75% of its assets in securities rated
investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by Stan-
dard & Poor's Corporation ("S&P"), which are often referred to as "junk
bonds," or in unrated obligations of comparable quality. Securities in the
fourth highest rating category, though considered to be investment grade, have
speculative characteristics. Securities rated as low as D are extremely specu-
lative and are in actual default of interest and/or principal payments.
There are several risks in connection with the use of certain portfolio strat-
egies by the Fund, such as the use of when-issued securities, municipal bond
index and interest rate futures contracts and put and call options thereon as
hedging devices, and municipal leases. See "Investment Objective and Manage-
ment Policies--Certain Portfolio Strategies."
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and, unless otherwise noted, the Fund's operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY
MASSACHUSETTS MUNICIPALS FUND CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None* 4.50% 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (net of fee waivers) 0.30% 0.30% 0.30% 0.30%
12b-1 fees** 0.15 0.65 0.70 --
Other expenses*** 0.35 0.36 0.34 0.35
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.80% 1.31% 1.34% 0.65%
- ------------------------------------------------------------------------------
</TABLE>
*Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months.
**Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
***For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares had been sold as of
November 30, 1996.
Class A shares of the Fund purchased through the Smith Barney AssetOne Program
will be subject to an annual asset-based fee, payable quarterly, in lieu of the
initial sales charge. The fee will vary to a maximum of 1.50%, depending on the
amount of assets held through the Program. For more information, please contact
a Smith Barney Financial Consultant.
The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.15% of the value of average daily net
assets of Class A shares. Smith Barney also receives, with respect to Class B
shares, an annual 12b-1 fee of 0.65% of the value of average daily net assets
of that Class, consisting of a 0.50% distribution fee and a 0.15% service fee.
For Class C shares, Smith Barney receives
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
an annual 12b-1 fee of 0.70% of the value of average daily net assets of that
Class, consisting of a 0.55% distribution fee and a 0.15% service fee. "Other
expenses" in the above table include fees for shareholder services, custodial
fees, legal and accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares," "Redemption of Shares"
and "Management of the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY
MASSACHUSETTS MUNICIPALS FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A..................................... $48 $65 $83 $135
Class B..................................... 58 72 82 144
Class C..................................... 24 42 73 161
Class Y..................................... 7 21 36 81
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $48 $65 $83 $135
Class B..................................... 13 42 72 144
Class C..................................... 14 42 73 161
Class Y..................................... 7 21 36 81
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</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two-year period ended November 30, 1996 has
been audited by KPMG Peat Marwick llp, independent auditors, whose report
thereon appears in the Fund's Annual Report to Shareholders. The information
for the fiscal years ended November 30, 1988 through November 30, 1994 has
been audited by other auditors. The information set out below should be read
in conjunction with the financial statements and related notes that also
appear in the Fund's Annual Report, which is incorporated by reference into
the Statement of Additional Information. No information is presented for Class
Y shares since no Class Y shares were outstanding for the periods shown.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
<TABLE>
<CAPTION>
CLASS A SHARES 1996 1995 1994 1993(1) 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $12.96 $11.35 $13.26 $12.63 $12.28
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2) 0.68 0.69 0.70 0.72 0.77
Net realized and unrealized
gains (loss) 0.02 1.61 (1.85) 0.72 0.43
- ------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.70 2.30 (1.15) 1.44 1.20
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.67) (0.68) (0.69) (0.73) (0.77)
Overdistribution of net
investment income -- (0.01) (0.01) (0.01) --
Net realized gains -- -- (0.06) (0.07) (0.04)
Capital -- -- -- -- (0.04)
- ------------------------------------------------------------------------------
Total Distributions (0.67) (0.69) (0.76) (0.81) (0.85)
- ------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.99 $12.96 $11.35 $13.26 $12.63
- ------------------------------------------------------------------------------
TOTAL RETURN 5.65% 20.73% (9.07)% 11.74% 10.06%
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NET ASSETS, END OF YEAR (000'S) $30,109 $29,159 $27,634 $32,592 $27,354
- ------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.80% 0.83% 0.81% 0.82% 0.71%
Net investment income 5.32 5.42 5.55 5.49 6.12
- ------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 10% 37% 10% 73%
- ------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for this year
since use of the undistributed investment income method does not accord
with results of operations.
(2) The investment adviser waived all or part of its fees for the eight years
ended November 30, 1996 and the period from December 21, 1987 through
November 30, 1988. If such fees were not waived, the per share decrease in
net investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
----------------------------- -----------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.01 $0.03 $0.04 $0.05 $0.08 0.91% 1.07% 1.09% 1.18% 1.32%
</TABLE>
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
<TABLE>
<CAPTION>
CLASS A SHARES 1991 1990 1989 1988*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.81 $12.11 $11.88 $11.40
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.84 0.84 0.88 0.82
Net realized and unrealized gain (loss) 0.48 (0.27) 0.21 0.54
- -------------------------------------------------------------------------------
Total Income From Operations 1.32 0.57 1.09 1.36
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.84) (0.85) (0.86) (0.82)
Net realized gains -- (0.02) -- (0.06)
Capital (0.01) -- -- --
- -------------------------------------------------------------------------------
Total Distributions (0.85) (0.87) (0.86) (0.88)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.28 $11.81 $12.11 $11.88
- -------------------------------------------------------------------------------
TOTAL RETURN 11.57% 4.93% 9.43% 12.25%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S) $19,621 $18,036 $20,375 $14,548
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.66% 0.74% 0.58% 0.67%+
Net investment income/(loss) 6.89% 7.00% 7.24% 7.00%+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 87% 51% 28% 128%
- -------------------------------------------------------------------------------
</TABLE>
(2) The investment adviser waived all or part of its fees for the eight years
ended November 30, 1996 and the period from December 21, 1987 through
November 30, 1988. If such fees had not been waived, the per share changes
in net investment income and the expense ratios would have been as fol-
lows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
--------------------------- -----------------------
1991 1990 1989 1988 1991 1990 1989 1988
------ ------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.07 $0.04 $0.14 $0.16 1.28% 1.09% 1.92% 2.00%
</TABLE>
* The Fund commenced operations on December 21, 1987. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
<TABLE>
<CAPTION>
CLASS B SHARES 1996 1995 1994 1993 1992(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $12.96 $11.35 $13.26 $12.63 $12.52
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2) 0.61 0.63 0.63 0.66 0.06
Net realized and unrealized
gains (loss) 0.03 1.61 (1.84) 0.72 0.10
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.64 2.24 (1.21) 1.38 0.16
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.61) (0.62) (0.63) (0.67) (0.05)
Overdistribution of net
investment income -- (0.01) (0.01) (0.01) --
Net realized gains -- -- (0.06) (0.07) --
- -------------------------------------------------------------------------------
Total Distributions (0.61) (0.63) (0.70) (0.75) (0.05)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.99 $12.96 $11.35 $13.26 $12.63
- -------------------------------------------------------------------------------
TOTAL RETURN 5.14% 20.15% (9.50)% 11.09% 1.29%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000'S) $28,874 $28,726 $23,279 $22,317 $2,938
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 1.31% 1.35% 1.32% 1.31% 1.34%+
Net investment income 4.81 4.94 5.04 4.99 5.49+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 10% 37% 10% 73%
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to November 30, 1992.
(2) The investment adviser has waived all or part of its fees for the four
years ended November 30, 1996 and the period ended November 30, 1992. If
such fees had not been waived, the per share changes in net investment
income and expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
----------------------------- ------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $0.01 $0.04 $0.03 $0.05 $0.01 1.42% 1.59% 1.60% 1.68% 1.94%+
</TABLE>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
<TABLE>
<CAPTION>
CLASS C SHARES 1996 1995 1994(1)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.95 $11.35 $11.34
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.60 0.63 0.05
Net realized and unrealized gain 0.03 1.60 --
- ---------------------------------------------------------------------
Total Income From Operations 0.63 2.23 0.05
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.60) (0.63) (0.04)
Overdistribution of net investment income -- (0.00)* (0.00)*
- ---------------------------------------------------------------------
Total Distributions (0.60) (0.63) (0.04)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.98 $12.95 $11.35
- ---------------------------------------------------------------------
TOTAL RETURN 5.09% 20.04% 0.40%++
- ---------------------------------------------------------------------
NET ASSETS, END OF YEAR ($000'S) $179 $146 $75
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 1.34% 1.35% 1.36%+
Net investment income 4.77 4.65 5.00+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 23% 10% 37%
- ---------------------------------------------------------------------
</TABLE>
(1)For the period from November 10, 1994 (inception date) to November 30, 1994.
(2) The investment adviser has waived all or part of its fees for the two-years
ended November 30, 1996 and the period ended November 30, 1994. If such
fees had not been waived, the per share changes in net investment income
and the ratios of expenses to average net assets would have been as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
------------------------ ---------------------
<CAPTION>
1996 1995 1994 1996 1995 1994
------------------------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class C $0.01 $0.04 $0.00* 1.44% 1.58% 1.63%+
</TABLE>
* Amount represents less than $0.01.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to provide Massachusetts investors with
as high a level of dividend income exempt from Federal and Massachusetts per-
sonal income taxes as is consistent with prudent investment management and the
preservation of capital. This investment objective may not be changed without
the approval of the holders of a majority of the Fund's outstanding shares.
There can be no assurance that the Fund's investment objective will be
achieved.
The Fund operates subject to an investment policy providing that, under normal
market conditions, the Fund will invest at least 80% of its net assets in Mas-
sachusetts Municipal Securities. The Fund may invest up to 20% of its net
assets in municipal securities of non-Massachusetts municipal issuers, the
interest on which is excluded from gross income for Federal income tax purposes
(not including the possible applicability of a Federal alternative minimum
tax), but which is subject to Massachusetts personal income taxes. When SBMFM
believes that market conditions warrant adoption of a temporary defensive pos-
ture, the Fund may invest without limit in non-Massachusetts municipal issues
and in "Temporary Investments" as described below.
The Fund generally will invest at least 75% of its total assets in investment-
grade debt obligations rated no lower than Baa, MIG 3 or Prime-1 by Moody's or
BBB, SP-2 or A-1 by S&P, or in unrated obligations of comparable quality.
Unrated securities will be considered to be of investment grade if deemed by
SBMFM to be comparable in quality to instruments so rated, or if other out-
standing obligations of the issuers of the unrated securities are rated Baa or
better by Moody's or BBB or better by S&P. The balance of the Fund's assets may
be invested in securities rated as low as C by Moody's or D by S&P, or compara-
ble unrated securities which are often referred to as "junk bonds." Securities
in the fourth highest rating category, though considered to be investment
grade, have speculative characteristics. Securities rated as low as D are
extremely speculative and are in actual default of interest and/or principal
payments.
The Fund's average weighted maturity will vary from time to time based on the
judgment of SBMFM. The Fund intends to focus on intermediate- and long-term
obligations, that is, obligations with remaining maturities at the time of pur-
chase from three to in excess of twenty years. Obligations which are rated Baa
by Moody's or BBB by S&P and those which are rated lower than investment grade
are subject to greater market fluctuation and more uncertainty as to payment of
principal and interest, and therefore generate higher yields than obligations
rated above Baa or BBB. A description of the rating systems of Moody's and S&P
is contained in the Statement of Additional Information.
Because many issuers of Massachusetts Municipal Securities may choose not to
have their obligations rated, it is possible that a large portion of the Fund's
portfolio may consist of unrated obligations. Unrated obligations are not nec-
essarily of lower quality than rated obligations, but to the extent the Fund
invests in unrated
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
obligations, the Fund will be more reliant on SBMFM's judgment, analysis and
experience than would be the case if the Fund invested only in rated obliga-
tions.
The Fund 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. Municipal leases may take the form of a lease or an
installment purchase contract issued by state and local government authorities
to obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Although lease obligations do not constitute general obligations of the munic-
ipality for which the municipality's taxing power is pledged, a lease obliga-
tion is ordinarily backed by the municipality's covenant to budget for, appro-
priate 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-appropri-
ation" lease obligations are often secured by the underlying property, dispo-
sition 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 obliga-
tions, SBMFM 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 credit-
worthiness 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.
The Fund may invest without limit 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 pur-
poses of the Federal individual and corporate alternative minimum taxes. Indi-
vidual and corporate shareholders may be subject to a Federal alternative min-
imum tax to the extent the Fund's dividends are derived from interest on those
bonds. Dividends derived from interest income on Massachusetts Municipal Secu-
rities are a component of the "current earnings" adjustment item for purposes
of the Federal corporate alternative minimum tax.
The Fund is classified as a non-diversified investment company under the 1940
Act, which means that the Fund is not limited by the 1940 Act in the propor-
tion of its assets that it may invest in the obligations of a single issuer.
The Fund intends to
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
conduct its operations, however, so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"), which will relieve the Fund of any liability for Federal income tax to
the extent its earnings are distributed to shareholders. To so qualify, among
other requirements, the Fund will limit its 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 Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
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.
The Fund may invest without limit in debt obligations that are repayable out of
revenue streams generated from economically-related projects or facilities.
Sizeable investments in such obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial dif-
ficulties. In addition, the Fund may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale and
other instruments which are not readily marketable and up to 5% of its assets
in the securities of issuers which have been in continuous operation for less
than three years. Notwithstanding the foregoing, the Fund shall not invest more
than 10% of its assets in securities (excluding those subject to Rule 144A
under the Securities Act of 1933, as amended) that are restricted. The Fund
also is authorized to borrow an amount of up to 10% of its total assets (in-
cluding the amount borrowed) valued at market less liabilities (not including
the amount borrowed) in order to meet anticipated redemptions and to pledge its
assets to the same extent in connection with the borrowings.
Further information about the Fund's investment policies, including a list of
those restrictions on the Fund's investment activities that cannot be changed
without shareholder approval, appears in the Statement of Additional
Information.
CERTAIN PORTFOLIO STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, the following portfolio strategies:
When-Issued Securities. New issues of Massachusetts Municipal Securities (and
other tax-exempt obligations) are frequently offered on a when-issued basis,
which means that delivery and payment for such securities normally take place
15 to 45 days after the date of the commitment to purchase. The payment obliga-
tion and the interest rate that will be received on when-issued securities are
fixed at the time the buyer enters into the commitment. Massachusetts Municipal
Securities, like other investments made by the Fund, may decline or appreciate
in value before their actual
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
delivery to the Fund. Due to the fluctuations in the value of securities pur-
chased and sold on a when-issued basis, the yields obtained on these securi-
ties may be higher or lower than the yields available in the market on the
date when the investments actually are delivered to the buyers. The Fund will
not accrue income with respect to a when-issued security prior to its stated
delivery date. The Fund will establish a segregated account with the Fund's
custodian consisting of cash, obligations issued or guaranteed by the United
States government or its agencies or instrumentalities ("U.S. government secu-
rities") or debt obligations of any grade so long as such assets are liquid,
unencumbered and marked-to-market daily, in an amount equal to the amount of
the purchase price of the when-issued securities. Placing securities rather
than cash in the segregated account may have a leveraging effect on the Fund's
net assets. The Fund generally will make commitments to purchase Massachusetts
Municipal Securities (and other tax-exempt obligations) on a when-issued basis
only with the intention of actually acquiring the securities, but the Fund may
sell these securities before the delivery date if it is deemed advisable.
Temporary Investments. Under normal market conditions, the Fund may hold up to
20% of its total assets in cash or money market instruments, including taxable
money market instruments ("Temporary Investments"). In addition, when SBMFM
believes that market conditions warrant, including when acceptable Massachu-
setts Municipal Securities are unavailable, the Fund may take a temporary
defensive posture and invest without limitation in Temporary Investments. Tax-
exempt securities eligible for short-term investment by the Fund are municipal
notes rated at the time of purchase within the three highest grades by Moody's
or S&P or, if not rated, issued by issuers with outstanding debt securities
rated within the three highest grades by Moody's or S&P. The Fund may also
invest in certain taxable short-term instruments having quality characteris-
tics comparable to those for tax-exempt investments. To the extent the Fund
holds Temporary Investments, it may not achieve its investment objective.
Municipal Bond Index and Interest Rate Futures Contracts and Options on Munic-
ipal Bond Index and Interest Rate Futures Contracts. The Fund may enter into
municipal bond index and interest rate futures contracts and purchase and sell
options on these futures contracts that are traded on a United States exchange
or board of trade. Such investments, if any, by the Fund will be made solely
for the purpose of hedging against changes in the value of its portfolio secu-
rities and in the value of securities it intends to purchase due to antici-
pated changes in interest rates and market conditions and when the transac-
tions are economically appropriate to the reduction of risks inherent in the
management of the Fund.
A municipal bond index futures contract, which is based on an index of long-
term, tax-exempt municipal bonds, is an agreement in which two parties agree
to take or make delivery of an amount of cash equal to a specific dollar
amount times 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. Interest rate futures
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
contracts are contracts for the future purchase or sale of specified interest
rate sensitive debt securities such as United States Treasury bills, bonds and
notes, obligations of the Government National Mortgage Association and bank
certificates of deposit. Although most interest rate futures contracts require
the delivery of the underlying securities, some settle in cash. Each contract
designates the price, date, time and place of delivery. Entering into a futures
contract to deliver the index or instrument underlying the contract is referred
to as entering into a "short" position in the futures contract, whereas enter-
ing into a futures contract to take delivery of the index or instrument is
referred to as entering into a "long" position in the futures contract.
A put or call option on a municipal bond index or interest rate futures con-
tract gives the purchaser the right, in return for the premium paid, to assume
a short or long position, respectively, in the underlying futures contract at a
specified exercise price at any time prior to the expiration date of the
option. The Fund may purchase put and call options on both municipal bond index
and interest rate futures contracts. The Fund will sell options on these
futures contracts only as part of closing purchase transactions to terminate
its options positions, although no assurance can be given that closing transac-
tions can be effected.
Entering into a futures contract for a purchase or sale of a municipal bond
index or debt security or purchasing options on index or interest rate futures
contracts will enable the Fund to protect its assets from fluctuations in
interest rates on tax-exempt securities without initially buying or selling the
securities. The Fund may enter into futures contracts to sell an index or debt
security or may purchase put options when SBMFM believes that interest rates
will rise and consequently the value of the Fund's portfolio securities will
decrease. The Fund may enter into futures contracts to buy an index or debt
security or may purchase call options when SBMFM anticipates purchasing portfo-
lio securities at a time of declining interest rates.
There are several risks in connection with the use of municipal bond index and
interest rate futures contracts and options on those futures contracts as hedg-
ing devices. There can be no assurance that there will be a correlation between
price movements in the municipal bond index or interest rate futures, on the
one hand, and price movements in municipal bonds which are the subject of the
hedge, on the other hand. The lack of correlation could be pronounced with
respect to municipal bond index futures contracts because the Fund primarily
will hold Massachusetts Municipal Securities rather than a selection of the
bonds constituting an index. Positions in futures contracts and options on
futures contracts may be closed out only by entering into offsetting positions
on the exchange on which the contract was initiated, and no assurance can be
given that an active market will exist for the contract or the option at any
particular time. Consequently, the Fund may realize a loss on a futures con-
tract that is not offset by an increase in the price of the municipal bonds
that are being hedged or may not be able to close a futures position in the
event of adverse price movements. Any income earned by the Fund from transac-
tions in futures contracts
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and options on futures contracts will be taxable. Accordingly, it is antici-
pated that such investments will be made only in unusual circumstances, such as
when SBMFM anticipates an extreme change in interest rates or market condi-
tions.
When the Fund enters into futures contracts to purchase an index or debt secu-
rity or purchases call options, an amount of cash, U.S. government securities
or debt securities of any grade so long as such assets are liquid, unencumbered
and marked-to-market daily, equal to the market value of the contract will be
deposited and maintained in a segregated account with the Fund's custodian to
collateralize the positions, thereby insuring that the use of the contract is
unleveraged.
MASSACHUSETTS MUNICIPAL SECURITIES
As used in this Prospectus, the term "Massachusetts Municipal Securities" gen-
erally refers to intermediate- and long-term debt obligations issued by the
Commonwealth of Massachusetts and its political subdivisions, agencies and pub-
lic authorities (together with certain other governmental issuers such as
Puerto Rico, the Virgin Islands and Guam) to obtain funds for various public
purposes. The interest on such obligations is, in the opinion of bond counsel
to the issuers, excluded from gross income for Federal income tax purposes and
exempt from Massachusetts personal income taxes and, for that reason, generally
is fixed at a lower rate than it would be if it were subject to such taxes.
Interest income on certain Massachusetts Municipal Securities is a specific tax
preference item for purposes of the Federal individual and corporate alterna-
tive minimum taxes.
CLASSIFICATIONS
The two principal classifications of Massachusetts Municipal Securities are
"general obligation bonds" and "revenue bonds." General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the reve-
nues 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, but not from the general taxing power. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
related facilities experience financial difficulties. In addition, certain
types of private activity bonds issued by or on behalf of public authorities to
obtain funds for privately operated facilities are included in the term Massa-
chusetts Municipal Securities, provided that the interest paid on the bonds
qualifies as excluded from gross income for Federal income tax purposes and as
exempt from Massachusetts personal income taxes. Tax-exempt private activity
bonds do not generally carry the pledge of the credit of the issuing municipal-
ity.
19
<PAGE>
MASSACHUSETTS MUNICIPAL SECURITIES (CONTINUED)
SPECIAL CONSIDERATIONS
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among Feder-
al, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value
of the municipal lease experiencing non-payment and a potential decrease in
the net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Fund could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and the Fund may
not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operat-
ing expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be tax-
exempt. In addition, the Fund's intention to qualify as a "regulated invest-
ment company" under the Code may limit the extent to which the Fund may exer-
cise its rights by taking possession of such assets, because as a regulated
investment company the Fund is subject to certain limitations on its invest-
ments and on the nature of its income.
Because it invests primarily in Massachusetts Municipal Securities, the Fund
may be affected by any political, economic, regulatory, legal or other devel-
opments that constrain the taxing, spending and revenue collection authority
of issuers of Massachusetts Municipal Securities or otherwise affect the abil-
ity of such issuers to pay interest or repay principal or any premium. Several
statutes limit the taxing authority of certain Massachusetts governmental
entities and may impair the ability of some issuers of Massachusetts Municipal
Securities to maintain debt service on their obligations. It should be noted
that the Commonwealth has experienced fiscal difficulties, including an oper-
ating deficit in each of the fiscal years ended June 30, 1989 through 1991.
Budgeted operating funds ended fiscal 1992, 1993 and 1994 with an excess of
revenues and other sources over expenditures and other uses. The Commonwealth
is in the process of closing its fiscal 1995 financial records. Budgeted reve-
nues and other sources to be collected in fiscal 1996 are currently estimated
by the Executive Office of Administration and Finance to fall short of the
expenditures authorized by the fiscal 1996 budget. Any significant imbalance
in revenues and expenditures is likely to affect the bond ratings and credit
standing of the public authorities and municipalities within Massachusetts, as
well as of the Commonwealth itself. Any such imbalance could adversely affect
the market values and marketability of obligations issued by such entities,
and could result in payment defaults on outstanding obligations.
20
<PAGE>
MASSACHUSETTS MUNICIPAL SECURITIES (CONTINUED)
During the period from 1989 through 1992, Massachusetts experienced a slowdown
in certain sectors of the economy, including high technology, construction,
real estate, financial services and manufacturing. Since 1992, employment
within most of these sectors has improved as part of a general recovery of the
economy. Employment losses within the manufacturing sector have continued, but
at a slower rate than in prior years. For additional information concerning the
Commonwealth's economic difficulties and other considerations relating to
investments in Massachusetts Municipal Securities, see the Statement of Addi-
tional Information.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE, on each day that the NYSE is open, by dividing the value
of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the absence
of a market value with respect to any securities, at fair value as determined
by or under the direction of the Fund's Board of Trustees. Short-term invest-
ments that mature in 60 days or less are valued at amortized cost whenever the
Fund's Board of Trustees determines that amortized cost reflects fair market
value of those investments. Amortized cost involves valuing an instrument at
its original cost to the Fund 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. Further information
regarding the Fund's valuation policies is contained in the Statement of Addi-
tional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund pays dividends from its net investment income (that is, net income
other than its net realized long and short-term capital gains) on the last Fri-
day of each calendar month to shareholders of record as of the preceding Tues-
day. Distributions of net realized long- and short-term capital gains, if any,
are declared and paid annually after the end of the fiscal year in which they
have been earned.
If a shareholder does not otherwise instruct, dividends and capital gains dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 of each year of any undistributed ordi-
nary income or capital gains and expects to pay any other distributions as are
necessary to avoid the application of this tax.
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions may
be treated as a tax-free return of capital (up to the amount of the sharehold-
er's tax basis in his or her shares). The amount treated as a tax-free return
of capital will reduce a shareholder's adjusted basis in his or her shares.
Pursuant to the requirements of the 1940 Act and other applicable laws, a
notice will accompany any distribution paid from sources other than net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C shares.
The per share dividends on Class A shares of the Fund may be lower than the
per share dividends on Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, B, C and Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a regu-
lated investment company under the Code and will designate and pay exempt-
interest dividends derived from interest earned on qualifying tax-exempt obli-
gations. Such exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes although (a) all or a por-
tion of such exempt-interest dividends will be a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes to
the extent they are derived from certain types of private activity bonds
issued after August 7, 1986, and (b) all exempt-interest dividends will be a
component of the "current earnings" adjustment item for purposes of the Fed-
eral corporate alternative minimum tax. In addition, corporate shareholders
may incur a greater Federal "environmental" tax liability through the receipt
of Fund dividends and distributions. Under Massachusetts law, exempt-interest
dividends paid by the Fund are exempt from Massachusetts personal income tax
for individuals who are otherwise subject to Massachusetts personal income tax
to the extent the dividends are derived from interest payments on Massachu-
setts Municipal Securities and municipal leases.
Dividends paid from taxable net investment income, if any, and distributions
of any net realized short-term capital gains (whether from tax-exempt or tax-
able obligations) are taxable to shareholders as ordinary income regardless of
how long shareholders have held their Fund shares and whether such dividends
or distributions are received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains (whether from tax-exempt
or taxable securities) are taxable to shareholders as long-term capital gains
regardless of how long they have held Fund
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
shares and whether such distributions are received in cash or reinvested in
additional Fund shares. Furthermore, as a general rule, a shareholder's gain or
loss on a sale or redemption of his or her shares will be a long-term capital
gain or loss if the shareholder has held the shares for more than one year and
will be a short-term capital gain or loss if the shareholder has held the
shares for one year or less. The Fund's dividends and distributions will not
qualify for the dividends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and distribu-
tions are mailed annually. Each shareholder will also receive, if appropriate,
various written notices after the close of the Fund's prior taxable year as to
the Federal income tax status of his or her dividends and distributions which
were received from the Fund during the Fund's prior taxable year. These state-
ments may set forth the dollar amount of income excluded or exempt from Federal
income taxes or exempt from Massachusetts personal income taxes and the dollar
amount, if any, subject to Federal income taxes or Massachusetts personal
income taxes. Moreover, these statements will designate the amount of exempt-
interest dividends that is a specific preference item for purposes of the Fed-
eral individual and corporate alternative minimum taxes. Shareholders should
consult their own tax advisors with specific reference to their own tax situa-
tions.
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000 (except for pur-
chases of Class Y shares of Smith Barney Concert Series Inc., for which there
is no minimum purchase amount). See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group. When purchasing shares of the Fund, investors must specify whether the
purchase is for Class A, Class B, Class C or Class Y shares. No maintenance fee
will be charged by the Fund in connection with a brokerage account through
which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an account by making
an initial investment of at least $1,000 for each account in the Fund. Invest-
ors in Class Y shares may open an account by making an initial investment of
$5,000,000.
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Subsequent investments of at least $50 may be made for all Classes. For share-
holders purchasing shares of the Fund through the Systematic Investment Plan
on a monthly basis, the minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
classes is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a quarterly basis, the minimum initial invest-
ment's requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all classes is $50. There are no minimum investment
requirements for Class A shares for employees of Travelers and its subsidiar-
ies, including Smith Barney, Trustees of the Fund and their spouses and chil-
dren and unitholders who invest distributions from a UIT sponsored by Smith
Barney. The Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares from
time to time. Shares purchased will be held in the shareholder's account by
the Fund's transfer agent, First Data Investor Services Group, Inc. (the
"Transfer Agent"). Share certificates are issued only upon a shareholder's
written request to the Transfer Agent.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day, provided the order is
received by the Fund or Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased though Smith Barney or Introducing
Brokers purchasing though Smith Barney, payment for Fund shares is due on the
third business day after the trade date (the "settlement 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, Smith Barney or the 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 account with a bank or other financial
institution indicated by the shareholder to provide 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 Smith Barney or
the Transfer Agent. The Systematic Investment Plan also authorizes Smith Bar-
ney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
DEALERS'
AMOUNT OF SALES CHARGE AS % SALES CHARGE AS % REALLOWANCE AS %
INVESTMENT OF OFFERING PRICE OF AMOUNT INVESTED OF OFFERING PRICE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
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 * * *
- ----------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and may
be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children, or a trustee or other fiduciary of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of all Class A shares held in funds sponsored by Smith Barney that are offered
with a sales charge listed under "Exchange Privilege."
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 of Class A shares to (i)
Board Members and employees of Travelers and its subsidiaries and any of 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 security will not be resold except through redemption or repur-
chase; (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
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with 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 Con-
sultant and (iii) was subject to a sales charge; (d) shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another Smith Barney
Mutual Fund that are offered with a sales charge equal to or greater than the
maximum sales charge of the Fund) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) accounts managed by registered investment advisory sub-
sidiaries of Travelers; (f) direct rollovers by plan participants of distribu-
tions from 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 separate accounts used to fund certain unregistered variable annu-
ity contracts; and (h) purchases by investors participating in a Smith Barney
fee based arrangement. 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 funds sponsored by Smith Barney which are offered
with a sales charge 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 discon-
tinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
is that the plan must be open to specified partners or employees of the
employer and its subsidiaries, if any. Such plan may, but is not required to,
provide for payroll deductions. Smith Barney may also offer a reduced sales
charge or net asset value purchase for aggregating related fiduciary accounts
under such conditions that Smith Barney will realize economies of sales
efforts and sales related expenses. An individual who is a member of a quali-
fied group may also purchase Class A shares at the reduced sales charge appli-
cable to the group as a whole. The sales charge is based upon the aggregate
dollar value of Class A shares offered with a sales charge that have been pre-
viously purchased and are still owned by the group, plus the amount of the
current purchase. A "qualified group" is one which (a) has been in existence
for more than six months, (b) has a purpose other than acquiring Fund shares
at a discount and (c) satisfies uniform criteria which enable Smith Barney to
realize economies of scale in its costs of distributing shares. A qualified
group must have more than 10 members, must be available to arrange for group
meetings between representatives of the Fund and the members, and must agree
to include sales and other materials related to the Fund in its publications
and mailings to members at no cost to Smith Barney. In order to obtain such
reduced sales charge or to purchase at net asset value, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase qualifies for the reduced sales charge. Approval of group
purchase reduced sales charge plans is subject to the discretion of Smith Bar-
ney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts 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 the investor refers to such Let-
ter when placing orders. For purposes of a Letter of Intent, the "Amount
Invested" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge listed under "Exchange Privilege" over a 13 month
period based on the total amount of intended purchases plus the value of all
Class A shares previously purchased and still owned. An alternative is to com-
pute the 13 month period starting up to 90 days before the date of execution
of a Letter of Intent. 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 differ-
ence between the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed shares will be
redeemed. Please contact a Smith Barney Financial Consultant or the Transfer
Agent to obtain a Letter of Intent application.
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. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y shares of the Fund
within six months from
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
the date of the Letter. If a total investment of $5,000,000 is not made within
the six-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 0.15%) and expenses applicable to the Fund's Class A shares, which may
include a CDSC of 1%. The Fund expects that such transfer will not be subject
to Federal income taxes. Please contact a Smith Barney Financial Consultant or
the Transfer Agent for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at the net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase payment may
be immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. CDSC Shares are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares, which when combined with Class A shares offered
with a sales charge currently held by an investor, equal or exceed $500,000 in
the aggregate.
Any applicable CDSC 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. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that 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 C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C and Class A shares that are CDSC Shares are subject to a 1.00% CDSC if
redeemed within 12 months of purchase. In circumstances in which the CDSC 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 aggre-
gated and deemed to have been made on the last day of the preceding Smith Bar-
ney statement month. The following table sets forth the rates of the charge for
redemptions of Class B shares by shareholders.
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
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 also will be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total number
of his or her Class B shares converting at the time bears to the total number
of Class B shares (other than Class B Dividend Shares) owned by the sharehold-
er. Shareholders who held Class B shares of Smith Barney Shearson Short-Term
World Income Fund (the "Short-Term World Income Fund") on July 15, 1994 and who
subsequently exchanged those shares for Class B shares of the Fund will be
offered the opportunity to exchange all such Class B shares for Class A shares
of the Fund four years after the date on which those shares were deemed to have
been purchased. Holders of such Class B shares will be notified of the pending
exchange in writing approximately 30 days before the fourth anniversary of the
purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the fourth anniversary date. See "Prospectus
Summary--Alternative Purchase Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been held
will be calculated from the date that 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 CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares 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 CDSC 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.
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b) au-
tomatic 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 com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic 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 that
were established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) involun-
tary redemptions; and (e) redemptions of shares made 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
CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also 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.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B
and Class C shares are subject to minimum investment requirements and all
shares are subject to the other requirements of the fund into which exchanges
are made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Concert Social Awareness Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
*Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc. -- Cash Portfolio
++Smith Barney Money Funds, Inc. -- Government Portfolio
***Smith Barney Money Funds, Inc. -- Retirement Portfolio
***Smith Barney Muni Funds -- California Money Market Portfolio
***Smith Barney Muni Funds -- New York Money Market Portfolio
***Smith Barney Municipal Money Market Fund, Inc.
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder (unless such share-
holder was a Class B shareholder of the Short-Term World Income Fund on July
15, 1994) wishes to exchange all or a portion of his or her shares in any of
the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. 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.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the fund that
have been exchanged.
Class A and Y Exchanges. 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 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 the Fund's performance and its shareholders. SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by the share-
holder. 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 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 deter-
mining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
below are also applicable for exchanging shares, and exchanges will be made
upon receipt of all supporting documents in proper form. If the account regis-
tration of the shares of the fund being acquired is identical to the registra-
tion of the shares of the fund exchanged, no signature guarantee is required. A
capital gain or loss for tax purposes will be realized upon the exchange,
depending upon the cost or other basis of shares redeemed. Before exchanging
shares, investors should read the current prospectus describing the shares to
be acquired. The Fund reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with 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 permit-
ted under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a writ-
ten request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Massachusetts Municipals Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
33
<PAGE>
REDEMPTION OF SHARES
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the Transfer Agent together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2,000, must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. The Transfer Agent may require additional sup-
porting documents for redemptions made by corporations, executors, administra-
tors, trustees or guardians. A redemption request will not be deemed to be
properly received until the Transfer Agent receives all required documents in
proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact the Trans-
fer Agent at (800) 451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a sig-
nature guarantee, that will be provided by the Transfer Agent upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with a signature guarantee when making his/her initial
investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling the Transfer
Agent at (800) 451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemptions of shares
(i) by retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed to
his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and,
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
for the protection of the shareholder's assets, will be required to provide a
signature guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the account
registration of the fund being acquired is identical to the registration of the
shares of the fund exchanged. Such exchange requests may be made by calling the
Transfer Agent at (800) 451-2010 between between 9:00 a.m. and 4:00 p.m. (New
York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time follow-
ing at least seven (7) days' prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC 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 shareholder's
shares subject to the CDSC.) For further information regarding the automatic
cash withdrawal plan, shareholders should contact a Smith Barney Financial Con-
sultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation .
35
<PAGE>
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30 day "yield" and "equivalent
taxable yield" of each Class of shares. The yield refers to the income gener-
ated by an investment in those shares over the 30 day period identified in the
advertisement and is computed by dividing the net investment income per share
earned by the Class during the period by the maximum public offering price per
share on the last day of the period. This income is "annualized" by assuming
that the amount of income is generated each month over a one year period and is
compounded semi-annually. The annualized income is then shown as a percentage
of the net asset value.
The Fund's equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's tax-
exempt yield for each Class. It is calculated by increasing the yield shown for
the Class to the extent necessary to reflect the payment of taxes at specified
tax rates. Thus, the equivalent taxable yield always will exceed the Fund's
yield.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return which provides the ending redeemable
value. Such standard total return information may also be accompanied with non-
standard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund also may include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. or similar independent services that
monitor the performance of mutual funds, or other industry publications.
36
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund, includ-
ing agreements with the Fund's distributor, investment adviser and administra-
tor, custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment adviser and administrator. The Statement of
Additional Information contains background information regarding each Trustee
and executive officer of the Fund.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the investment advi-
sory agreement, effective November 7, 1994, from its affiliate, Mutual Manage-
ment Corp. (Mutual Management Corp. and SBMFM are both wholly owned subsidiar-
ies of Holdings.) Investment advisory services continue to be provided to the
Fund by the same portfolio managers who had provided services under the agree-
ment with Mutual Management Corp. SBMFM (through its predecessors) has been in
the investment counseling business since 1934 and is a registered investment
adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of December 31, 1996 in excess of $80
billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers,
and securities analysts who provide research services to the Fund. Prior to
November 17, 1995, for investment advisory services rendered, the Fund paid
SBMFM a fee computed daily and payable monthly at the following annual rates
of average daily net assets: 0.35% up to $500 million and 0.32% of the net
assets in excess of $500 million. Effective November 17, 1995, the Fund pays
SBMFM an advisory fee calculated at an annual rate of 0.30% of average daily
net assets. For the fiscal year ended November 30, 1996, the Fund paid SBMFM
investment advisory fees equal to 0.18% of the value of the average daily net
assets of the Fund.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, an Investment Officer of SBMFM, has served as Vice
President and Investment Officer of the Fund since December 21, 1987 (com-
mencement of operations) and manages the day-to-day operations of the Fund,
including making all investment decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended November 30, 1996, is included
in the Annual Report dated November 30, 1996. A copy of the Annual Report may
be obtained upon request without charge from a Smith Barney Financial Consul-
tant or by
37
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
writing or calling the Fund at the address or phone number listed on page one
of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays a
fee computed daily and payable monthly at the following annual rates of average
daily net assets: 0.20% up to $500 million and 0.18% of the net assets in
excess of $500 million. For the fiscal year ended November 30, 1996, SBMFM was
paid administration fees equal to 0.12% of the value of the average daily net
assets of the Fund.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.15% of the average daily net assets of the respective Class. Smith
Barney also is paid a distribution fee with respect to Class B and Class C
shares at the annual rate of 0.50% and 0.55%, respectively, of the average
daily net assets attributable to those Classes. Class B shares which automati-
cally convert to Class A shares eight years after the date of original purchase
will no longer be subject to a distribution fee. The fees are used by Smith
Barney to pay its Financial Consultants for servicing shareholder accounts and,
in the case of Class B and Class C shares, 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;
payments to and expenses of Smith Barney Financial Consultants and other per-
sons who provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and overhead costs of
Smith Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class B and Class C shares are not tied
exclusively to the distribution and shareholder service expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred.
38
<PAGE>
DISTRIBUTOR (CONTINUED)
The Fund's Board of Trustees will evaluate the appropriateness of the Plan and
its payment terms on a continuing basis and in so doing will consider all rele-
vant factors, including expenses borne by Smith Barney, amounts received under
the Plan and the proceeds of the CDSC.
ADDITIONAL INFORMATION
The Fund was organized on January 13, 1987 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." It is registered with the SEC as a non-diversified open-end
management investment company.
Each Class of the Fund represents an identical interest in the Fund's invest-
ment portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privilege of each Class; and (g) the conversion feature
of the Class B shares. The Fund's Board of Trustees does not anticipate that
there will be any conflicts among the interests of the holders of the different
Classes. The Trustees, on an ongoing basis, will consider whether any such con-
flict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings of shareholders held for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
upon the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share held
and a proportionate, fractional vote for each fractional share held of that
Class. Generally, shares of the Fund will be voted on a Fund-wide basis on all
matters except matters affecting only the interests of one Class.
PNC Bank, National Association, located at 17th and Chestnut Streets, Philadel-
phia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc., located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
The Fund sends to each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Fund plans to consolidate the mailing of its semi-
annual and annual reports
39
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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
accounts should contact their Smith Barney Financial Consultants or the Trans-
fer Agent.
40
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [ART]
SMITH BARNEY
MASSACHUSETTS
MUNICIPALS
FUND
388 Greenwich Street
New York, New York 10013
FD0226 3/97
Smith Barney
Massachusetts Municipals Fund
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional
Information
March 28, 1997
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney Massachusetts
Municipals Fund (the "Fund"), dated March 28, 1997, as amended or supplemented
from time to time, and should be read in conjunction with the Fund's
Prospectus. The Fund's Prospectus may be obtained from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or
telephone number set forth above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where shown
below:
Management of the
Fund.......................................................................
....................... 1
Investment Objective and Management
Policies............................................................. 4
Municipal Bonds (See in the Prospectus "Massachusetts Municipal
Securities")............ 12
Purchase of
Shares........................................................................
............................... 17
Redemption of
Shares........................................................................
............. ............. 17
Distributor................................................................
................................................... 18
Valuation of
Shares........................................................................
.............................. 19
Exchange
Privilege.....................................................................
.................................. 20
Performance Data (See in the Prospectus
"Performance'')............................................. 20
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes'')............................. 23
Additional
Information................................................................
................................. 25
Financial
Statements.................................................................
................................... 26
Appendix...................................................................
...................................... A-1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
Name Service
Smith Barney Inc.
("Smith
Barney'')........................
................................
Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM'')...............................................................
Investment Adviser and
Administrator
PNC Bank, National Association ("PNC")..................... Custodian
First Data Investor Services Group, Inc.,
(the "Transfer
Agent")................................................Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional Information.
Trustees and Executive Officers of the Fund
The names of the Trustees and executive officers of the Fund, together with
information as to their principal business occupations during the past five
years, are shown below. Each Trustee who is an "interested person'' of the
Fund, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"), is indicated by an asterisk.
Herbert Barg, Trustee (Age 73). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 74). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 75). Vice Chairman of the Board of Restaurant
Associates Corp. His address is HMK Associates, 30 Columbia Turnpike, Florham,
New Jersey 07932.
Burt N. Dorsett, Trustee (Age 66). Managing Partner of Dorsett McCabe
Management, Inc., an investment counseling firm; Director of Research
Corporation Technologies, Inc., a non-profit patent-clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (Age 70). Chairman of the Board and Chief
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan Drive,
Suffern, New York 10901.
Stephen E. Kaufman, Trustee (Age 64). Attorney. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 66). Financial Consultant. His address is
200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 63).
Managing Director of Smith Barney and Chairman of Smith Barney Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers"), Vice Chairman of Shearson
Asset Management, a Director of PanAgora Asset Management, Inc. and PanAgora
Asset Management Limited. Mr. McLendon is Chairman of the Board and
Investment Officer of 41 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Trustee (Age 63). President, Cornelius C. Rose
Associates, Inc., Financial Consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is P.O.
Box 355, Fair Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Trustee emeritus (Age 89). Attorney; formerly Justice of
the Supreme Court of the State of New York. His address is 118 East 60th
Street, New York, New York 10022.
Jessica M. Bibliowicz, President (Age 37). Executive Vice President of
Smith Barney; prior to 1994, Director of Sales and Marketing for Prudential
Mutual Funds; prior to 1990, First Vice President, Asset Management Division
of Shearson Lehman Brothers. Ms. Bibliowicz serves as President of 39 Smith
Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New York
10013.
Lawrence T. McDermott, Vice President and Investment Officer (Age 49).
Investment Officer of SBMFM; prior to November 7, 1994, Managing Director of
Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors, the predecessor to Greenwich Street Advisors. Mr. McDermott
serves as Investment Officer of 8 Smith Barney Mutual Funds. His address is
388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39). Managing
Director of Smith Barney; Director and Senior Vice President of SBMFM. Mr.
Daidone serves as Senior Vice President and Treasurer of 41 Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM. Ms. Sydor serves as Secretary of 41
Smith Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New
York 10013.
As of January 10, 1997, the Trustees and officers of the Fund, as a group,
owned none of the Fund's outstanding shares of beneficial interest.
No officer, director or employee of Smith Barney or any parent or
subsidiary receives any compensation from the Fund for serving as an officer
or Trustee of the Fund. The Fund pays each Trustee who is not an officer,
director or employee of Smith Barney or of its affiliates a fee of $1,000 per
annum plus $100 per meeting attended and each Trustee emeritus $500 per annum
plus $50 per meeting attended. All Trustees are reimbursed for travel and out-
of-pocket expenses.
For the fiscal year ended November 30, 1996, the Trustees of the Fund were
paid the following compensation:
Aggregate
Compensation
Aggregate
Compensation
from the Smith
Barney
Trustee (*)
from the Fund
Mutual Funds**
Herbert Barg (18)
$1,600
$105,175
Alfred Bianchetti (13)
1,500
51,500
Martin Brody (21)
1,500
124,700
Dwight B. Crane (24)
1,500
140,375
Burt N. Dorsett (13)
1,500
47,400
Elliot S. Jaffe (13)
1,600
51,100
Stephen E. Kaufman (15)
1,600
91,050
Joseph J. McCann (13)
1,600
52,700
Heath B. McLendon (41)
- -------
- --------
Cornelius C. Rose (13)
1,600
51,400
James J. Crisona (12)
950
20,575
* Indicates number of funds within the Smith Barney Mutual Fund complex for
which each Trustee serves as Director/Trustee.
** Reflects compensation paid during calendar year ended December 31, 1996.
Trustee emeritus. A Trustee emeritus may attend meetings but has no
voting rights at such meetings.
Investment Adviser and Administrator -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a transfer of the
investment advisory agreement, effective November 7, 1994, from its affiliate,
Mutual Management Corp. Mutual Management Corp. and SBMFM are both wholly
owned subsidiaries of Smith Barney Holdings Inc. ("Holdings"), which in turn
is a wholly owned subsidiary of Travelers Group Inc. The investment advisory
agreement is dated July 30, 1993 (the "Advisory Agreement"), and was most
recently approved by the Fund's Board of Trustees, including a majority of
those Trustees who are not "interested persons" of the Fund or Smith Barney
(the "Independent Trustees"), on July 17, 1996. The services provided by SBMFM
under the Advisory Agreement are described in the Prospectus under "Management
of the Fund." SBMFM bears all expenses in connection with the performance of
its services and pays the salary of any officer or employee who is employed by
both it and the Fund.
Effective November 17, 1995, as compensation for investment advisory
services, the Fund pays SBMFM a fee computed daily and payable monthly at
0.30% of the value of the Fund's average daily net assets. For the fiscal
years ended November 30, 1994, 1995 and 1996, the Fund paid SBMFM and/or its
predecessor, net of fee waivers and expense reimbursements, $96,113, $190,675
and $170,838, respectively, in investment advisory fees. For the fiscal years
ended November 30, 1994,1995 and 1996, SBMFM and/or its predecessor
voluntarily waived investment advisory fees of $95,209, $82,803 and $36,129,
respectively.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement''), which was
most recently approved by the Fund's Board of Trustees, including a majority
of the Independent Trustees, on July 17, 1996. The services provided by SBMFM
under the Administration Agreement are described in the Prospectus under
"Management of the Fund.'' SBMFM pays the salary of all officers and employees
who are employed by both it and the Fund and bears all expenses in connection
with the performance of its services.
As compensation for administrative services rendered to the Fund, SBMFM
receives a fee computed daily and payable monthly at the following annual
rates of average daily net assets: 0.20% up to $500 million; and 0.18% in
excess of $500 million. For the fiscal year ended November 30, 1996, the Fund
paid SBMFM $113,892 (net of fee waivers amounting to $24,086) in
administration fees. For the fiscal period from April 20, 1994 through
November 30, 1994, the Fund paid $32,879 (net of fee waivers amounting to
$34,514) in administration fees. For the fiscal year ended November 30, 1995,
the Fund paid SBMFM $109,514 (net of fee waivers amounting to $47,369) in
administration fees.
The Fund bears expenses incurred in its operation including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the Fund
who are not officers, directors, shareholders or employees of Smith Barney or
SBMFM; Securities and Exchange Commission ("SEC") fees and state Blue Sky
qualification fees; charges of custodians; transfer and dividend disbursing
agent's fees; certain insurance premiums; outside auditing and legal expenses;
costs of maintaining corporate existence; costs of investor services
(including allocated telephone and personnel expenses); costs of preparing and
printing of prospectuses for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and shareholder
meetings; and meetings of the officers or Board of Trustees of the Fund.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Independent
Trustees of the Fund have selected Stroock & Stroock & Lavan LLP as their
legal counsel.
KPMG Peat Marwick LLP, independent auditors, 345 Park Avenue, New York, New
York 10154, serve as auditors of the Fund and have rendered an opinion on the
Fund's financial statements for the fiscal year ended November 30, 1996.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies it
employs to achieve that objective. The following discussion supplements the
description of the Fund's investment policies in the Prospectus. For purposes
of this Statement of Additional Information, obligations of non-Massachusetts
municipal issuers that pay interest which is excluded from gross income for
Federal income tax purposes ("Non-Massachusetts Municipal Securities") and
obligations of the Commonwealth of Massachusetts and its political
subdivisions, agencies and public authorities (together with certain other
municipal 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 ("Massachusetts Municipal
Securities"), are collectively referred to as "Municipal Bonds."
As noted in the Prospectus, the Fund is classified as a non-diversified
investment company under the 1940 Act, which means that the Fund is not
limited by the 1940 Act in the proportion of its assets that may be invested
in the obligations of a single issuer. The identification of the issuer of
Municipal Bonds generally depends upon the terms and conditions of the
security. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of the
government creating the issuing entity and the security is backed only by the
assets and revenues of such entity, such entity would be deemed to be the sole
issuer. Similarly, in the case of a private activity bond, if that bond is
backed only by the assets and revenues of the nongovernmental user, then such
nongovernmental user is deemed to be the sole issuer. If in either case,
however, the creating government or some other entity guarantees a security,
such a guarantee would be considered a separate security and would be treated
as an issue of such government or other entity.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc. ("Moody's'') and
Standard & Poor's Corporation ("S&P") represent the opinions of those agencies
as to the quality of the Municipal Bonds and short-term investments which they
rate. It should be emphasized, however, that such ratings are relative and
subjective, are not absolute standards of quality and do not evaluate the
market risk of securities. These ratings will be used by the Fund as initial
criteria for the selection of portfolio securities, but the Fund also will
rely upon the independent advice of SBMFM to evaluate potential investments.
Among the factors that will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends. To the
extent the Fund invests in lower-rated and comparable unrated securities, the
Fund's achievement of its investment objective may be more dependent on
SBMFM's credit analysis of such securities than would be the case for a
portfolio consisting entirely of higher-rated securities. The Appendix
contains information concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds may
cease to be rated or its rating may be reduced below the rating given at the
time the securities were acquired by the Fund. Neither event will require the
sale of such Municipal Bonds by the Fund, but SBMFM will consider such event
in its determination of whether the Fund should continue to hold the Municipal
Bonds. In addition, to the extent the ratings change as a result of changes in
such organizations or their rating systems or due to a corporate restructuring
of Moody's or S&P, the Fund will attempt to use comparable ratings as
standards for its investments in accordance with its investment objective and
policies.
The Fund generally may invest up to 25% of its total assets in securities
rated below investment grade (i.e., lower than Baa, MIG 3 or Prime-1 by
Moody's or BBB, SP-2 or A-1 by S&P), or in unrated securities of comparable
quality. Such securities (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are
outweighed by large uncertainties or major risk exposures to adverse
conditions and (b) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation.
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values
of higher-rated securities, the market values of certain low-rated and
comparable unrated municipal securities also tend to be more sensitive than
higher-rated securities to short-term corporate and industry developments and
changes in economic conditions (including recession) in specific regions or
localities or among specific types of issuers. In addition, low-rated
securities and comparable unrated securities generally present a higher degree
of credit risk. During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of low-rated and comparable unrated
securities to service their payment obligations, meet projected goals or
obtain additional financing may be impaired. The risk of loss due to default
by such issuers is significantly greater because low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings.
While the market for municipal securities is considered generally to be
adequate, the existence of limited markets for particular low-rated and
comparable unrated securities may diminish the Fund's ability to (a) obtain
accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (b) sell the securities at fair value
either to meet redemption requests or to respond to changes in the economy or
in the financial markets. The market for certain low-rated and comparable
unrated securities has not fully weathered a major economic recession. Any
such economic downturn would adversely affect the value of such securities and
the ability of the issuers of these securities to repay principal and pay
interest thereon.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower
yielding security, thus resulting in a decreased return to the Fund.
Temporary Investments
When the Fund is maintaining a defensive position, it may invest in short-term
investments ("Temporary Investments") consisting of: (a) the following tax-
exempt securities - notes of municipal issuers having, at the time of
purchase, a rating within the three highest grades of Moody's or S&P or, if
not rated, having an issue of outstanding Municipal Bonds rated within the
three highest grades by Moody's or S&P; and (b) the following taxable
securities: obligations of the United States government, its agencies or
instrumentalities ("U.S. government securities"), including repurchase
agreements with respect to such securities; other debt securities rated within
the three highest grades by Moody's and S&P, commercial paper rated in the
highest grade by either of such rating services; and certificates of deposit
of domestic banks with assets of $1 billion or more. The Fund may invest in
Temporary Investments for defensive reasons in anticipation of a market
decline. At no time will more than 20% of the Fund's total assets be invested
in Temporary Investments unless the Fund has adopted a defensive investment
policy. The Fund intends, however, to purchase tax-exempt Temporary
Investments pending the investment of the proceeds of the sale of portfolio
securities or of the Fund's shares of beneficial interest, or in order to have
highly liquid securities available to meet anticipated redemptions.
Investments in Municipal Bond Index and Interest Rate Futures Contracts and
Options on Municipal Bond Index and Interest Rate Futures Contracts
Municipal Bond Index and Interest Rate Futures Contracts. The purpose of
entering into a municipal bond index or interest rate futures contract by the
Fund, as the holder of long-term Municipal Bonds, is to protect the Fund from
fluctuations in interest rates on tax-exempt securities without buying or
selling the Municipal Bonds. If the Fund owns long-term Municipal Bonds and
interest rates are expected to increase, for example, the Fund might enter
into futures contracts to sell a municipal bond index or the debt security
underlying the interest rate future. Such a transaction would have much the
same effect as selling some of the long-term Municipal Bonds in the Fund's
portfolio. If interest rates increase as anticipated, the value of certain
long-term Municipal Bonds in the Fund's portfolio would decline, but the value
of the Fund's futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. Of course, because the value of the Municipal Bonds in
the Fund's portfolio will far exceed the value of the futures contracts
entered into by the Fund, an increase in the value of the futures contracts
could only mitigate -- but not totally offset -- the decline in the value of
the portfolio.
When interest rates are expected to decline, futures contracts to purchase
a municipal bond index or debt security, could be entered into to hedge
against the Fund's anticipated purchases of long-term Municipal Bonds at
higher prices. Because the rate of fluctuation in the value of the futures
contracts should be similar to that of long-term Municipal Bonds, the Fund
could enter into futures contracts at lower prices. At the time the Fund deems
it appropriate to purchase the Municipal Bonds, the futures contracts could be
liquidated and the Fund's cash could then be used to buy long-term Municipal
Bonds. The Fund could accomplish similar results by selling Municipal Bonds
with long maturities and investing in Municipal Bonds with short maturities
when interest rates are expected to increase or by buying Municipal Bonds with
long maturities and selling Municipal Bonds with short maturities when
interest rates are expected to decline. In circumstances when the market for
Municipal Bonds may not be as liquid as that for the futures contracts,
however, the ability to enter into such contracts could enable the Fund to
react more quickly to anticipated changes in market conditions or interest
rates.
Unlike the purchase or sale of a Municipal Bond, no consideration is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit in the name of the futures
commission merchant effecting the transaction an amount of cash or cash
equivalents equal to approximately 10% of the contract amount (this amount is
subject to change by the board of trade on which the contract is traded and
members of the board of trade may charge a higher amount). This amount is
known as initial margin and is in the nature of a performance bond or good
faith deposit on the contract that is returned to the Fund upon termination of
the futures contract, assuming that all contractual obligations have been
satisfied. Subsequent payments, known as variation margin, to and from the
futures commission merchant will be made on a daily basis as the price of the
index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. At any time prior to the expiration of the
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
futures contract.
There are several risks in connection with the use of municipal bond index
and interest rate futures contracts as hedging devices. Successful use of
these futures contracts by the Fund is subject to SBMFM'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 portfolio. In addition, there can
be no assurance that there will be a correlation between movements in the
price of the municipal bond index or the debt security underlying the futures
contract 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 Bonds and technical influences on futures
trading. The degree of imperfection of correlation may be increased with
respect to the Fund, which will hold primarily Massachusetts Municipal
Securities rather than a selection of the bonds constituting any index. The
Fund's Municipal Bonds and the bonds in the index also may differ 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 the Fund intends to enter into futures contracts only if an active
market exists for the contracts, there can be no assurance that an active
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 that 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. Futures contract prices may 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 might 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 portfolio
being hedged, if any, may partially or completely offset losses on the futures
contract. As described above, however, no assurance can be given that the
price of Municipal Bonds will, in fact, correlate with the price movements in
the municipal bond index or interest rate futures contract and thus provide an
offset to losses on a futures contract.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of Municipal Bonds held in its portfolio
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.
Options on Municipal Bond Index and Interest Rate Futures Contracts. Options
on futures contracts are similar to options on securities, which give the
purchaser the right, in return for the premium paid, to purchase securities. A
call option gives the purchaser of such option the right to assume a long
position in a specified underlying futures contract, and a put option gives
the purchaser the right to assume a short position in a specified underlying
futures contract, at a stated exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. The
potential loss related to the purchase of an option on a futures contract is
limited to the premium paid for the option (plus transaction costs). Because
the value of the option is fixed at the point of sale, no daily cash payments
are made to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected
in the net asset value of the Fund.
The Fund will purchase put and call options on municipal bond index and
interest rate futures contracts which are traded on a United States exchange
or board of trade as a hedge against changes in interest rates, and will enter
into closing transactions with respect to such options to terminate existing
positions. The Fund may purchase put options on interest rate or municipal
bond index futures contracts if SBMFM anticipates a rise in interest rates.
The purchase of put options on these futures contracts is analogous to the
purchase of put options on debt securities so as to hedge a portfolio of debt
securities against the risk of rising interest rates. Because of the inverse
relationship between the trends in interest rates and values of debt
securities, a rise in interest rates would result in a decline in the value of
Municipal Bonds held in the Fund's portfolio. Because the value of a municipal
bond index or interest rate futures contract moves inversely in relation to
changes in interest rates, as is the case with Municipal Bonds, a put option
on such a contract becomes more valuable as interest rates rise. By purchasing
put options on these futures contracts at a time when SBMFM expects interest
rates to rise, the Fund would seek to realize a profit to offset the loss in
value of its portfolio securities without the need to sell such securities.
The Fund may purchase call options on municipal bond index or interest rate
futures contracts if SBMFM anticipates a decline in interest rates. The
purchase of a call option on a municipal bond index or interest rate futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a call option
on an individual debt security, which can be used as a substitute for a
position in the debt security itself. Depending upon the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities. The Fund
would purchase a call option on a futures contract to hedge against a market
advance when the Fund was holding cash in anticipation of purchasing Municipal
Bonds. The Fund could take advantage of the anticipated rise in the value of
long-term securities without actually buying them until the market had
stabilized. At that time, the options could be liquidated and the Fund's cash
could be used to buy Municipal Bonds.
The Fund would sell put and call options on futures contracts only as part
of closing transactions to terminate its options positions. No assurance can
be given that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the Fund's purchase of put
or call options will be based upon predictions as to anticipated interest rate
trends by SBMFM, which could prove to be inaccurate. Even if SBMFM's
expectations are correct, there may be an imperfect correlation between the
change in the value of the options and of the Fund's portfolio securities. The
Fund's ability to purchase and sell options on futures contracts and to trade
in these contracts may be limited to some extent by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
regulated investment company. See "Taxes" below.
Repurchase Agreements. The Fund may enter into repurchase agreements with
banks which are the issuers of instruments acceptable for purchase by the Fund
and with certain dealers on the Federal Reserve Bank of New York's list of
reporting dealers. A repurchase agreement is a contract under which the buyer
of a security simultaneously commits to resell the security to the seller at
an agreed-upon price on an agreed-upon date. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for
a relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. Under
each repurchase agreement, the selling institution will be required to
maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. SBMFM, acting under the supervision of
the Fund's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate potential risks. Repurchase
agreements could involve certain risks in the event of default or insolvency
of the other party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities, the risk of a possible
decline in the value of the underlying securities during the period in which
the Fund seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or part of
the income from the agreement.
Investment Restrictions
The Fund has adopted the following investment restrictions for the protection
of shareholders. Restrictions 1 through 7 below cannot be changed without the
approval of the holders of a majority of the outstanding shares of the Fund,
defined as the lesser of (a) 67% of the Fund's shares present at a meeting, if
the holders of more than 50% of the outstanding shares are present in person
or by proxy, or (b) more than 50% of the Fund's outstanding shares. The
remaining restrictions may be changed by the Fund's Board of Trustees at any
time.
The Fund will not:
1. Issue senior securities as defined in the 1940 Act and any rules and
orders thereunder, except insofar as the Fund may be deemed to have issued
senior securities by reason of: (a) borrowing money or purchasing securities
on a when-issued or delayed-delivery basis; (b) purchasing or selling futures
contracts and options on futures contracts and other similar instruments; and
(c) issuing separate classes of shares.
2. Invest more than 25% of its total assets in securities, the issuers of
which are in the same industry. For purposes of this limitation, U.S.
government securities 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 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,
in an amount not exceeding 10% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's total assets, the Fund will
not make additional investments.
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
objective and policies; (b) repurchase agreements; and (c) loans of its
portfolio securities.
5. Engage in the business of underwriting securities issued by other persons,
except to the extent that the Fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing of
portfolio securities.
6. Purchase or sell real estate, real estate mortgages, real estate investment
trust securities, commodities or commodity contracts, but this shall not
prevent the Fund from: (a) investing in securities of issuers engaged in the
real estate business 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 (c) trading in futures contracts and options on
futures contracts.
7. Purchase any securities on margin (except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except against the box). For
purposes of this restriction, the deposit or payment by the Fund of initial or
maintenance margin in connection with futures contracts and related options
and options on securities is not considered to be the purchase of a security
on margin.
8. 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.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets in the securities of
issuers having a record, including predecessors, of less than three years of
continuous operation, except U.S. government securities. (For purposes of this
limitation, issuers include predecessors, sponsors, controlling persons,
general partners, guarantors and originators of underlying assets.)
11. Invest in companies for the purpose of exercising control.
12. Invest in securities of other investment companies, except as they may be
acquired as part of a merger, consolidation or acquisition of assets and
except to the extent permitted by Section 12 of the 1940 Act (currently, up to
5% of the total assets of the Fund and no more than 3% of the total
outstanding voting stock of any one investment company).
13. Engage in the purchase or sale of put, call, straddle or spread options or
in the writing of such options, except that the Fund may make margin deposits
in connection with municipal bond index and interest rate futures contracts
and may purchase and sell options on municipal bond index and interest rate
futures contracts.
Certain restrictions listed above permit the Fund to engage in investment
practices that the Fund does not currently pursue. The Fund has no present
intention of altering its current investment practices as otherwise described
in the Prospectus and this Statement of Additional Information and any future
change in those practices would require Board approval and appropriate notice
to shareholders. If a percentage restriction is complied with at the time of
an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the amount
of the Fund's assets will not constitute a violation of such restriction. In
order to permit the sale of the Fund's shares in certain states, the Fund may
make commitments more restrictive than the restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of the Fund and its shareholders, it will revoke the commitment by
terminating sales of its shares in the state involved.
Portfolio Transactions
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales usually are
placed with those dealers from which it appears that the best price or
execution will be obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters of newly
issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers normally
are executed at a price between the bid and asked prices. (The Fund has paid
no brokerage commissions since its commencement of operations.)
Allocation of transactions, including their frequency, to various dealers
is determined by SBMFM in its best judgment and in a manner deemed fair and
reasonable to shareholders. The primary considerations are availability of the
desired security and the prompt execution of orders in an effective manner at
the most favorable prices. Subject to these considerations, dealers that
provide supplemental investment research and statistical or other services to
SBMFM may receive orders for portfolio transactions by the Fund. Information
so received is in addition to, and not in lieu of, services required to be
performed by SBMFM, and the fees of SBMFM are not reduced as a consequence of
their receipt of such supplemental information. Such information may be useful
to SBMFM in serving both the Fund and other clients and, conversely,
supplemental information obtained by the placement of business of other
clients may be useful to SBMFM in carrying out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence of any
underwriting or selling group relating thereto of which Smith Barney is a
member, except to the extent permitted by the SEC. Under certain
circumstances, the Fund may be at a disadvantage because of this limitation in
comparison with other investment companies which have a similar investment
objective but which are not subject to such limitation. The Fund also may
execute portfolio transactions through Smith Barney and its affiliates in
accordance with rules promulgated by the SEC.
While investment decisions for the Fund are made independently from those
of the other accounts managed by SBMFM, investments of the type the Fund may
make also may be made by those other accounts. When the Fund and one or more
other accounts managed by SBMFM are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by SBMFM to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received
by the Fund or the size of the position obtained or disposed of by the Fund.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of purchases or sales of
portfolio securities during the year, excluding purchases or sales of short-
term securities, divided by the monthly average value of portfolio securities)
generally is not expected to exceed 100%, but the portfolio 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. For the 1995 and 1996 fiscal years,
the Fund's portfolio turnover rates were 10% and 23% , respectively.
MUNICIPAL BONDS
General Information
Municipal Bonds generally are understood to include debt obligations issued to
obtain funds for various public purposes, including construction of a wide
range of public facilities, refunding of outstanding obligations, payment of
general operating expenses and extensions of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance various privately operated facilities are included
within the term Municipal Bonds if the interest paid thereon qualifies as
excluded from gross income (but not necessarily from alternative minimum
taxable income) for Federal income tax purposes in the opinion of bond counsel
to the issuer.
The yields on Municipal Bonds are dependent upon a variety of factors,
including general economic and monetary conditions, the financial condition of
the issuer, general conditions of the Municipal Bond market, the size of a
particular offering, the maturity of the obligation offered and the rating of
the issue. Municipal Bonds 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 the
obligations or upon the ability of municipalities to levy taxes. The
possibility also exists that as a result of litigation or other conditions,
the power or ability of any one or more issuers to pay, when due, principal of
and interest on its, or their, Municipal Bonds may be materially and adversely
affected.
When-Issued Securities
The Fund may purchase Municipal Bonds on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield). The
payment obligation and the interest rate that will be received on the
Municipal Bonds purchased on a when-issued basis are each fixed at the time
the buyer enters into the commitment. Although the Fund will purchase
Municipal Bonds on a when-issued basis only with the intention of actually
acquiring the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strategy.
Municipal Bonds are subject to changes in value based upon the public's
perception of the creditworthiness of the issuers and changes, real or
anticipated, in the level of interest rates. In general, Municipal Bonds tend
to appreciate when interest rates decline and depreciate when interest rates
rise. Purchasing Municipal Bonds on a when-issued basis, therefore, can
involve the risk that the yields available in the market when the delivery
takes place actually may 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 with 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 daily so that 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 commitment. Upon the settlement
date of the when-issued securities, the Fund will meet its 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 or Massachusetts personal income taxes.
When the Fund engages in when-issued transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
Special Considerations Relating to Massachusetts Municipal Securities
The Commonwealth of Massachusetts and certain of its cities and towns have at
certain times in the recent past undergone serious financial difficulties
which have adversely affected their credit standing. The prolonged effects of
such financial difficulties could adversely affect the market value of the
Massachusetts Municipal Securities held by the Fund. The information
summarized below describes some of the more significant factors that could
affect the Fund or the ability of the obligors to pay debt service on certain
of these securities. The sources of such information are the official
statements of issuers located in the Commonwealth of Massachusetts, as well as
other publicly available documents, and statements of public officials. The
Fund has not independently verified any of the information contained in such
statements and documents, but the Fund is not aware of facts which would
render such information inaccurate.
Fiscal Matters -- General. The Commonwealth's constitution requires, in
effect, that its budget, though not necessarily its operating expenditures and
revenues, be balanced each year. In addition, the Commonwealth has certain
budgetary procedures and fiscal controls in place that are designed to ensure
that sufficient cash is available to meet the Commonwealth's obligations, that
state expenditures are consistent with periodic allotments of annual
appropriations and that funds are expended consistent with statutory and
public purposes. The General Fund, in addition to being the Commonwealth's
primary operating fund, ordinarily functions as a residuary fund to receive
otherwise unallocated revenues and to provide monies to transfer to the other
operating funds as required. The condition of the General Fund generally is
regarded as the principal indicator of whether the Commonwealth's operating
revenues and expenses are in balance. The other principal operating funds (the
Local Aid Fund and the Highway Fund) are customarily funded to at least a zero
balance.
The Commonwealth of Massachusetts has experienced fiscal difficulties. In
order to constrain future debt service costs, the Executive Office for
Administration and Finance established in November, 1988 an annual fiscal year
limit on capital spending of $925 million, effective fiscal 1990. In January,
1990, legislation was enacted to impose a limit on debt service in
Commonwealth budgets beginning in fiscal 1991. The law provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt of the
Commonwealth (excluding Fiscal Recovery Bonds). It is possible that other
measures affecting the taxing or spending authority of Massachusetts or its
political subdivisions may be approved or enacted in the future. From the
fiscal year 1987 through fiscal year 1994 (estimate), this percentage has been
substantially below the limit established by this law.
Operating losses in 1990 and 1991, which totaled $1.251 billion and $21.2
million, respectively, were covered primarily through deficit borrowings.
During the period, fund balances in the budgeted operating funds increased
from opening balances of negative $1.104 billion in fiscal 1990 to positive
ending balances of $549.4 million in fiscal 1992. The Commonwealth ended
fiscal 1992 and 1993 with operating surpluses of $312.3 million and $13.1
million, respectively, and statutory closing fund balances increased to $562.5
million at the end of fiscal 1993. Fiscal 1994 ended with a current operating
surplus of $26.8 million and ending fund balances of $589.3 million prior to
taking into account certain revenue and expenditure reductions based on
preliminary financial information. The Commonwealth is in the process of
closing its fiscal 1995 financial records. Based on the unaudited Preliminary
Financial Report of the Commonwealth revenues collected in fiscal 1995 were
approximately $16.392 billion and expenditures were approximately $16.259.
On June 21, 1995, the Governor signed into law the fiscal 1996 budget,
which, together with authorizations contained in the final fiscal 1995
appropriations bill and expected supplemental appropriations relating to
welfare and certain other programs, provides for approximately $16.998 billion
in fiscal 1996 expenditures. Budgeted revenues and other sources to be
collected in fiscal 1996 are estimated by the Executive Office of
Administration and Finance to be approximately $16.778 billion. Fiscal 1995
tax revenues were approximately $12 million above the Department of Revenue's
tax revenue estimate of $10.151 billion.
Limitations on Tax Revenues. In Massachusetts efforts to limit and reduce
levels of taxation have been under way for several years. Limits were
established on state tax revenues by legislation enacted on October 25, 1986
and by an initiative petition approved by the voters on November 4, 1986. The
two measures are inconsistent in several respects.
Chapter 62F, which was added to the General Laws by initiative petition 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 governmental 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 legislation enacted
in October 1986, which added Chapter 29B to the General Laws, also establishes
an allowable state revenue growth factor by reference to total wages and
salaries in the Commonwealth. However, rather than utilizing a three-year
average wage and salary growth rate, as used by Chapter 62F, Chapter 29B's
formula utilizes one-third of the positive percentage gain in Massachusetts
wages and salaries, as reported by the federal government, during the three
calendar years immediately preceding the end of a given fiscal year.
Additionally, unlike Chapter 62F, Chapter 29B excludes from its definition of
state tax revenues income derived from local option taxes and excises and from
revenues needed to fund debt service costs.
Tax revenues in fiscal 1989 through fiscal 1994 were lower than the limit
set by either Chapter 62F or Chapter 29B.
Proposition 2 1/2. During recent years, limitations were placed on the
taxing authority of certain Massachusetts governmental entities that may
impair the ability of the issuers of some of the Bonds in Massachusetts to
maintain debt service on their obligations. For example, in November of 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 (a) 2.5% of the full and fair cash valuation of the real
estate and personal property therein, and (b) 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 (a) 2.5% of the total charges
and fees imposed in the preceding fiscal year, and (b) any increase in charges
for services customarily provided locally or services obtained by the city or
town at its option. As a result of Proposition 2 1/2, between fiscal 1981 and
fiscal 1989, the aggregate property tax levy declined in real terms by 15.6%.
Many communities have responded to the limitation imposed by Proposition 2
1/2 through statutory permitted overrides and exclusions. Override activity
peaked in fiscal 1991, when 182 communities attempted votes on one of the
three types of referenda questions (override of levy limit, exclusion of debt
service, or exclusion of capital expenditures) and 100 passed at least one
question, adding $58.5 million to their levy limits. In fiscal 1992, 67 of 143
communities had successful votes totaling $31.0 million. In fiscal 1994, 48
communities had successful override referenda which added $8.4 million to
their levy limits and in fiscal year 1995, 32 communities added $8.8 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.
Local Aid. 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 1995,
approximately 32.1% of the Commonwealth's budget is estimated to be allocated
to Local Aid. Local Aid payments to cities, towns and regional school
districts take the form of both direct and indirect assistance.
Direct Local Aid decreased from $2.961 billion in fiscal 1989 to
approximately $2.360 billion in fiscal 1992 and increased to approximately
$2.547 billion in fiscal 1993 and approximately $2.727 billion in fiscal 1994.
It is estimated that fiscal 1995 expenditures for direct Local Aid will be
$2.979 billion, which is an increase of approximately 9.2% above the fiscal
1994 level. The additional amount of indirect Local Aid provided over and
above direct Local Aid was approximately $2.069 billion in fiscal 1994. It is
estimated that in fiscal 1995 approximately $2.318 billion of indirect Local
Aid will also be paid.
A statute adopted by voter initiative petition to the November 1990
statewide election regulates the distribution of Local Aid to cities and
towns. The 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 would call for such an increase in fiscal 1993 and in
subsequent years. However, Local Aid payments expressly remain subject to
annual appropriation, and fiscal 1992, fiscal 1993 and fiscal 1994
appropriations for Local Aid did not meet, and fiscal 1995 appropriations for
Local Aid do not meet the levels set forth in the initiative law.
Commonwealth Expenditures. From fiscal 1989 to fiscal 1990 budgeted
expenditures of the Commonwealth increased approximately 4.9% to $13.260
million. Fiscal 1991 budgeted expenditures were $13.655 billion, or a 3.0%
increase over fiscal 1990 budgeted expenditures. For fiscal 1992, budgeted
expenditures were $13.420 billion, representing a decline of 1.7% from the
level of budgeted expenditures in fiscal 1991. Fiscal 1993 budgeted
expenditures were $14.696 billion, an increase of 9.6% from fiscal 1992.
Fiscal 1994 budgeted expenditures were $15.952 billion, an increase of 8.5%
from fiscal 1993. It is estimated that fiscal 1995 budgeted expenditures will
be $16.482 billion, an increase of 3.3% over the fiscal 1994 level.
Commonwealth expenditures since fiscal 1989 largely reflect significant
growth in several programs and services provided by the Commonwealth,
principally: Medicaid and group health insurance; public assistance programs;
debt service; pensions; and assistance to the Massachusetts Bay Transportation
Authority and regional transit authorities.
The Commonwealth's pension systems were established on a pay-as-you-go
basis. The Commonwealth's unfunded actuarial pension liability is significant
- -- approximately $9.651 billion as of January 1, 1993, for state employees and
teachers and local retirement system cost-of-living increases. The amount in
the state's pension reserve, established to address the unfunded liabilities
of the two state systems, has increased significantly in recent years due to
substantial appropriations and changes in the law relating to investment of
retirement systems assets. As of December 31, 1994, the reserve was
approximately $4.925 billion. Pension funding is estimated to be $951 million
in fiscal 1994. Comprehensive pension legislation approved in 1988 committed
the Commonwealth to fund future pension liabilities currently and to amortize
the Commonwealth's accumulated unfunded liabilities over 40 years.
From 1980 to 1989, the Massachusetts unemployment rate was significantly
lower than the national average. Between 1990 and 1992, however, the
Massachusetts unemployment rate was considerably higher that the national
average. Unemployment rates in Massachusetts since 1993 have declined after
that the national average.
The balance in the Massachusetts Unemployment Compensation Trust Fund
had been exhausted as of September, 1991 due to the continued high levels of
unemployment. As of December 31, 1992, the Massachusetts Unemployment
Compensation Trust Fund balance was in deficit by $377 million. As of November
30, 1993, the Fund was in deficit by $163 million. Benefit payments in excess
of contributions are being financed by use of repayable advances from the
federal unemployment loan account. Legislation enacted in May, 1992 increased
employer contributions in order to reduce advances from the federal loan
account. Since September 1994, the balance in the Trust fund have been
positive.
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 services programs, is in significant part dependent upon continuing
Federal reimbursements which have been declining.
Federal legislation in recent years has resulted in substantial reductions
in direct Federal payments and grants to states and municipalities for
programs in social service, water pollution control and other areas. Federal
reimbursements have also declined as a result of decreased state expenditures.
Further loss of Federal grants and financing by the Commonwealth could
exacerbate the economic slowdown and cause programs to be curtailed or cause
the recipients of such funding to find other revenue sources.
PURCHASE OF SHARES
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; (d) a pension, profit-sharing or other employee benefit plan
qualified under Section 401(a) of the Code, and qualified employee benefit
plans of employers who are "affiliated persons" of each other within the
meaning of the 1940 Act; (e) tax-exempt organizations enumerated in Section
501(c) (3) or (13) of the Code; and (f) 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 Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in Class A
shares of the Fund and in Class A shares of other funds of the Smith Barney
Mutual Funds that are offered with a sales charge, including the purchase
being made, of any purchaser is $25,000 or more. The reduced sales charge is
subject to confirmation of the shareholder's holdings through a check of
appropriate records. The Fund reserves the right to terminate or amend the
combined right of accumulation at any time after written notice to
shareholders. For further information regarding the right of accumulation,
shareholders should contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The public
offering price per Class A and Class Y share of the Fund is equal to the net
asset value per share at the time of purchase plus, for Class A shares, an
initial sales charge based on the aggregate amount of the investment. The
public offering price per Class B and Class C 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,
Class C, and Class A shares when purchased in amounts exceeding $500,000. The
method of computing the public offering price is shown in the Fund's financial
statements, incorporated by reference in their entirety into this Statement of
Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange, Inc. ("NYSE'') is
closed (other than for customary weekend or holiday closings), (b) when
trading in the markets the Fund normally utilizes is restricted, or an
emergency, as determined by the SEC, exists, 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.
Distributions in Kind
If the Fund's Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make a redemption
payment wholly in cash, the Fund may pay, in accordance with SEC rules, any
portion of a redemption in excess of the lesser of $250,000 or 1.00% of the
Fund's net assets by a distribution in kind of portfolio 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 a shareholder's shares at
the time the Withdrawal Plan commences.) 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 will reduce the shareholder's investment and
may 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.
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. All dividends and
distributions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund. For additional information,
shareholders should contact a Smith Barney Financial Consultant. Effective
November 7, 1994, Withdrawal Plans should be set up with a Smith Barney
Financial Consultant. A shareholder who purchases shares directly through the
Transfer Agent may continue to do so and applications for participation in the
Withdrawal Plan must be received by the Transfer Agent no later than the
eighth day of the month to be eligible for participation beginning with that
month's withdrawals.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis pursuant
to a written agreement dated July 30, 1993 (the "Distribution Agreement"),
which was most recently approved by the Fund's Board of Trustees on July 7,
1996. For the fiscal years ended November 30, 1994, 1995 and 1996, Smith
Barney and/or its predecessor, Shearson Lehman Brothers, received $93,015,
$42,000 and $42,635, respectively, in sales charges from the sale of the
Fund's Class A shares, and did not reallow any portion thereof to dealers.
For the fiscal years ended November 30, 1994, 1995 and 1996, Smith Barney or
its predecessor, Shearson Lehman Brothers, received from shareholders ,
$58,056, $61,000 and $185,465, respectively, in CDSC on the redemptions of
Class B and Class C shares.
When payment is made by the investor before settlement date, unless
otherwise noted by the investor, the funds will be held as a free credit
balance in the investor's brokerage account, and Smith Barney may benefit from
the temporary use of the funds. The investor may designate another use for the
funds prior to settlement date, such as an investment in a money market fund
(other than Smith Barney Exchange Reserve Fund) of the Smith Barney Mutual
Funds. If the investor instructs Smith Barney to invest the funds in a Smith
Barney money market fund, the amount of the investment will be included as
part of the average daily net assets of both the Fund and the money market
fund, and affiliates of Smith Barney that serve the funds in an investment
advisory or administrative capacity will benefit from the fact they are
receiving fees from both such investment companies for managing those assets,
computed on the basis of their average daily net assets. The Fund's Board of
Trustees has been advised of the benefits to Smith Barney resulting from these
settlement procedures and will take such benefits into consideration when
reviewing the Advisory, Administration and Distribution Agreements for
continuance.
For the fiscal year ended November 30, 1996, Smith Barney incurred
distribution expenses totalling approximately $288,100, consisting of
approximately $12,000 for advertising, $2,500 for printing and mailing of
prospectuses, $138,000 for support services, $132,000 to Smith Barney
Financial Consultants, and $3,600 in accruals for interest on the excess of
Smith Barney expenses incurred in distributing the Fund's shares over the sum
of the distribution fees and CDSC received by Smith Barney from the Fund.
Distribution Arrangements
To compensate Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the Fund has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, the Fund pays Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of 0.15% of the value of the
Fund's average daily net assets attributable to the Class A, Class B and Class
C shares. In addition, the Fund pays Smith Barney a distribution fee with
respect to the Class B and Class C shares primarily intended to compensate
Smith Barney for its initial expense of paying its Financial Consultants a
commission upon sales of those shares. The Class B distribution fee is
calculated at the annual rate of 0.50% of the value of the Fund's average
daily net assets attributable to the shares of the Class. The Class C
distribution fee is calculated at the annual rate of 0.55% of the value of the
Fund's average daily net assets attributable to the shares of the Class. For
the fiscal year ended November 30, 1994, the Class A, Class B and Class C
shares incurred $46,201, $35,788 and $6, respectively, in service fees. For
the same period, the Class B and Class C shares incurred $119,293 and $22,
respectively, in distibution fees. For the fiscal year ended November 30,
1995, the Class A, Class B and Class C shares incurred $42,539, $39,517 and
$79, respectively, in service fees. For the same period, the Class B and
Class C shares incurred $131,725 and $293, respectively, in distribution fees.
For the fiscal year ended November 30, 1996, the Class A, Class B and Class C
shares incurred $42,635, $42,585 and $199, respectively, in service fees. For
the same period, the Class B and Class shares incurred $141,951 and $730,
respectively, in distribution fees.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Fund's Board of Trustees,
including a majority of the Independent Trustees who have no direct or
indirect financial interest in the operation of the Plan or in the
Distribution Agreement. The Plan may not be amended to increase the amount of
the service and distribution fees without shareholder approval, and all
amendments of the Plan also must be approved by the Trustees and the
Independent Trustees in the manner described above. The Plan may be terminated
with respect to a Class at any time, without penalty, by vote of a majority of
the Independent Trustees or by vote of a majority of the outstanding voting
securities of the Class (as defined in the 1940 Act). Pursuant to the Plan,
Smith Barney will provide the Fund's Board of Trustees with periodic reports
of amounts expended under the Plan and the purpose for which such expenditures
were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE currently is
scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively. Because of the differences in distribution
fees and Class-specific expenses, the per share net asset value of each Class
may differ. The following is a description of the procedures used by the Fund
in valuing its assets.
Securities listed on a national securities exchange will be valued on the
basis of the last sale on the date on which the valuation is made or, in the
absence of sales, at the mean between the closing bid and asked prices. Over-
the-counter securities will be valued on the basis of the bid price at the
close of business on each day, or, if market quotations for those securities
are not readily available, at fair value, as determined in good faith by the
Fund's Board of Trustees. Short-term obligations with maturities of 60 days
or less are valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Trustees. Amortized cost involves valuing
an instrument at its original cost to the Fund and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of
the effect of fluctuating interest rates on the market value of the
instruments. All other securities and other assets of the Fund will be valued
at fair value as determined in good faith by the Fund's Board of Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Smith Barney Mutual Fund may
exchange all or part of their shares for shares of the same Class of other
funds of the Smith Barney Mutual Funds, to the extent such shares are offered
for sale in the shareholder's state of residence, on the basis of relative net
asset value per share at the time of exchange as follows:
A. Class A shares of the Fund may be exchanged without a sales charge
for Class A shares of any of the Smith Barney Mutual Funds.
B. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of another Smith
Barney Mutual Fund will be subject to the higher applicable CDSC of the
two funds and, for purposes of calculating CDSC rates and conversion
periods, will be deemed to have been held since the date the shares
being exchanged were deemed to be purchased.
C. Class C shares of any fund may be exchanged without a sales charge.
For purposes of CDSC applicability, Class C shares of the Fund exchanged
for Class C shares of another Smith Barney Mutual Fund will be deemed to
have been owned since the date the shares being exchanged were deemed to
be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investor's prior ownership of Class A shares of Smith Barney High Income Fund
and the account number in order to accomplish an exchange of shares of Smith
Barney High Income Fund under Paragraph B above. 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 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 would 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 are 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.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of a Class in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Time, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values, The New York
Times, USA Today and The Wall Street Journal. To the extent any advertisement
or sales literature of the Fund describes the expenses or performance of any
Class it will also disclose such information for the other Classes.
Average Annual Total Return
"Average annual total return," as described below, is computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
N = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
The Fund's average annual total return for Class A shares assuming the
maximum applicable sales charge was as follows for the periods indicated
(reflecting the waiver of the Fund's investment advisory and administration
fees and reimbursement of expenses):
1.42% for the one-year period from December 1, 1995 through November 30, 1996.
6.49% for the five-year period from December 1, 1991 through November 30,
1996.
7.87% per annum during the period from the Fund's commencement of operations
on December 21, 1987 through November 30, 1996.
A Class' average annual total return assumes that the maximum applicable
sales charge or CDSC assessed by the Fund has been deducted from the
hypothetical investment. Had the advisory and administration fees not been
waived and expenses reimbursed, and assuming that the maximum 4.00% sales
charge had not been deducted, Class A's average annual total return would have
been 5.65%, 7.36% and 8.36%, respectively, for those same periods.
The Fund's average annual total return for Class B shares assuming the
maximum applicable CDSC was as follows for the periods indicated (reflecting
the waiver of the Fund's investment advisory and administration fees and
reimbursement of expenses):
0.64 % for the one-year period from on December 1, 1995 through November 30,
1996.
6.18% per annum during the period from commencement (November 6, 1992) through
November 30, 1996.
Had the advisory and administration fees not been waived and expenses
reimbursed, and assuming the maximum applicable CDSC had not been deducted at
the time of redemption, Class B's average annual total return would have been
5.14% and 6.38%, respectively, for the same periods.
Aggregate Total Return
"Aggregate total return" represents the cumulative change in the value of an
investment in the Class for the specified period and are computed by the
following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
The Fund's aggregate total return for Class A shares was as follows for the
periods indicated (reflecting the waiver of the Fund's investment advisory and
administration fees and reimbursement of expenses):
1.42% for the one-year period from December 1, 1995 through November 30, 1996.
36.95% for the five-year period from December 1, 1991 through November 30,
1996.
96.98% for the period from the Fund's commencement of operations on December
21, 1987 through November 30, 1996.
A Class' aggregate total return assumes that the maximum applicable sales
charge or maximum applicable CDSC has been deducted from the investment. If
the maximum sales charge had not been deducted at the time of purchase, Class
A's aggregate total return for the same periods would have been 5.65%, 42.63%
and 105.11%, respectively.
The Fund's aggregate total return for Class B shares was as follows for the
periods indicated (reflecting the waiver of the Fund's investment advisory and
administration fees and reimbursement of expenses):
0.64% for the one-year period from December 1, 1995 through November 30, 1996.
27.64% for the period from commencement (November 6, 1992) through November
30, 1996.
If the maximum applicable CDSC had not been deducted at the time of
redemption, Class B's aggregate total return for the same periods would have
been 5.14% and 28.64%, respectively.
The Fund's aggregate total return for Class C shares was as follows for the
period indicated (reflecting the waiver of the Fund's investment advisory and
administration fees and reimbursement of expenses):
25.98% for the period from commencement (November 10, 1994) through November
30, 1996.
If the maximum applicable CDSC had not been deducted at the time of
redemption, Class C's aggregate total return for the same period would have
been 25.98%.
Performance will vary from time to time depending on market conditions, the
composition of the Fund's portfolio and operating expenses and the expenses
exclusively attributable to the Class. Consequently, any given performance
quotation should not be considered as representative of the Class' performance
for any specified period in the future. Because performance will vary, it may
not provide a basis for comparing an investment in the Class with certain bank
deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing a Class' performance with that of other mutual funds
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance. Each Class' net investment income changes in response to
fluctuations in interest rates and the expenses of the Fund.
TAXES
The following is a summary of selected Federal income tax considerations that
may affect the Fund and its shareholders. The summary is not intended as a
substitute for individual tax advice and investors are urged to consult their
own tax advisors as to the tax consequences of an investment in the Fund.
As described above and in the Fund's Prospectus, the Fund is designed to
provide shareholders with current income which is excluded from gross income
for Federal income tax purposes and which is exempt from Massachusetts
personal income taxes. The Fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital gains or
maximum tax-exempt income irrespective of fluctuations in principal.
Investment in the Fund would not be suitable for tax-exempt institutions,
qualified retirement plans, H.R. 10 plans and individual retirement accounts
because such investors would not gain any additional tax benefit from the
receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Provided that the Fund (a) is a
regulated investment company and (b) distributes at least 90% of its taxable
net investment income (including, for this purpose, 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- and short-term
capital gains, if any, are distributed to its shareholders.
Because the Fund will distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry Fund shares is not
deductible for Federal income tax purposes and Massachusetts personal income
tax purposes. If a shareholder receives exempt-interest dividends with respect
to any share and if such share is held by the shareholder for six months or
less, then, for Federal income tax purposes, any loss on the sale or exchange
of such share may, to the extent of exempt-interest dividends, be disallowed.
In addition, the Code may require a shareholder, if he or she receives exempt-
interest dividends, to treat as Federal taxable income a portion of certain
otherwise non-taxable social security and railroad retirement benefit
payments. Furthermore, that portion of any exempt-interest dividend paid by
the Fund which represents income derived from private activity bonds held by
the Fund may not retain its Federal 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" thereof. Moreover, as noted in the Fund's Prospectus,
(a) some or all of the Fund's dividends may be a specific preference item, or
a component of an adjustment item, for purposes of the Federal individual and
corporate alternative minimum taxes and (b) the receipt of the Fund's
dividends and distributions may affect a corporate shareholder's Federal
"environmental" tax liability. In addition, the receipt of the Fund's
dividends and distributions may affect a foreign corporate shareholder's
Federal "branch profits" tax liability and the Federal "excess net passive
income'' tax liability of a shareholder 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 such users
within the meaning of the Code or (b) subject to a Federal alternative minimum
tax, the Federal environmental tax, the Federal branch profits tax or the
Federal "excess net passive income" tax.
As described above and in the Fund's Prospectus, the Fund may invest in
municipal bond index and interest rate futures contracts and options on these
futures contracts. The Fund anticipates that these investment activities will
not prevent the Fund from qualifying as a regulated investment company;
however, in order to continue to qualify as a regulated investment company,
the Fund might have to limit its investments in such municipal bond index and
interest rate futures contracts and options on these futures contracts. As a
general rule, these investment activities will increase or decrease the amount
of long- and short-term capital gains or losses realized by the 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 municipal bond index and
interest rate futures contracts and options on these futures contracts
described above (collectively referred to 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 the Fund's fiscal year end
for their fair market value. As a result, the Fund may be treated as realizing
a greater or lesser amount of gains or losses than 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, and,
accordingly, the mark-to-market system generally will affect the amount of
capital gains or losses taxable to the Fund and the amount of distributions
taxable to a shareholder. Moreover, if the Fund invests in both section 1256
contracts and offsetting positions, which together constitute a straddle, then
the Fund may be required to defer certain realized losses. The Fund expects
that its activities with respect to section 1256 contracts and offsetting
positions in those contracts will not cause it to be treated as receiving a
materially greater amount of capital gains than actually realized and will
permit it to use substantially all of the losses for the fiscal years in which
such losses actually occur.
While the Fund does not expect to realize a significant amount of net long-
term capital gains, any such gains realized will be distributed as described
in the Fund's Prospectus. Such distributions ("capital gain dividends"), if
any, will be taxable to shareholders as long-term capital gains, regardless of
how long they have held Fund shares, and will be designated as capital gain
dividends in a written notice mailed by the Fund to shareholders after the
close of the Fund's taxable year. If a shareholder receives a capital gain
dividend with respect to any share and if the share has been held by the
shareholder for six months or less, then any loss (to the extent not
disallowed pursuant to the six-month rule described above relating to exempt-
interest dividends) on the sale or exchange of such share, to the extent of
the capital gain dividend, will be treated as a long-term capital loss.
If a shareholder incurs a sales charge in acquiring shares of the 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 (that is, exchange privilege), the original sales charge
will not be taken into account in computing gain or loss on the original
shares to the extent the subsequent sales charge is reduced. Instead, it will
be added to the tax basis in the newly acquired shares. Furthermore, the same
rule also applies to a disposition of the newly acquired or redeemed 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.
Each shareholder will receive after the close of the calendar year an
annual statement as to the Federal income tax and Massachusetts personal
income tax status of his or her dividends and distributions from the Fund for
the prior calendar year. These statements also will designate the amount of
exempt-interest dividends that is a preference item for purposes of the
Federal individual and corporate alternative minimum taxes. Each shareholder
also will receive, if appropriate, various written notices after the close of
the Fund's prior taxable year as to the Federal income tax status of his or
her dividends and distributions which were received from the Fund during the
Fund's prior taxable year. Shareholders should consult their tax advisors as
to any other state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded or exempt from Federal
income taxation and Massachusetts personal income taxation and the dollar
amount of dividends subject to Federal income taxation and Massachusetts
personal income taxation, if any, will vary for each shareholder depending
upon the size and duration of each shareholder's investment in the Fund. To
the extent the Fund earns taxable net investment income, it intends to
designate as taxable dividends the same percentage of each day's dividend as
its taxable net investment income bears to its total net investment income
earned on that day. Investors considering buying shares of the 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 payment.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that he
or she has provided a correct taxpayer identification number and that he or
she is not subject to ``backup withholding,'' then the shareholder may be
subject to a 31% backup withholding tax with respect to (a) taxable dividends
and distributions and (b) the proceeds of any redemptions of Fund shares. An
individual's taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and may be
credited against a taxpayer's regular Federal income tax liability.
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 the Fund, 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 the Fund's distributions derived from
Massachusetts Municipal Securities are not exempt from Massachusetts corporate
excise tax.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute
for careful tax planning. Investors are urged to consult their tax advisors
with specific reference to their own Federal, state and local tax situations.
ADDITIONAL INFORMATION
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103,
serves as the Fund's custodian. Under the custody agreement, PNC holds the
Fund's portfolio securities and keeps all necessary accounts and records. For
its services, PNC receives a monthly fee based upon the month-end market value
of securities held in custody and also receives securities transaction
charges. The assets of the Fund are held under bank custodianship in
compliance with the 1940 Act.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston, Massachusetts 02109, serves as the Fund's transfer 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, and distributes dividends and distributions payable
by the Fund. For these services, the Transfer Agent receives a monthly fee
computed on the basis of the number of shareholder accounts it maintains for
the Fund during the month, and is reimbursed for out-of-pocket expenses.
The Fund is a business trust established under the laws of the Commonwealth
of Massachusetts pursuant to a Master Trust Agreement dated January 13, 1987,
as amended from time to time. The Fund commenced operations on December 21,
1987, under the name Shearson Lehman Massachusetts Municipals. On December 7,
1988, August 27, 1990, July 30, 1993 and October 14, 1994, the Fund changed
its name to SLH Massachusetts Municipals Fund, Shearson Lehman Brothers
Massachusetts Municipals Fund, Smith Barney Shearson Massachusetts Municipals
Fund and Smith Barney Massachusetts Municipals Fund, respectively.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. The Master Trust
Agreement disclaims shareholder liability for acts or obligations of the Fund,
however, and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or a
Trustee. The Master Trust Agreement provides for indemnification from Fund
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Fund. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations, a
possibility which management of the Fund believes is remote. Upon payment of
any liability incurred by the Fund, a shareholder paying such liability will
be entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operation of the Fund in such a way so as to avoid, as
far as possible, ultimate liability of the shareholders for liabilities of the
Fund.
Description of Shares
The Master Trust Agreement of the Fund permits the Trustees of the Fund to
issue an unlimited number of full and fractional shares of a single class and
to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests in the Fund.
Each share in the Fund represents an equal proportional interest in the Fund
with each other share. Shareholders of the Fund are entitled upon its
liquidation to share pro rata in its net assets available for distribution. No
shareholder of the Fund has any preemptive or conversion rights. Shares of the
Fund are fully paid and non-assessable.
Pursuant to the Master Trust Agreement, the Fund's Trustees may authorize
the creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios) and additional classes
of shares within any series (which would be used to distinguish among the
rights of different categories of shareholders, as might be required by future
regulations or other unforeseen circumstances).
Voting Rights
The shareholders of the Fund are entitled to a full vote for each full share
held (and a fractional vote for any fractional share held). The Trustees of
the Fund have the power to alter the number and the terms of office of the
Trustees, and have terms of unlimited duration (subject to certain removal
procedures) and may appoint their own successors, provided at least a majority
of the Trustees at all times have been elected by the shareholders of the
Fund. The voting rights of the shareholders of the Fund are not cumulative, so
that the holders of more than 50% of the shares can, if they choose, elect all
of the Trustees of the Fund; the holders of the remaining shares of the Fund
would be unable to elect any of the Trustees.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended November 30, 1996
accompanies this Statement of Additional Information and is incorporated
herein by reference in its entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue bonds.
General obligation bonds are usually secured by all resources available to the
municipality and the factors outlined in the rating definitions below are
weighed in determining the rating. Because revenue bonds in general are
payable from specifically pledged revenues, the essential element in the
security for a revenue bond is the quantity and quality of the pledged
revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality
of general obligation bond credit is usually appropriate in the rating
analysis of a revenue bond, other factors are important, including
particularly the competitive position of the municipal enterprise under review
and the basic security covenants. Although a rating reflects S&P's judgment as
to the issuer's capacity for the timely payment of debt service, in certain
instances it may also reflect a mechanism or procedure for an assured and
prompt cure of a default, should one occur, i.e., an insurance program,
Federal or state guarantee or the automatic withholding and use of state aid
to pay the defaulted debt service.
AAA
Prime These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong,
due to the competitive position of the municipal enterprise or to the nature
of the revenues. Basic security provisions (including rate covenant, earnings
test for issuance of additional bonds, and debt service reserve requirements)
are rigorous. There is evidence of superior management.
AA
High Grade The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of the
prime quality issues. Bonds rated "AA'' have the second strongest capacity for
payment of debt service.
A
Good Grade Principal and interest payments on bonds in this category are
regarded as safe. This rating describes the third strongest capacity for
payment of debt service. It differs from the two higher ratings because:
General Obligation Bonds There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer to
meet debt obligations at some future date.
Revenue Bonds Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Medium Grade Of the investment grade ratings, this is the lowest.
General Obligation Bonds Under certain adverse conditions, several of the
above factors could contribute to a lesser capacity for payment of debt
service. The difference between "A'' and "BBB" ratings is that the latter
shows more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, -2 or -3) by S&P to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are 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 sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured; interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal or
interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a high
degree. These issues are often in default or have other marked short-comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction is in recognition of the differences between short- and long-term
credit risk. Loans bearing the designation MIG 1 or VMIG 1 are of the best
quality, enjoying strong protection by established cash flows of funds for
their servicing, from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2 or VMIG 2 are of
high quality, with margins of protection ample although not as large as the
preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may be
narrow and market access for refinancing is likely to be less well
established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial paper
rating assigned by S&P. Paper rated A-1+ must have either the direct credit
support of an issuer or guarantor that possesses excellent long-term operating
and financial strengths combined with strong liquidity characteristics
(typically, such issuers or guarantors would display credit quality
characteristics which would warrant a senior bond rating of "AA\-'' or
higher), or the direct credit support of an issuer or guarantor that possesses
above-average long-term fundamental operating and financing capabilities
combined with ongoing excellent liquidity characteristics. Paper rated A-1 by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A'' or better; the issuer
has access to at least two additional channels of borrowing; basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and the reliability and
quality of management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
Smith Barney
Massachusetts
Municipals Fund
Statement of
Additional
Information
March 28, 1997
Smith Barney
Massachusetts Municipals Fund
388 Greenwich Street
New York, NY 10013..................................Fund
........................ SMITH BARNEY
A Member of Travelers Group
28
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended
November 30, 1996 and the report of Independent
Accountants dated November 30, 1996, are incorporated by
reference to the Definitive 30b2-1 filed on January 30, 1997
as Accession #0000091155-91-000056.
Included in Part C:
Consent of Independent Auditors
(b) Exhibits
All references are to the Registrant's Registration Statement on
Form N-1A (the "Registration Statement") as filed with the SEC on
January 26, 1987 (File Nos. 33-11417 and 811-4994).
(1) (a) First Amended and Restated Master Trust Agreement, dated November
5, 1992, is incorporated by reference to Post-Effective Amendment
No. 12 filed on November 26, 1994 ("Post-Effective No. 12").
(b) Amendment No. 1 to the Registrant's Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 12.
(c) Amendment No. 2 to the Registrant's Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 15 filed on January 26, 1995 ("Post-Effective
Amendment No. 15").
(2) Registrant's by-laws are incorporated by reference to the
Registration Statement.
(3) Not applicable.
(4) (a) Registrant's form of stock certificate is incorporated by
reference to Post-Effective Amendment No. 9 filed on October 23,
1992 ("Post-Effective Amendment No. 9").
(5) (a) Investment Advisory Agreement dated July 30, 1993 between
the Registrant and Greenwich Street Advisors is incorporated
by reference to Post-Effective Amendment
No. 12.
(b) Form of Transfer and Assumption of Investment Advisory Agreement
between the Registrant, Mutual Management Corp. and Smith Barney
Mutual Funds Management Inc. is incorporated by reference to Post-
Effective Amendment No. 16.
(6) Distribution Agreement dated July 30, 1993, between the Registrant
and Smith Barney Shearson Inc. is incorporated by reference to
Post-Effective Amendment No. 12.
(7) Not applicable.
(8) Form of Custodian Agreement between the Registrant and PNC Bank,
National Association is incorporated by reference to Post-
Effective Amendment No. 16.
(9) (a) Administration Agreement between the Registrant and Smith, Barney
Advisers, Inc., dated April 20, 1994 is incorporated by reference
to Post-Effective Amendment No. 15.
(b) Transfer Agency Agreement between the Registrant and The
Shareholder Services Group, Inc., dated August 2, 1993, is
incorporated by reference to Post-Effective Amendment No. 13 filed
on January 28, 1994.
(10) Not applicable.
(11) Consent of Independent Accountants is filed herein.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Amended Service and Distribution Plan dated as of November 7, 1994
pursuant to Rule
12b-1 between the Registrant and Smith Barney Inc. is incorporated
by reference to Post-Effective Amendment No. 15.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 3 filed on January 29, 1990.
(17) Not applicable.
(18) Form of Rule 18f-3(d) Multiple Class Plan of the Registrant is
incorporated by reference to Post-Effective Amendment No. 16.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1)
Title of
Class
(2)
Number of Record Holders
by class as of January 10, 1997
Common Stock
Class A - 639
par value
$.001 per share
Class B - 833
Class C - 013
Class Y - 000
Item 27. Indemnification.
The response to this item is incorporated by reference to the Registration
Statement.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser--Smith Barney Mutual Funds Management Inc., formerly known
as Smith, Barney Advisers, Inc. ("SBMFM").
SBMFM was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). SBMFM is registered as an investment adviser under
the Investment Advisers Act of 1940 ("Advisers Act").
The list required by this Item 28 of officers and directors of SBMFM together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by such officers and directors during the
past two years, is incorporated by reference to Schedules A and D of Form ADV
filed by SBMFM pursuant to the Advisers Act (SEC File No. 801-8314).
Prior to the close of business on November 7, 1994, Greenwich Street Advisors
served as investment adviser. Greenwich Street Advisors, through its
predecessors, has been in the investment counseling business since 1934 and
was a division of Mutual Management Corp. ("MMC"). MMC was incorporated in
1978 and is a wholly owned subsidiary of Smith Barney Holdings Inc. (formerly
known as Smith Barney Shearson Holdings Inc.) ("Holdings"), which in turn is a
wholly owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). The list required by this Item 28 of officers and
directors of MMC and Greenwich Street Advisors, together with information as
to any other business, profession, vocation or employment of a substantial
nature engaged in by such officers and directors during the past two fiscal
years, is incorporated by reference to Schedules A and D of Form ADV filed by
MMC on behalf of Greenwich Street Advisors pursuant to the Advisers Act (SEC
File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Inc. (formerly
known as Smith Barney Shearson Inc.) acquired the domestic retail brokerage
and asset management business of Shearson Lehman Brothers, which included the
business of the Registrant's prior investment adviser. Shearson Lehman
Brothers was a wholly owned subsidiary of Shearson Lehman Brothers Holdings
Inc. ("Shearson Holdings"). All of the issued and outstanding common stock of
Shearson Holdings (representing 92% of the voting stock) was held by American
Express Company. Information as to any past business, vocation or employment
of a substantial nature engaged in by officers or directors of Shearson Lehman
Advisors can be located in Schedules A and D of Form ADV filed by Shearson
Lehman Brothers on behalf of Shearson Lehman Advisors prior to July 30, 1993
(SEC File No. 801-3701).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as a distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith Barney Massachusetts
Municipals Fund, Smith Barney Managed Government Fund Inc., Smith Barney
Aggressive Growth Fund Inc., Smith Barney Appreciation Fund Inc., Smith Barney
Principal Return Fund, Smith Barney Income Funds, Smith Barney Equity Funds,
Smith Barney Investment Funds Inc., Smith Barney Natural Resources Fund Inc.,
Smith Barney Telecommunications Trust, Smith Barney Arizona Municipals Fund
Inc., Smith Barney New Jersey Municipals Fund Inc., The USA High Yield Fund
N.V., Travelers Series Fund, Smith Barney Fundamental Value Fund Inc., Smith
Barney Series Fund, Consulting Group Capital Markets Funds, Smith Barney
Investment Trust, Smith Barney Adjustable Rate Government Income Fund, Smith
Barney Oregon Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni
Funds, Smith Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith
Barney Municipal Money Market Fund, Inc., Smith Barney Variable Account Funds,
Smith Barney U.S. Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V.,
Worldwide Securities Limited (Bermuda), Smith Barney International Fund
(Luxembourg), Smith Barney Institutional Cash Management Fund, Inc. and
various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). On June 1, 1994, Smith Barney changed its name
from Smith Barney Shearson Inc. to its current name. The information required
by this Item 29 with respect to each officer, director and partner of Smith
Barney is incorporated by reference to Schedule A of Form BD filed by Smith
Barney pursuant to the Securities Exchange Act of 1934 (SEC File No. 812-
8510).
Item 30. Location of Accountants and Records
(1) Smith Barney Massachusetts
Municipals Fund
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual
Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None.
485(b) Certification
The Registrant hereby certifies that it meets all the requirements for
effectiveness of this registration statement pursuant to Rule 485(b) under the
Securities Act or 1933, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY MASSACHUSETTS
MUNICIPALS FUND, has duly caused this registration statement to be signed on
its behalf by the undersigned, thereto duly authorized in the City of New
York, and State of New York as of the 24th day of March, 1997.
SMITH BARNEY MASSACHUSETTS
MUNICIPALS FUND
/s/Heath B. McLendon
Heath B. McLendon, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/Heath B. McLendon
Heath B. McLendon Chairman of the Board March 24, 1997
(Chief Executive Officer)
/s/Lewis E. Daidone
Lewis E. Daidone Treasurer March 24, 1997
(Chief Financial and
Accounting Officer)
/s/Herbert Barg
Herbert Barg Director March 24, 1997
/s/Alfred Bianchetti
Alfred J. Bianchetti Director March 24, 1997
/s/Martin Brody
Martin Brody Director March 24, 1997
/s/Dwight B. Crane
Dwight B. Crane Director March 24, 1997
/s/Burt N. Dorsett
Burt N. Dorsett Director March 24, 1997
/s/Elliot S. Jaffe
Elliot S. Jaffe Director March 24, 1997
/s/Stephen E. Kaufman
Stephen E. Kaufman Director March 24, 1997
/s/Joseph J. McCann
Joseph J. McCann Director March 24, 1997
/s/Cornelius C. Rose, Jr.
Cornelius C. Rose, Jr. Director March 24, 1997
EXHIBIT INDEX
Exhibit No. Exhibit Page Number
11(b) Auditor's Consent
17 Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Massachusetts Municipals Fund
We consent to the use of our reports, as listed below, with respect to the
Fund incorporated herein by reference and to the references to our Firm
under the headings "Financial Highlights"in the Prospectus and
Independent Auditors in the Statement of Additional
Information.
Date of Independent Auditors Report January 10, 1997
KPMG Peat Marwick LLP
New York, New York
March 24, 1997
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