ANNUAL REPORT
1996
1996
1996
1996
1996
SMITH BARNEY
MASSACHUSETTS
MUNICIPALS
FUND
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November 30, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing For Your Future.
Every Day.
<PAGE>
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Smith Barney Massachusetts Municipals Fund
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Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Massachusetts Municipals Fund for the year ended November 30, 1996. In this
report, we summarize the period's prevailing economic and market conditions and
outline our portfolio strategy. A detailed summary of the Fund's performance
can be found in the appropriate sections that follow in the annual report.
For the year ended November 30, 1996, the Class A shares of the Massachusetts
Municipals Fund had a total return of 5.65%. This compares favorably to the
average return of 5.03% for Massachusetts tax-exempt funds as reported by Lipper
Analytical Services, Inc. (Lipper is an independent fund tracking organization.)
Over the twelve-month period covered by this report, the Fund distributed
dividends totaling $0.672 per share for Class A shares; based on its net asset
value (NAV) of $12.99 as of November 30, 1996, this equates to an annualized
distribution rate of 5.17%. For a Massachusetts resident in the combined federal
and state income tax bracket of 48%, the tax free yield of 5.17% is equivalent
to a taxable yield of 9.94%.
Market and Economic Overview
Throughout 1996, the U.S. economy has continued to enjoy a healthy recovery
which began over six years ago. The national unemployment rate has fallen from
around 7.50% in 1992, to just over 5.00% in 1996. Consumer price inflation has
remained virtually unchanged since the end of 1991, and producer prices still
appear to be declining on a long-term basis. Although there were little signs of
inflation in 1996, the strength of the U.S. economy, particularly during the
first two quarters of 1996, caused inflation fears to rise among many investors
throughout most of the year. In addition, the debate over whether or not the
Federal Reserve Board (the Fed) would raise interest rates continued to linger
over the U.S. bond markets, which added to bond market volatility between April
and September. However, during the third quarter of 1996, U.S. economic growth
moderated, fears of inflation subsided, and interest rates broke out of the
trading range of 6.75% to 7.20% that had existed since April. As of November 30,
1996, the yield on the 30-year Treasury was 6.36%. The recent bond market rally
was fueled by data that seem to suggest inflation is virtually non-existent in
the U.S. economy, as well as the announcement that the Fed left rates unchanged
at its most recent Federal Open Market Committee meeting.
1
<PAGE>
Municipal bond yields have also declined recently as many investors became
comforted by the fact that any radical tax reform that could have resulted from
the November elections was purely political rhetoric. Looking ahead into 1997,
we believe that any future tax reform will be moderate at best. While some may
say that municipal bonds are now "rich" relative to Treasuries, as opposed to
being "inexpensive" throughout the first half of the year, we disagree. In our
view, municipal bonds are now more fairly priced relative to Treasuries.
Massachusetts Economic Highlights
Massachusetts, as well as the rest of the Northeast, has not enjoyed the same
robust economic growth that the rest of the U.S. has experienced over the past
six years. However, the Commonwealth has made progress over the past few years.
For example, the unemployment rate in Massachusetts dropped to 3.90% in
November, while the national rate was 5.30%. In fact, the Commonwealth's
unemployment rate has been below the U.S. rate for 38 of the last 42 months.
Moreover, Massachusetts is one of the only states that has an unemployment rate
of under 4.00%. In addition, job creation remains strong in Massachusetts within
the high-tech services and the Commonwealth has the best technology-related
resources and workers in the nation.
With Governor William Weld remaining in office, after losing the November
election for U.S. senator, we believe that there will be no major policy changes
in Massachusetts, and bond issuance will continue to be low. An important point
worth mentioning is that Middlesex County recently defaulted on a note that it
had issued on behalf of Middlesex Hospital. We fortunately do not have any
exposure to Middlesex County or Middlesex Hospital bonds. While the future
outcome of the situation is still uncertain, we believe this is a clear example
of the importance of conservative, professional investment management in
managing your tax-exempt investments.
Fund's Investment Strategy
The Massachusetts Municipals Fund's investment strategy continues to focus on
higher coupon bonds in order to maintain an attractive level of dividend income
exempt from Federal and Massachusetts State income taxes. In addition, we strive
to maintain a high quality portfolio. The Fund has over 96% of its assets
invested in investment grade securities, of which approximately 54% are rated
triple-A. As of November 30, 1996 the majority of the Fund's assets were
allocated among the following types of municipal bond issues: hospital bonds
(22.5%), general obligation bonds (21.8%), education bonds (17.7%) and housing
bonds (13.6%). The Fund's average weighted maturity as of November 30, 1996 was
approximately 21 years.
2
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Municipal Bond Market Outlook
Throughout 1995 and 1996, the supply of new municipal bond issues was low
relative to the number of bonds that were retired. Going forward, the calling
and maturing of municipal bonds will begin to slow down, but the market in our
view will not see a large increase in municipal bond issuance. However, during
the recent November elections, 90% of bond issues that were ballot initiatives
were approved, as opposed to the 50% approval rate of two years ago. Therefore,
at some point in time, we believe an increase in municipal bond issuance will
occur, but not at the levels seen in years past. Nevertheless, we believe that
supply and demand trends should remain intact over the next couple of years.
In our opinion, another factor that could have a future impact on the bond
markets, is the "Boskin Commission's" recent report on the Consumer Price Index
(CPI). The report suggests that the U.S. government has overstated the annual
inflation rate by approximately 1.1%, and recommends that the best approach to
improve the CPI might be through legislative action. If Congress and the
administration take steps to improve the accuracy of the CPI, we believe it will
be positive for the bond markets which tend to perform better in a lower-
inflation environment.
On a short-term basis, we expect to see the recent bond market rally to
continue, at least into the first quarter of 1997. In our view, the Fed should
remain on the sidelines for now, but may be compelled to raise short-term
interest rates during the first quarter of 1997, if the fourth quarter U.S.
economic numbers show any signs of inflation.
In closing, thank you for investing in the Smith Barney Massachusetts Municipals
Fund. We look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/Heath B. McLendon /s/Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman and Vice President and
Chief Executive Officer Investment Officer
December 20, 1996
3
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Historical Performance--Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/96 $12.96 $12.99 $0.67 $0.00 $0.00 5.65%
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11/30/95 11.35 12.96 0.69 0.00 0.00 20.73
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11/30/94 13.26 11.35 0.70 0.06 0.00 (9.07)
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11/30/93 12.63 13.26 0.74 0.07 0.00 11.74
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11/30/92 12.28 12.63 0.77 0.04 0.04 10.06
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11/30/91 11.81 12.28 0.84 0.00 0.01 11.57
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11/30/90 12.11 11.81 0.85 0.02 0.00 4.93
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11/30/89 11.88 12.11 0.86 0.00 0.00 9.43
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Inception*-11/30/88 11.40 11.88 0.82 0.06 0.00 12.25+
====================================================================================================================
Total $6.94 $0.25 $0.05
====================================================================================================================
</TABLE>
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Historical Performance--Class B Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/96 $12.96 $12.99 $0.61 $0.00 $0.00 5.14%
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11/30/95 11.35 12.96 0.63 0.00 0.00 20.15
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11/30/94 13.26 11.35 0.64 0.06 0.00 (9.50)
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11/30/93 12.63 13.26 0.68 0.07 0.00 11.09
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Inception*-11/30/92 12.52 12.63 0.05 0.00 0.00 1.29+
====================================================================================================================
Total $2.61 $0.13 $0.00
====================================================================================================================
</TABLE>
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Historical Performance--Class C Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/96 $12.95 $12.98 $0.60 $0.00 $0.00 5.09%
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11/30/95 11.35 12.95 0.63 0.00 0.00 20.04
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Inception*-11/30/94 11.34 11.35 0.04 0.00 0.00 0.40+
====================================================================================================================
Total $1.27 $0.00 $0.00
====================================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
4
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Average Annual Total Return
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<TABLE>
<CAPTION>
Without Sales Charge(1)
-----------------------------
Class A Class B Class C
===============================================================
<S> <C> <C> <C>
Year Ended 11/30/96 5.65% 5.14% 5.09%
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Five Years Ended 11/30/96 7.36 N/A N/A
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Inception* through 11/30/96 8.36 6.38 12.17
===============================================================
<CAPTION>
Without Sales Charge(2)
-----------------------------
Class A Class B Class C
===============================================================
<S> <C> <C> <C>
Year Ended 11/30/96 1.42% 0.64% 4.09%
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Five Years Ended 11/30/96 6.49 N/A N/A
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Inception* through 11/30/96 7.87 6.18 12.17
===============================================================
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Cumulative Total Return
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<CAPTION>
Without Sales Charge(1)
=================================================================
<S> <C>
Class A (Inception* through 11/30/96) 105.11%
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Class B (Inception* through 11/30/96) 28.64
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Class C (Inception* through 11/30/96) 26.66
=================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gains distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.00% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are December 21, 1987, November
6, 1992 and November 10, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of
the Smith Barney Massachusetts Municipals Fund vs.
Lehman Municipal Bond Fund Index and
Lipper Massachusetts Municipal Fund Average+
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December 1987--November 1996
[GRAPHIC]
Smith Barney Lehman Municipal Lipper Massachusetts
Massachusetts Bond Fund Index Municipal Fund Average
Fund
12/21/87 $ 9,596 $10,000 $10,000
11/88 10,772 10,904 10,969
11/89 11,787 12,106 12,011
11/90 12,368 13,038 12,722
11/91 13,799 14,376 14,083
11/92 15,187 15,818 15,528
11/93 16,970 17,571 17,341
11/94 15,431 16,649 16,105
11/95 18,629 19,797 19,081
11/30/96 19,682 20,959 20,045
+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on December 21, 1987, assuming deduction of the maximum 4.00%
sales charge at the time of investment and reinvestment of dividends and
capital gains, if any, at net asset value through November 30, 1996. The
Lehman Municipal Bond Fund Index is a broad based, total return index
comprised of 8,000 actual bonds which are all investment grade, fixed rate,
long term maturities (greater than two years) and are selected from issues
larger than $50 million dated since January, 1984. The index is unmanaged
and is not subject to the same management and trading expenses as a mutual
fund. The Lipper Massachusetts Municipal Fund Average is composed of the
Fund's peer group of mutual funds (50 funds as of November 30, 1996). The
performance of the Fund's other classes may be greater or less than the
Class A shares' performance indicated on this chart, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
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Portfolio Highlights (unaudited) November 30, 1996
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Industry Breakdown
[GRAPHIC]
<TABLE>
<CAPTION>
Percentage of
Industry Total Investments
===========================================================================
<S> <C>
Water and Sewer 8.6%
Housing: Multi-Family 7.0
Housing: Single-Family 6.6
Hospitals 22.5
Short-Term 0.2
Miscellaneous 2.2
Education 17.7
Utilities 4.0
Industrial Development 1.6
Transportation 3.3
Pollution Control 4.5
General Obligation 21.8
===========================================================================
</TABLE>
Summary of Investments by Combined Ratings
<TABLE>
<CAPTION>
Standard & Percentage of
Moody's and/or Poor's Total Investments
- ---------------------------------------------------------------
<S> <C> <C>
Aaa AAA 53.8%
Aa AA 12.4
A A 17.6
Baa BBB 12.6
Ba BB 1.1
B B 1.5
NR NR 1.0
-----
100.0%
=====
</TABLE>
7
<PAGE>
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Schedule of Investments November 30, 1996
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
========================================================================================
<S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- 100%
Education -- 17.7%
Boston Financing Authority, IDR, College of Pharmacy,
Project A, CONNIE LEE-Insured:
$ 750,000 AAA 5.250% due 10/1/14 $ 723,750
1,000,000 AAA 5.250% due 10/1/26 950,000
1,425,000 AAA Chelsea (School Project), AMBAC-Insured,
6.000% due 6/15/14 1,512,281
185,000 A Massachusetts Educational Loan Authority, Issue D,
Series A, 7.650% due 1/1/07 (a) 192,631
Massachusetts State Health & Educational Facilities
Authority Revenue:
430,000 AAA Community College Program, Series A,
CONNIE LEE-Insured, 6.600% due 10/1/22 448,275
1,000,000 AAA Series G, MBIA-Insured, 5.375% due 7/1/24 970,000
Suffolk University, Series B, CONNIE LEE-Insured:
200,000 AAA 6.250% due 7/1/12 207,500
1,850,000 AAA 6.350% due 7/1/22 1,921,681
Massachusetts State Industrial Finance Agency Revenue:
750,000 A* Clark University, Series E, 7.000% due 7/1/12 812,813
MBIA-Insured:
1,000,000 AAA Assumption College Issue, 6.000% due 7/1/26 1,023,750
1,000,000 AAA College of The Holy Cross, 5.625% due 3/1/26 1,007,500
500,000 AAA Southeastern Massachusetts University, Series A,
AMBAC-Insured, 5.900% due 5/1/12 519,375
- ----------------------------------------------------------------------------------------
10,289,556
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General Obligation -- 21.8%
700,000 AAA Boston GO, Series A, AMBAC-Insured, 6.500% due 7/1/12 762,125
250,000 A- Brockton Utility GO, 6.125% due 6/15/18 259,063
920,000 AAA Dedham-Westwood Water District, Refunding Bonds,
MBIA-Insured, 5.100% due 10/15/12 891,250
500,000 AAA Fall River GO, MBIA-Insured, 7.200% due 6/1/10 556,875
556,875
500,000 AAA Gloucester GO, Municipal Purpose Loan, FSA-Insured,
5.500% due 11/15/13 504,375
250,000 AAA Groveland GO, AMBAC-Insured, 6.850% due 6/15/06 275,625
1,000,000 AAA Haverhill Revenue Bonds, Series A, AMBAC-Insured,
6.700% due 9/1/10 1,085,000
500,000 AAA Holyoke GO, Series B, FSA-Insured, 6.125% due 8/1/13 532,500
Lowell GO:
AMBAC-Insured:
500,000 AAA 6.000% due 8/1/13 528,750
500,000 AAA 6.000% due 8/1/14 526,250
250,000 AAA Series B, FSA-Insured, 5.600% due 11/1/12 252,813
250,000 AAA Mansfield GO, AMBAC-Insured, 6.700% due 1/15/11 272,813
500,000 AAA Massachusetts State Health & Educational Facilities
Authority Revenue, Capital Asset Program, Series F,
MBIA-Insured, 7.300% due 10/1/18 549,375
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
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Schedule of Investments (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=============================================================================================
<C> <C> <S> <C>
General Obligation -- 21.8% (continued)
$ 610,000 AAA New Bedford Massachusetts, FSA-Insured, 5.625% due 10/1/16 $ 616,863
250,000 AAA North Reading GO, MBIA-Insured, 6.875% due 6/15/07 273,750
1,000,000 AAA Northhampton GO, MBIA-Insured, 5.750% due 5/15/16 1,030,000
795,000 A- Plymouth County GO, COP, Series A, 6.750% due 10/1/04 881,456
200,000 A Puerto Rico Commonwealth GO, 8.000% due 7/1/08 214,250
500,000 AAA Revere Municipal Purpose Loan, FSA-Insured,
6.125% due 6/15/13 529,375
500,000 AAA Salem GO, AMBAC-Insured, 6.800% due 8/15/10 553,750
750,000 Baa* Springfield GO, School Project Loan, Series B,
7.100% due 9/1/11 859,688
Virgin Islands Public Finance Authority Revenue, Series A,
Matching Funds Loan Note, Marine Midland:
15,000 AAA Escrowed to Maturity with U.S. Government
Securities, 7.300% due 10/1/18 18,413
110,000 AAA Pre-Refunded--Escrowed with U.S. Government
Securities to 10/1/00 Call @ 101,
7.300% due 10/1/18 123,338
485,000 AAA Webster GO, AMBAC-Insured, 6.700% due 9/1/10 525,013
- ---------------------------------------------------------------------------------------------
12,622,710
- ---------------------------------------------------------------------------------------------
Hospitals -- 22.5%
1,750,000 Aa* Boston Revenue Refunding Bonds, Boston City Hospital,
FHA-Insured, 5.750% due 2/15/23 1,741,250
1,000,000 AAA Massachusetts General Hospital, Series F,
AMBAC-Insured, 6.250% due 7/1/20 1,036,250
Massachusetts State Health & Educational Facilities
Authority Revenue:
750,000 A* Addison Gilbert Hospital, Series C,
5.750% due 7/1/23 735,938
250,000 A Beth Israel Hospital, Series E, 7.000% due 7/1/14 265,625
1,000,000 A Brockton Hospital, Series B, 8.100% due 7/1/13 1,036,150
750,000 Ba1* Central New England Health Systems, Series A,
6.300% due 8/1/18 652,500
1,000,000 BBB+ Faulkner Hospital, Series C, 6.000% due 7/1/13 988,750
500,000 A- Melrose-Wakefield Healthcare, Series C,
6.000% due 7/1/12 508,125
Morton Hospital & Medical Center, Series B,
CONNIE LEE-Insured:
1,000,000 AAA 5.250% due 7/1/14 963,750
500,000 AAA 5.500% due 7/1/23 481,250
1,000,000 AAA Regular Linked Stars & Cars, AMBAC-Insured,
6.550% due 6/23/22 1,090,000
1,000,000 B Saints Memorial Medical Center, Series A,
6.000% due 10/1/23 853,750
750,000 AAA South Shore Hospital, Series E, MBIA-Insured,
5.500% due 7/1/20 741,563
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=============================================================================================
<C> <C> <S> <C>
Hospitals -- 22.5% (continued)
$ 600,000 AAA University of Massachusetts Medical Center,
CONNIE LEE-Insured, 6.000% due 7/1/23 $ 607,500
700,000 AAA Valley Regional Health System, Series C,
CONNIE LEE-Insured, 7.000% due 7/1/06 815,500
500,000 AAA Winchester Hospital, Series D, CONNIE LEE-Insured,
5.750% due 7/1/14 500,625
- ---------------------------------------------------------------------------------------------
13,018,526
- ---------------------------------------------------------------------------------------------
Housing: Multi-Family -- 7.0%
1,000,000 AAA Framingham Housing Authority Mortgage Revenue, Beaver
Terrace Apartments, Series A, GNMA-Collateralized,
6.650% due 2/20/32 1,028,750
Massachusetts State HFA:
1,120,000 A+ Housing Project, Series A, 6.375% due 4/1/21 1,141,000
1,000,000 AAA Rental Mortgage, Series E, AMBAC-Insured,
6.000% due 7/1/37 (a) 998,750
795,000 BBB Puerto Rico Commonwealth, Urban Renewal & Housing
Corp. Refunding Bonds, 7.875% due 10/1/04 875,494
- ---------------------------------------------------------------------------------------------
4,043,994
- ---------------------------------------------------------------------------------------------
Housing: Single-Family -- 6.6%
Massachusetts State HFA, Housing Revenue,
Single-Family Housing:
100,000 Aa* Series 5, 8.375% due 6/1/15 103,173
945,000 AAA Series 14, FHA-Insured, 7.700% due 12/1/14 992,250
600,000 Aa* Series 18, 7.350% due 12/1/16 638,250
1,000,000 Aa* Series 31, 6.450% due 12/1/16 (b) 1,037,500
1,000,000 Aa* Series 38, 7.200% due 12/1/26 (a) 1,068,750
- ---------------------------------------------------------------------------------------------
3,839,923
- ---------------------------------------------------------------------------------------------
Industrial Development -- 1.6%
Massachusetts State Industrial Finance Agency:
100,000 AAA IDR, Guaranteed Loan Program, Series A, 7.875% due
5/1/07 (Mandatory Put 5/1/97 @ 100) (a) 102,000
Resource Recovery Revenue, Series A:
250,000 BBB Refusetech Inc. Project, 6.300% due 7/1/05 264,063
500,000 NR S.E. Massachusetts Project, 9.000% due 7/1/15 567,500
- ---------------------------------------------------------------------------------------------
933,563
- ---------------------------------------------------------------------------------------------
Miscellaneous -- 2.2%
500,000 A+ Massachusetts State Convention Center Authority, Boston
Common Parking Garage, Series A, 5.375% due 9/1/13 491,250
250,000 AAA Massachusetts State Industrial Finance Agency Revenue,
Concord Academy, FSA-Insured, 6.900% due 9/1/21 274,063
500,000 BB+ Puerto Rico Port Authority Revenue, Special Facilities,
American Airlines, Series A, 6.300% due 6/1/23 (a) 515,625
- ---------------------------------------------------------------------------------------------
1,280,938
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=============================================================================================
<C> <C> <S> <C>
Pollution Control -- 4.5%
$ 1,000,000 Baa2* Massachusetts State Industrial Finance Agency,
PCR, (Eastern Edison Co. Project), Series E,
5.875% due 8/1/08 $ 991,250
1,500,000 Aa* Massachusetts State Water Pollution, Series A,
6.375% due 2/1/15 1,605,000
30,000 A1* Springfield Industrial Development Finance Authority, PCR,
(Monsanto Company Project), 9.100% due 11/1/04 33,713
- ---------------------------------------------------------------------------------------------
2,629,963
- ---------------------------------------------------------------------------------------------
Short-Term(c) -- 0.2%
100,000 P-1* Massachusetts State Health & Educational Facilities
Authority Revenue, 3.400% due 1/1/35 100,000
- ---------------------------------------------------------------------------------------------
Transportation -- 3.3%
750,000 BBB Guam Airport Authority Revenue, Series A,
6.500% due 10/1/23 779,063
1,065,000 A+ Massachusetts Bay Transportation Authority, Series C,
6.100% due 3/1/23 1,114,256
- ---------------------------------------------------------------------------------------------
1,893,319
- ---------------------------------------------------------------------------------------------
Utilities -- 4.0%
300,000 AAA Lynn Water & Sewer Commission, General Revenue,
FGIC-Insured, 5.500% due 12/1/10 303,000
2,000,000 BBB+ Massachusetts Municipal Wholesale Electric Company,
Power Supply Revenue, Series D, 6.125% due 7/1/19 2,037,500
- ---------------------------------------------------------------------------------------------
2,340,500
- ---------------------------------------------------------------------------------------------
Water & Sewer -- 8.6%
Massachusetts State Water Resource Authority:
1,000,000 AAA Series A, FGIC-Insured, 5.500% due 11/1/21 995,000
Series B:
1,000,000 AAA MBIA-Insured, 5.500% due 3/1/17 996,250
1,420,000 A 6.250% due 11/1/10 1,510,525
1,000,000 A 5.500% due 3/1/17 991,250
500,000 AAA South Essex Sewer District, Series B, MBIA-Insured,
5.250% due 6/15/24 484,375
- ---------------------------------------------------------------------------------------------
4,977,400
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $55,878,045**) $57,970,392
=============================================================================================
</TABLE>
(a) Income from this is considered a preference item for purposes of calculating
the alternative minimum tax.
(b) Security segregated by Custodian for open purchase commitment.
(c) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 12 and 13 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
11
<PAGE>
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Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except those identified by an asterisk (*) are rated by Moody's Investors
Service Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's--Ratings from "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standings within the major rating
categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in
a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default
than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments.
B -- Bonds rated "B" have a greater vulnerability to default but
currently have the capacity to meet interest payments and
principal payments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BB-" rating.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic
rating from "Aa" to "Ba," where 1 is the highest and 3 the
lowest ranking within its generic category.
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger
than in Aaa securities.
A -- Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa -- Bonds that are rated "Baa" are considered 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 thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
12
<PAGE>
- --------------------------------------------------------------------------------
Short-Term Securities Ratings
- --------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rating indicating very strong or
strong capacity to pay principal and interest; those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of
safety regarding timely payment is either overwhelming or very
strong; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having a demand feature--VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior
to the advent of the VMIG 1 rating.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governors
AIG -- American International Guaranty
AMBAC -- American Municipal Bond Assurance Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance
CONNIE LEE-- College Construction Loan Insurance Association
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed To Maturity
FLAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GNMA -- Government National Mortgage Association
GIC -- Guaranteed Investment Contract
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters Company
ISD -- Independent School District
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate lnverse Coupon Security
PCR -- Pollution Control Revenue
PSF -- Permanent School Fund
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
SYCC -- Structured Yield Curve Certificate
GNMA -- Government National Mortgage Association
VA -- Veterans Administration
VRDD -- Variable Rate Daily Demand
VRWE -- Variable Rate Wednesday Demand
13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities November 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (Cost--$55,878,045) $57,970,392
Cash 90,181
Interest receivable 1,116,436
Receivable for Fund shares sold 214,596
Receivable for securities sold 15,000
- ------------------------------------------------------------------------------
Total Assets 59,406,605
- ------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 97,585
Investment advisory fees payable 38,398
Administration fees payable 24,905
Payable for Fund shares purchased 7,349
Distribution fees payable 5,880
Accrued expenses 70,001
- ------------------------------------------------------------------------------
Total Liabilities 244,118
- ------------------------------------------------------------------------------
Total Net Assets $59,162,487
==============================================================================
NET ASSETS:
Par value of shares of beneficial interest $4,554
Capital paid in excess of par value 57,299,077
Undistributed net investment income 23,502
Accumulated net realized loss on security transactions (256,993)
Net unrealized appreciation of investments 2,092,347
- ------------------------------------------------------------------------------
Total Net Assets $59,162,487
==============================================================================
Shares Outstanding:
Class A 2,317,071
- ------------------------------------------------------------------------------
Class B 2,223,027
- ------------------------------------------------------------------------------
Class C 13,827
- ------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.99
- ------------------------------------------------------------------------------
Class B* $12.99
- ------------------------------------------------------------------------------
Class C** $12.98
- ------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.17% of net asset value per share) $13.53
==============================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from initial purchase (See Note 4).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended November 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest $ 3,477,937
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 228,100
Investment advisory fees (Note 4) 170,838
Administration fees (Note 4) 113,892
Audit and legal 42,100
Shareholder communications 28,500
Shareholder and system servicing fees 27,500
Registration fees 19,500
Trustees' fees 13,000
Pricing service fees 12,395
Custody 3,000
Other 1,800
- --------------------------------------------------------------------------------
Total Expenses 660,625
Less: Investment advisory and administration fee waiver (Note 4) (60,215)
- --------------------------------------------------------------------------------
Net Expenses 600,410
- --------------------------------------------------------------------------------
Net Investment Income 2,877,527
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 12,943,382
Cost of securities sold 12,609,094
- --------------------------------------------------------------------------------
Net Realized Gain 334,288
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 2,282,929
End of year 2,092,347
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (190,582)
- --------------------------------------------------------------------------------
Net Gain on Investments 143,706
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 3,021,233
================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended November 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
==========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,877,527 $ 2,826,954
Net realized gain (loss) 334,288 (145,044)
Increase (decrease) in net unrealized appreciation (190,582) 7,360,473
- ------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,021,233 10,042,383
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 3):
Net investment income (2,854,025) (2,792,554)
Overdistribution of net investment -- (99,356)
- ------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,854,025) (2,891,910)
- ------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sales of shares 7,320,630 7,850,525
Net asset value of shares issued
for reinvestment of dividends 1,741,106 1,841,633
Cost of shares required (8,097,290) (9,799,797)
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions 964,446 (107,639)
- ------------------------------------------------------------------------------------------
Increase in Net Assets 1,131,654 7,042,834
NET ASSETS:
Beginning of year 58,030,833 50,987,999
- ------------------------------------------------------------------------------------------
End of year* $59,162,487 $58,030,833
==========================================================================================
* Includes undistributed net investment income of: $ 23,502 --
==========================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Massachusetts Municipals Fund ("Fund"), a Massachusetts business
trust, is registered under the Investment Company Act of 1940, as amended, as a
non-diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on the trade date; (b) securities are
valued at the mean between the quoted bid and ask prices by an independent
pricing service; (c) securities maturing within 60 days are valued at cost plus
accreted discount or minus amortized premium, which approximates market value;
(d) gains or losses on the sale of securities are calculated by using the
specific identification method; (e) interest income, adjusted for amortization
of premium and accretion of original issue discount, is recorded on the accrual
basis; market discount is recognized upon the disposition of the security; (f)
direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (i) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. FUND CONCENTRATION
Since the Fund invests primarily in obligations of issuers within the
Commonwealth of Massachusetts, it is subject to possible concentration risks
associated with economic, political or legal developments or industrial or
regional matters specifically affecting Massachusetts.
3. EXEMPT-INTEREST DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from regular Federal income tax, to retain
such tax-exempt status when distributed to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBMFM a fee calculated at the annual rate of 0.30% of its average daily net
assets. This fee is calculated daily and paid monthly. For the year ended
November 30, 1996, the Fund waived $36,129 of its investment advisory fees.
SBMFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to $500
million and 0.18% of the average daily net assets in excess of $500 million.
This fee is calculated daily and paid monthly. For the year ended November 30,
1996, the Fund waived $24,086 of its administration fees.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
the Fund's shares. For the year ended November 30, 1996, SB received sales
charges of approximately $45,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the year ended November 30, 1996, CDSCs paid to SB were
approximately:
Class B Class C
============================================================================
CDSCs $56,000 $ 1,000
============================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
its Class A, B and C shares calculated at the annual rate of 0.15% of the
average daily net assets of each respective class. In addition, the Fund pays a
distribution fee with respect to its Class B and C shares calculated at the
annual rates of 0.50% and 0.55%, respectively, of the average daily net assets
of each class, respectively. For the year ended November 30, 1996, total
Distribution Plan fees incurred were:
Class A Class B Class C
=============================================================================
Distribution Plan Fees $42,635 $184,536 $929
=============================================================================
All officers and one Trustee of the Fund are employees of SB.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. INVESTMENTS
For the year ended November 30, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
====================================================================
Purchases $13,814,282
- --------------------------------------------------------------------
Sales 12,943,382
====================================================================
At November 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
====================================================================
Gross unrealized appreciation $2,414,190 *
Gross unrealized depreciation (321,843)*
- --------------------------------------------------------------------
Net unrealized appreciation $2,092,347 *
====================================================================
* Substantially the same for Federal income tax purposes.
6. CAPITAl LOSS CARRYFORWARDS
At November 30, 1996, the Fund had, for Federal income tax purposes,
approximately $257,00 of capital loss carryforwards available to offset future
capital gains. To the extent that these carryforward losses are used to offset
capital gains, it is probable that the gains so offset will not be distributed.
The amount and year of the expiration for each carryforward loss is indicated
below:
11/30/02 11/30/03
========================================================================
Carryforward Amounts $112,000 $145,000
========================================================================
7. SHARES Of BENEFICIAl INTEREST
As of November 30, 1996, the Fund had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund
has the ability to issue multiple classes of shares. Each share of a class
represents an identical interest and has the same rights, except that each class
bears certain direct expenses, including those specifically related to the
distribution of its shares.
At November 30, 1996, total paid-in capital amounted to the following for each
class:
Class A Class B Class C
=====================================================================
Total Paid-in Capital $28,323,576 $28,810,509 $169,546
=====================================================================
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, 1996 November 30, 1995
--------------------- -----------------------
Shares Amount Shares Amount
==================================================================================
<S> <C> <C> <C> <C>
CLASS A
Shares sold 317,805 $ 4,035,583 203,917 $ 2,524,279
Shares issued on reinvestment 71,804 914,776 82,621 1,022,258
Shares redeemed (322,075) (4,102,582) (472,105) (5,793,837)
- ----------------------------------------------------------------------------------
Net Increase (Decrease) 67,534 $ 847,777 (185,567) $(2,247,300)
==================================================================================
CLASS B
Shares sold 244,909 $ 3,128,220 421,164 $ 5,187,847
Shares issued on reinvestment 64,621 823,030 65,930 817,336
Shares redeemed (303,544) (3,868,914) (321,620) (3,925,753)
- ----------------------------------------------------------------------------------
Net Increase 5,986 $ 82,336 165,474 $ 2,079,430
==================================================================================
CLASS C
Shares sold 12,355 $ 156,827 11,151 $ 138,399
Shares issued on reinvestment 260 3,300 166 2,039
Shares redeemed (10,031) (125,794) (6,691) (80,207)
- ----------------------------------------------------------------------------------
Net Increase 2,584 $ 34,333 4,626 $ 60,231
==================================================================================
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<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 gain (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%
- -------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $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 method does not accord with results of operations.
(2) The investment adviser waived all or part of its fees for the five years
ended November 30, 1996. If such fees were not waived, the per share effect on
net investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to 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>
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<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 gain (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 (000s) $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 were not waived, the per share effect on net investment income
and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to 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.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year:
<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 (000s) $ 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 were not waived, the per share effect on net investment income and the
expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waivers
------------------------------------ ----------------------------------
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 per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For the year ended November 30, 1996, 100% of the dividends paid by the Smith
Barney Massachusetts Municipals Fund from net investment income were tax-exempt
for regular federal income tax purposes.
23
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Massachusetts Municipals Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Massachusetts Municipals Fund as of
November 30, 1996, the related statement of operations for the year then ended
and the statements of changes in net assets and financial highlights for each of
the years in the two-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the years in the three-year period ended November 30, 1994, were audited by
other auditors whose report thereon, dated January 12, 1995, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1996, by correspondence with the custodian. As to securities sold
but not delivered, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principals used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Massachusetts Municipals Fund as of November 30, 1996, the results of its
operations for the year then ended and the changes in its net assets and
financial highlights for each of the years in the two-year period then ended, in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
New York, New York
January 10, 1997
24
<PAGE>
SMITH BARNEY
MASSACHUSETTS
MUNICIPALS
FUND
TRUSTEES
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
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A Member of TravelersGroup[LOGO]
INVESTMENT ADVISER
Smith Barney Mutual Funds
Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Massachusetts Municipals Fund. It is not authorized for
distribution to prospective investors unless accompanied or preceded by current
Prospectus for the Fund, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
SMITH BARNEY MASSACHUSETTS
MUNICIPALS FUND
388 Greenwich Street
New York, New York 10013
FD0302 1/97
