<PAGE>
================================================================================
ANNUAL REPORT
================================================================================
1997
1997
1997
1997
1997
Smith Barney
Massachusetts
Municipals
Fund
---------------------------------------------
November 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
==========================================
Smith Barney Massachusetts Municipals Fund
==========================================
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Massachusetts
Municipals Fund ("Fund") for the year ended November 30, 1997. 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.
Performance Update
For the year ended November 30, 1997, the Class A shares of the Fund posted a
total return of 7.85%. In comparison, the average for Massachusetts tax-exempt
funds was 6.63% for the same period according to Lipper Analytical Services,
Inc. ("Lipper"). (Lipper is a major independent fund-tracking organization.) For
performance information on the Fund's other share classes, please turn to page
four.
During the year covered by this report, the Fund distributed income dividends
totaling $0.67 and a capital gain distribution of $0.12 for Class A shares.
Based on the net asset value ("NAV") of $13.18 as of November 30, 1997 and
current monthly dividend rate of $0.054 for Class A shares, this equates to an
annualized distribution rate of 4.92%. For a Massachusetts state resident in the
combined federal and state tax bracket of 39.28%, the tax-free yield of 4.92% is
equivalent to a taxable yield of 8.10%. (This figure assumes an investor is in
the federal income tax bracket of 31%.)
Market and Economic Overview
Municipal bonds generally performed well during the year, benefiting from a
combination of a strong U.S. economy and low inflation. On the political front,
Congress passed the Taxpayer Reform Act of 1997 and the Balanced Budget
Agreement. But in our view, the most significant development for both stock and
bond investors alike was Asia's currency and financial crisis in the fall of
1997.
For most of the year, bond investors remained focused on how the Federal Reserve
Board ("Fed") would respond to a strengthening U.S. economy. Yields on the
30-year U.S. Treasury bond, a key measure of interest rates, were confined to a
fairly narrow trading range during the first part of the year as investors
attempted to reconcile the apparent contradiction between strong economic growth
and low inflation.
1
<PAGE>
However, the Fed raised short-term interest rates by 0.25% in March in an effort
to head off any inflationary pressures that may have been building in the
economy. Following that action, the bond market rallied as signs of inflationary
pressures were nearly absent despite the lowest unemployment rate in more than
twenty years. Nevertheless, the Fed maintained its vigilance against inflation
and although it chose to ultimately remain on the sidelines, it indicated a bias
toward tightening monetary policy at each of its meetings in May, July, August,
September and November.
In October, financial markets around the world were transformed almost overnight
as Asia's financial crisis, which had been developing since the summer, deepened
and eventually led to the sudden collapse of stock and bond markets throughout
the region. The dramatic decline of Asian financial markets caught many
investors by surprise and sentiment began to shift away from stocks in favor of
bonds as investors sought out "safe" havens. In the weeks that followed, the
U.S. Treasury bond market became one of the preferred alternatives for investors
seeking shelter from the "Asian contagion." The resulting rally in the
government bond market, along with an unusually heavy bond issuance, caused
municipal bonds to underperform U.S. Treasurys in November.
Massachusetts Economic Highlights
The Massachusetts economy continues to expand at a moderate pace with
manufacturing, retailing and insurance industries all reporting increased
revenues. High technology continues to play a major role in the economic
recovery of the Bay State and a number of companies are reportedly preparing to
ramp up production after the recent slump in technology. Commercial real estate
has also begun to thrive, particularly in Boston, where vacancy rates in
downtown Boston are reported to be 5% and rental prices have increased
significantly. We expect that job growth will likely slow slightly in the coming
year but the unemployment rate will probably remain in the current range of 4% -
4.5%.
In Massachusetts, we have seen the first increase in local general obligation
debt for the first time in years. We believe that this increase is not only the
result of lower interest rates, but also local municipalities are now better
equipped to access credit markets under Proposition 2 1/2, a tax limitation
initiative passed in 1990.
Fund's Investment Strategy
The Fund's investment strategy continues to seek 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
2
<PAGE>
management and the preservation of capital. In addition, we strive to maintain a
high-quality portfolio. As of November 30, 1997, 95.9% of the Fund's holdings
were rated investment grade or better, of which 51.3% were rated triple-A by
either Standard & Poor's Ratings Service or Moody's Investors Service Inc.
(Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's Investors
Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings Service, or
have an equivalent rating by any nationally recognized statistical rating
organization, or determined by the manager to be of equivalent quality.) At the
end of the reporting period, the Fund's average weighted maturity was roughly 21
years.
In addition, as of November 30, 1997, the Fund's top three sectors were: general
obligation bonds (20.3%), hospital bonds (18.5%) and education bonds (16.8%). We
have continued to favor the health-care industry as reforms have enabled many
HMOs to operate more efficiently.
Municipal Bond Market Outlook
We remain positive on the prospects for municipal bonds in the coming months.
Although the final impact of Asia's financial crisis on U.S. markets is not yet
clear, we believe that the excess production capacity that now exists in Asia
should help to offset rising prices in the U.S. However, the U.S. bond market
could experience some short-term selling pressure should the Japanese, the
largest foreign holder of U.S. government bonds, decide to sell their U.S. debt
holdings in order to restructure their still shaky financial industry.
Municipal bond issuance in 1997 was the second largest and the market's ability
to absorb these securities is an indication of healthy investor appetite for
tax-free investments. Insurance companies were among the largest buyers of these
bonds, but we believe that more and more individual investors are beginning to
recognize the attractive investment opportunities that currently exist in
tax-free municipal bonds.
In closing, thank you for your investment in the Smith Barney Massachusetts
Municipals Fund. We look forward to helping you pursue your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman Vice President and
Investment Officer
January 2, 1998
3
<PAGE>
================================================================================
Historical Performance -- Class A Shares
================================================================================
<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>
11/30/97 $12.99 $13.18 $0.67 $0.12 $0.00 7.85%
- ------------------------------------------------------------------------------------------------------
11/30/96 12.96 12.99 0.67 0.00 0.00 5.65
- ------------------------------------------------------------------------------------------------------
11/30/95 11.35 12.96 0.69 0.00 0.00 20.73
- ------------------------------------------------------------------------------------------------------
11/30/94 13.26 11.35 0.70 0.06 0.00 (9.07)
- ------------------------------------------------------------------------------------------------------
11/30/93 12.63 13.26 0.74 0.07 0.00 11.74
- ------------------------------------------------------------------------------------------------------
11/30/92 12.28 12.63 0.77 0.04 0.04 10.06
- ------------------------------------------------------------------------------------------------------
11/30/91 11.81 12.28 0.84 0.00 0.01 11.57
- ------------------------------------------------------------------------------------------------------
11/30/90 12.11 11.81 0.85 0.02 0.00 4.93
- ------------------------------------------------------------------------------------------------------
11/30/89 11.88 12.11 0.86 0.00 0.00 9.43
- ------------------------------------------------------------------------------------------------------
Inception*-11/30/88 11.40 11.88 0.82 0.06 0.00 12.25+
======================================================================================================
Total $7.61 $0.37 $0.05
======================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class B Shares
================================================================================
<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>
11/30/97 $12.99 $13.17 $0.61 $0.12 $0.00 7.25%
- -------------------------------------------------------------------------------------------------------
11/30/96 12.96 12.99 0.61 0.00 0.00 5.14
- -------------------------------------------------------------------------------------------------------
11/30/95 11.35 12.96 0.63 0.00 0.00 20.15
- -------------------------------------------------------------------------------------------------------
11/30/94 13.26 11.35 0.64 0.06 0.00 (9.50)
- -------------------------------------------------------------------------------------------------------
11/30/93 12.63 13.26 0.68 0.07 0.00 11.09
- -------------------------------------------------------------------------------------------------------
Inception*-11/30/92 12.52 12.63 0.05 0.00 0.00 1.29+
=======================================================================================================
Total $3.22 $0.25 $0.00
=======================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class C Shares
================================================================================
<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>
11/30/97 $12.98 $13.16 $0.60 $0.12 $0.00 7.21%
- ----------------------------------------------------------------------------------------------------
11/30/96 12.95 12.98 0.60 0.00 0.00 5.09
- ----------------------------------------------------------------------------------------------------
11/30/95 11.35 12.95 0.63 0.00 0.00 20.04
- ----------------------------------------------------------------------------------------------------
Inception*-11/30/94 11.34 11.35 0.04 0.00 0.00 0.40+
====================================================================================================
Total $1.87 $0.12 $0.00
====================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
4
<PAGE>
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
----------------------------------
Class A Class B Class C
===============================================================================
<S> <C> <C> <C>
Year Ended 11/30/97 7.85% 7.25% 7.21%
- -------------------------------------------------------------------------------
Five Years Ended 11/30/97 6.93 6.37 N/A
- -------------------------------------------------------------------------------
Inception* through 11/30/97 8.31 6.56 10.53
===============================================================================
<CAPTION>
With Sales Charge(2)
---------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 11/30/97 3.54% 2.75% 6.21%
- --------------------------------------------------------------------------------
Five Years Ended 11/30/97 6.05 6.22 N/A
- -------------------------------------------------------------------------------
Inception* through 11/30/97 7.87 6.56 10.53
===============================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
===============================================================================
<S> <C>
Class A (Inception* through 11/30/97) 121.20%
- -------------------------------------------------------------------------------
Class B (Inception* through 11/30/97) 37.97
- -------------------------------------------------------------------------------
Class C (Inception* through 11/30/97) 35.80
===============================================================================
</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 gain 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
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Massachusetts Municipals Fund vs.
Lehman Brothers Municipal Bond Index and
Lipper Massachusetts Municipal Fund Average+
- --------------------------------------------------------------------------------
December 1987 -- November 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Massachusetts Lehman Brothers Lipper Massachusetts
Municipals Fund Municipal Bond Index Municipal Fund Average
-------------------------- -------------------- ----------------------
<S> <C> <C> <C>
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
11/96 $19,682 $20,959 $20,037
11/30/97 $21,226 $22,462 $21,356
</TABLE>
+ 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, 1997. The
Lehman Brothers Municipal Bond Index is a broad based, total return index
comprised of investment grade, fixed rate municipal bonds selected from
issues larger than $50 million issued since January 1991. 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,
1997). 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
<PAGE>
================================================================================
Portfolio Highlights (unaudited) November 30, 1997
================================================================================
Industry Breakdown
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
General Obligation 20.3%
Water & Sewer 2.5%
Housing:
Multi-Family 5.1%
Housing:
Single-Family 6.5%
Hospitals 18.5%
Miscellaneous 2.4%
Life Care Systems 5.8%
Education 16.8%
Utilities 3.4%
Industrial Development 1.4%
Transportation 14.6%
Pollution Control 2.7%
</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 51.3%
Aa AA 17.0
A A 17.5
Baa BBB 10.1
Ba BB 1.3
B B 1.6
VMIG1 A-1 0.3
NR NR 0.9
-----
100.0%
=====
</TABLE>
7
<PAGE>
================================================================================
Schedule of Investments November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
============================================================================================
<S> <C> <C> <C>
Education -- 16.8%
$1,425,000 AAA Chelsea (School Project), AMBAC-Insured,
6.000% due 6/15/14 $ 1,522,967
165,000 A Massachusetts Educational Loan Authority, Issue D,
Series A, 7.650% due 1/1/07 (a) 172,013
Massachusetts State Health & Educational Facilities
Authority Revenue:
430,000 AAA Community College Program, Series A,
CONNIE LEE-Insured, 6.600% due 10/1/22 468,163
1,000,000 AAA Series G, MBIA-Insured, 5.375% due 7/1/24 1,000,000
Massachusetts State Industrial Finance Agency Revenue:
1,000,000 AAA Assumption College Issue, CONNIE LEE-Insured,
6.000% due 7/1/26 1,058,750
750,000 A- Clark University, Series E, 7.000% due 7/1/12 812,813
1,000,000 BBB- Dana Hall School Issue, 5.900% due 7/1/26 1,018,750
2,590,000 AAA Merrimack College, MBIA-Insured, 5.000% due 7/1/27 2,492,870
1,000,000 AAA Simons Rock College, AMBAC-Insured,
5.500% due 6/1/27 1,011,250
500,000 AAA Southeastern Massachusetts University, Series A,
AMBAC-Insured, 5.900% due 5/1/12 535,000
- --------------------------------------------------------------------------------------------
10,092,576
- --------------------------------------------------------------------------------------------
General Obligation -- 20.3%
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 6/15/18 259,688
250,000 AAA Groveland GO, AMBAC-Insured, 6.850% due 6/15/06 274,688
1,000,000 AAA Haverhill Revenue Bonds, Series A, AMBAC-Insured,
6.700% due 9/1/10 1,091,250
500,000 AAA Holyoke GO, Series B, FSA-Insured, 6.125% due 8/1/13 536,250
500,000 AAA Lowell GO, AMBAC-Insured, 6.000% due 8/1/14 533,750
1,750,000 AA- Massachusetts State GO, Series C, 5.000% due 8/1/17 1,701,875
750,000 Aaa* Nantucket GO, MBIA-Insured, 5.125% due 7/15/12 753,750
610,000 AAA New Bedford Municipal Purpose Loan, FSA-Insured,
5.625% due 10/1/16 628,300
250,000 AAA North Reading GO, MBIA-Insured, 6.875% due 6/15/07 272,813
795,000 A- Plymouth County GO, COP, Series A, 6.750% due 10/1/04 (b) 878,475
200,000 A Puerto Rico Commonwealth GO, 8.000% due 7/1/08 208,128
Revere GO, Series A, FSA-Insured:
300,000 AAA 5.400% due 6/15/15 304,125
265,000 AAA 5.400% due 6/15/16 268,313
500,000 AAA Revere Municipal Purpose Loan, Bank Qualified,
FSA-Insured, 6.125% due 6/15/13 533,125
500,000 AAA Salem GO, AMBAC-Insured, 6.800% due 8/15/10 (b) 551,250
1,705,000 AAA Springfield GO, Municipal Purpose Loan, FSA-Insured,
5.000% due 9/1/15 1,668,769
1,000,000 AAA Worcester GO, MBIA-Insured, 5.000% due 8/1/14 980,000
- --------------------------------------------------------------------------------------------
12,206,674
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
================================================================================
Schedule of Investments (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
============================================================================================
<S> <C> <C> <C>
Hospitals -- 18.5%
Massachusetts State Health & Educational Facilities
Authority Revenue:
$ 750,000 A* Addison Gilbert Hospital, Series C,
5.750% due 7/1/23 $ 765,000
250,000 A Beth Israel Hospital, Series E, 7.000% due 7/1/14 264,375
1,000,000 A Brockton Hospital, Series B, 8.100% due 7/1/13 (b) 1,022,650
750,000 Ba1* Central New England Health Systems, Series A,
6.300% due 8/1/18 759,375
1,000,000 BBB+ Faulkner Hospital, Series C, 6.000% due 7/1/13 1,030,000
1,000,000 AAA Massachusetts General Hospital, Series F,
AMBAC-Insured, 6.250% due 7/1/20 1,057,500
1,000,000 AAA Medical Center of Central Massachusetts,
AMBAC-Insured, 6.550% due 6/23/22 (b) 1,106,250
500,000 A- Melrose-Wakefield Healthcare, Series C,
6.000% due 7/1/12 521,875
500,000 AAA Morton Hospital & Medical Center, Series B,
CONNIE LEE-Insured, 5.500% due 7/1/23 501,250
1,000,000 B1* Saint Memorial Medical Center, Series A,
6.000% due 10/1/23 970,000
1,000,000 AAA South Shore Hospital, Series E, MBIA-Insured,
5.500% due 7/1/20 1,005,000
700,000 AAA Valley Regional Health System, Series C,
CONNIE LEE-Insured, 7.000% due 7/1/06 816,375
Youville House, FHA-Insured, Project A:
500,000 Aa2* 5.950% due 2/15/17 524,375
750,000 Aa2* 6.050% due 2/15/29 786,563
- --------------------------------------------------------------------------------------------
11,130,588
- --------------------------------------------------------------------------------------------
Housing: Multi-Family -- 5.1%
1,000,000 AAA Framingham Housing Authority Mortgage Revenue, Beaver
Terrace Apartments, Series A, GNMA-Collateralized,
6.650% due 2/20/32 1,047,500
1,120,000 A+ Massachusetts State HFA, Housing Project, Series A,
6.375% due 4/1/21 (b) 1,181,600
795,000 BBB Puerto Rico Commonwealth, Urban Renewal & Housing Corp.
Refunding Bonds, 7.875% due 10/1/04 856,613
- --------------------------------------------------------------------------------------------
3,085,713
- --------------------------------------------------------------------------------------------
Housing: Single-Family -- 6.5%
Massachusetts State HFA, Housing Revenue,
Single-Family Housing:
100,000 Aa3* Series 5, 8.375% due 6/1/15 102,000
945,000 AAA Series 14, FHA-Insured, 7.700% due 12/1/14 993,431
600,000 Aa3* Series 18, 7.350% due 12/1/16 641,250
1,000,000 Aa3* Series 31, 6.450% due 12/1/16 (b) 1,066,250
1,000,000 Aa3* Series 38, 7.200% due 12/1/26 (a)(b) 1,092,500
- --------------------------------------------------------------------------------------------
3,895,431
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Schedule of Investments (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
============================================================================================
<S> <C> <C> <C>
Industrial Development -- 1.4%
Massachusetts State Industrial Finance Agency, Resource
Recovery Revenue, Series A:
$ 250,000 Baa1* Refusetech Inc. Project, 6.300% due 7/1/05 $ 267,188
500,000 NR S.E. Massachusetts Project, 9.000% due 7/1/15 (b) 566,250
- --------------------------------------------------------------------------------------------
833,438
- --------------------------------------------------------------------------------------------
Life Care Systems -- 5.8%
Massachusetts Industrial Finance Agency Health Care
Facilities:
1,450,000 AA- Arbors at Amherst Project, Assisted Living Facilities
Revenue, GNMA-Collateralized, 5.750% due 6/20/17 1,477,188
2,000,000 A Jewish Geriatric Services, Series B, 5.500% due 5/15/27 2,005,000
- --------------------------------------------------------------------------------------------
3,482,188
- --------------------------------------------------------------------------------------------
Miscellaneous -- 1.2%
250,000 AAA Massachusetts State Industial Finance Agency Revenue,
Concord Academy, FSA-Insured, 6.900% due 9/1/21 274,375
450,000 AAA Puerto Rico Commonwealth, Infrastructure Financing
Authority, Series A, AMBAC-Insured, 5.000% due 7/1/28
434,813
- --------------------------------------------------------------------------------------------
709,188
- --------------------------------------------------------------------------------------------
Pollution Control -- 2.7%
1,500,000 Aa* Massachusetts State Water Pollution, Series A,
6.375% due 2/1/15 (b) 1,616,250
30,000 A1* Springfield Industrial Development Finance Authority, PCR,
(Monsanto Co. Project), 9.100% due 11/1/04 32,700
- --------------------------------------------------------------------------------------------
1,648,950
- --------------------------------------------------------------------------------------------
Pre-Refunded (c) -- 0.9%
500,000 AAA Massachusetts State Health & Educational Facilities
Authority Revenue, (Capital Assets Project), Series F,
MBIA-Insured, (Call 4/1/00 @ 102), 7.300% due 10/1/18 544,375
- --------------------------------------------------------------------------------------------
Short-Term (d) -- 0.3%
200,000 A-1 Massachusetts State GO, Updates, Series B,
3.800% due 12/1/97 200,000
- --------------------------------------------------------------------------------------------
Transportation -- 14.6%
750,000 BBB Guam Airport Authority Revenue, Series A,
6.500% due 10/1/23 818,438
2,500,000 A1* Massachusetts Bay Transportion Authority Revenue, Gerneral
Transportation Systems, Series C, 5.000% due 3/1/24 2,390,625
Massachusetts State Port Authority Revenue, Series A:
1,250,000 AA- 5.000% due 7/1/27 1,193,750
1,900,000 AAA Special Facilities, (U.S. Air Project), MBIA-Insured,
5.875% due 9/1/23 (a) 1,968,875
6,000,000 Aaa* Massachusetts State Turnpike Authority, Metropolitan
Highway System Revenue, Capital Appreciation,
Series C, MBIA-Insured, zero coupon due 1/1/16 2,385,000
- --------------------------------------------------------------------------------------------
8,756,688
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Schedule of Investments (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
============================================================================================
<S> <C> <C> <C>
Utilities -- 3.4%
$ 2,000,000 BBB+ Massachusetts Municipal Wholesale Electric Co., Power
Supply Revenue, Series D, 6.125% due 7/1/19 (b) $ 2,070,000
- --------------------------------------------------------------------------------------------
Water & Sewer -- 2.5%
1,000,000 AAA Massachusetts State Water Resource Authority
Series B, MBIA-Insured, 5.500% due 3/1/17 1,020,000
500,000 AAA South Essex Sewer District, Series A, MBIA-Insured,
5.250% due 6/15/24 498,125
- --------------------------------------------------------------------------------------------
1,518,125
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENT -- 100%
(Cost -- $57,512,986**) $60,173,934
============================================================================================
</TABLE>
(a) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Security is segregated by Custodian for open purchase commitment.
(c) Pre-refunded bond is escrowed by U.S. government securities and is
considered by the investment adviser to be triple-A rated even if the
issuer has not applied for new ratings.
(d) 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>
================================================================================
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
bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than in higher rated categories.
BB -- 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 "B," 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.
B -- Bonds that are rated "B" generally lack characteristics of
desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
12
<PAGE>
================================================================================
Short-Term Security 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 Governments
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity 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
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FLAIRS -- Floating Adjustable Interest Rate Securities
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Security Assurance
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
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
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
VA -- Veterans Administration
VRDD -- Variable Rate Daily Demand
VRWE -- Variable Rate Wednesday Demand
13
<PAGE>
================================================================================
Statement of Assets and Liabilities November 30, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $57,512,986) $ 60,173,934
Cash 32,261
Interest receivable 1,084,229
Receivable for securities sold 200,000
Receivable for Fund shares sold 133,045
- -------------------------------------------------------------------------------
Total Assets 61,623,469
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 431,153
Dividends payable 291,166
Investment advisory fees payable 42,893
Administration fees payable 33,350
Distribution fees payable 4,861
Accrued expenses 67,414
- -------------------------------------------------------------------------------
Total Liabilities 870,837
- -------------------------------------------------------------------------------
Total Net Assets $ 60,752,632
===============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 4,611
Capital paid in excess of par value 58,068,681
Overdistributed net investment income (34,801)
Accumulated net realized gain on security transactions 53,193
Net unrealized appreciation of investments 2,660,948
- -------------------------------------------------------------------------------
Total Net Assets $ 60,752,632
===============================================================================
Shares Outstanding:
Class A 2,483,887
----------------------------------------------------------------------------
Class B 2,094,932
----------------------------------------------------------------------------
Class C 32,505
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.18
----------------------------------------------------------------------------
Class B* $13.17
----------------------------------------------------------------------------
Class C** $13.16
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.17% of net asset value per share) $13.73
===============================================================================
</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>
================================================================================
Statement of Operations For the Year Ended November 30, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 3,476,327
- -----------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 228,820
Investment advisory fees (Note 4) 176,278
Administration fees (Note 4) 117,518
Audit and legal 42,200
Shareholder and system servicing fees 31,356
Shareholder communications 28,000
Trustees' fees 15,000
Pricing service fees 10,600
Registration fees 7,500
Custody 4,000
Other 3,600
- -----------------------------------------------------------------------------------
Total Expenses 664,872
Less: Investment advisory and administration fees waiver (Note 4) (44,268)
- -----------------------------------------------------------------------------------
Net Expenses 620,604
- -----------------------------------------------------------------------------------
Net Investment Income 2,855,723
- -----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 5):
Net Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 34,379,187
Cost of securities sold 33,498,810
- -----------------------------------------------------------------------------------
Net Realized Gain 880,377
- -----------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 2,092,347
End of year 2,660,948
- -----------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 568,601
- -----------------------------------------------------------------------------------
Net Gain on Investments 1,448,978
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 4,304,701
===================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Statements of Changes in Net Assets For the Years Ended November 30,
================================================================================
<TABLE>
<CAPTION>
1997 1996
====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,855,723 $ 2,877,527
Net realized gain 880,377 334,288
Increase (decrease) in net unrealized appreciation 568,601 (190,582)
- ------------------------------------------------------------------------------------
Increase in Net Assets From Operations 4,304,701 3,021,233
- ------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 3):
Net investment income (2,914,026) (2,854,025)
Net realized gains (570,191) --
- ------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,484,217) (2,854,025)
- ------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 6,670,106 7,320,630
Net asset value of shares issued
for reinvestment of dividends 2,041,608 1,741,106
Cost of shares reacquired (7,942,053) (8,097,290)
- ------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 769,661 964,446
- ------------------------------------------------------------------------------------
Increase in Net Assets 1,590,145 1,131,654
NET ASSETS:
Beginning of year 59,162,487 58,030,833
====================================================================================
End of year* $ 60,752,632 $ 59,162,487
====================================================================================
* Includes undistributed (overdistributed)
net investment income of: $(34,801) $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 trade date; (b) securities are
valued at the mean between the quoted bid and ask prices provided by an
independent pricing service; (c) securities maturing within 60 days are valued
at cost plus accreted discount or minus amortized premium, which approximates
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 an 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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH"), acts as investment adviser to the Fund. The Fund pays MMC a fee
calculated at an 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, 1997, the
Fund waived $26,561 of its investment advisory fees.
MMC 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,
1997, the Fund waived $17,707 of its administration fees.
Smith Barney Inc. ("SB"), another subsidiary of SSBH, acts as distributor
of the Fund's shares. For the year ended November 30, 1997, SB received sales
charges of approximately $68,000 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, 1997, CDSCs paid to SB for Class B
shares were approximately $48,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to its Class A, B and C shares calculated at an 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 an
annual rate of 0.50% and 0.55%, respectively, of the average daily net assets of
each class. For the year ended November 30, 1997, total Distribution Plan fees
incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $45,984 $180,545 $2,291
================================================================================
</TABLE>
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, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $35,028,499
- --------------------------------------------------------------------------------
Sales 34,379,187
================================================================================
</TABLE>
At November 30, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $2,665,353
Gross unrealized depreciation (4,405)
- --------------------------------------------------------------------------------
Net unrealized appreciation $2,660,948
================================================================================
</TABLE>
6. SHARES OF BENEFICIAL INTEREST
At November 30, 1997, 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, 1997, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $30,515,385 $27,145,650 $412,257
================================================================================
</TABLE>
19
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, 1997 November 30, 1996
---------------------- -----------------------
Shares Amount Shares Amount
========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 328,135 $ 4,290,143 317,805 $ 4,035,583
Shares issued on reinvestment 82,883 1,079,455 71,804 914,776
Shares redeemed (244,202) (3,177,789) (322,075) (4,102,582)
- ----------------------------------------------------------------------------------------
Net Increase 166,816 $ 2,191,809 67,534 $847,777
========================================================================================
Class B
Shares sold 161,821 $ 2,099,145 244,909 $ 3,128,220
Shares issued on reinvestment 72,576 944,328 64,621 823,030
Shares redeemed (362,492) (4,708,332) (303,544) (3,868,914)
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) (128,095) $(1,664,859) 5,986 $ 82,336
========================================================================================
Class C
Shares sold 21,630 $280,818 12,355 $ 156,827
Shares issued on reinvestment 1,369 17,825 260 3,300
Shares redeemed (4,321) (55,932) (10,031) (125,794)
- ----------------------------------------------------------------------------------------
Net Increase 18,678 $ 242,711 2,584 $ 34,333
========================================================================================
</TABLE>
20
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class A Shares 1997 1996 1995 1994 1993(1)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.99 $ 12.96 $ 11.35 $ 13.26 $ 12.63
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.66 0.68 0.69 0.70 0.72
Net realized and unrealized gain (loss) 0.32 0.02 1.61 (1.85) 0.72
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.98 0.70 2.30 (1.15) 1.44
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.67) (0.67) (0.69) (0.70) (0.74)
Net realized gains (0.12) -- -- (0.06) (0.07)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.79) (0.67) (0.69) (0.76) (0.81)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.18 $ 12.99 $ 12.96 $ 11.35 $ 13.26
- ----------------------------------------------------------------------------------------------------------------------
Total Return 7.85% 5.65% 20.73% (9.07)% 11.74%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $32,736 $30,109 $29,159 $27,634 $32,592
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.80% 0.80% 0.83% 0.81% 0.82%
Net investment income 5.07 5.32 5.42 5.55 5.49
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 58% 23% 10% 37% 10%
======================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) The investment adviser waived all or part of its fees for the five years
ended November 30, 1997. 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
---------------------------------- ------------------------------------
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.01 $0.01 $0.03 $0.04 $0.05 0.88% 0.91% 1.07% 1.09% 1.18%
</TABLE>
21
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class B Shares 1997 1996 1995 1994 1993(1)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.99 $ 12.96 $ 11.35 $ 13.26 $ 12.63
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.60 0.61 0.63 0.63 0.66
Net realized and unrealized gain (loss) 0.31 0.03 1.61 (1.84) 0.72
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.91 0.64 2.24 (1.21) 1.38
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.61) (0.61) (0.63) (0.64) (0.68)
Net realized gains (0.12) -- -- (0.06) (0.07)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.73) (0.61) (0.63) (0.70) (0.75)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.17 $ 12.99 $ 12.96 $ 11.35 $ 13.26
- ----------------------------------------------------------------------------------------------------------------------
Total Return 7.25% 5.14% 20.15% (9.50)% 11.09%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $27,589 $28,874 $28,726 $23,279 $22,317
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 1.31% 1.31% 1.35% 1.32% 1.31%
Net investment income 4.57 4.81 4.94 5.04 4.99
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 58% 23% 10% 37% 10%
======================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) The investment adviser has waived all or part of its fees for the five
years ended November 30, 1997. 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
--------------------------------- ---------------------------------
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $0.01 $0.01 $0.04 $0.03 $0.05 1.39% 1.42% 1.59% 1.60% 1.68%
</TABLE>
22
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class C Shares 1997 1996 1995 1994(1)
========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.98 $12.95 $11.35 $11.34
- ----------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.59 0.60 0.63 0.05
Net realized and unrealized gain 0.31 0.03 1.60 --
- ----------------------------------------------------------------------------------------
Total Income From Operations 0.90 0.63 2.23 0.05
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.60) (0.63) (0.04)
Net realized gains (0.12) -- -- --
- ----------------------------------------------------------------------------------------
Total Distributions (0.72) (0.60) (0.63) (0.04)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.16 $12.98 $12.95 $11.35
- ----------------------------------------------------------------------------------------
Total Return 7.21% 5.09% 20.04% 0.40%++
- ----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 428 $ 179 $ 146 $ 75
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 1.34% 1.34% 1.35% 1.36%+
Net investment income 4.51 4.77 4.65 5.00+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 58% 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 three
years ended November 30, 1997 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
------------------------------- --------------------------------
1997 1996 1995 1994 1997 1996 1995 1994
----- ----- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class C $0.01 $0.01 $0.04 $0.00* 1.42% 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.
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 the Smith Barney Massachusetts Municipals Fund
as of November 30, 1997, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the three-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
two-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, 1997, 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 the
Smith Barney Massachusetts Municipals Fund as of November 30, 1997, the results
of its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the three-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 15, 1998
24
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year
ended November 30, 1997:
-- long term capital gain distributions paid of $570,191.
-- 100% of the dividends paid by the Fund from net investment income as
tax-exempt for regular Federal income tax purposes.
25
<PAGE>
Smith Barney SMITH BARNEY
Massachusetts ------------
Municipals
Fund A Member of TraverlersGroup[LOGO]
Trustees Investment Adviser
Herbert Barg Mutual Management Corp.
Alfred J. Bianchetti
Martin Brody Distributor
Dwight B. Crane Smith Barney Inc
Burt N. Dorsett
Elliot S. Jaffe Custodian
Stephen E. Kaufman PNC Bank, N.A.
Joseph J. McCann
Heath B. McLendon, Chairman Shareholder
Cornelius C. Rose, Jr. Servicing Agent
First Data Investor Services Group, Inc.
James J. Crisona, Emeritus P.O. Box 9134
Boston, MA 02205-9134
Officers
Heath B. McLendon
President and
Chief Executive Officer
This report is submitted for the general
Lewis E. Daidone information of the shareholders of the
Senior Vice President Smith Barney Massachusetts Municipals
and Treasurer Fund. It is not authorized for
distribution to prospective investors
Lawrence T. McDermott unless accompanied or preceded by
Vice President and current Prospectus for the Fund, which
Investment Officer contains information concerning the
Fund's investment policies and expenses
Thomas M. Reynolds as well as other pertinent information.
Controller
Christina T. Sydor Smith Barney Massachusetts
Secretary Municipals Fund
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0302 1/98
