<PAGE>
P R O S P E C T U S
SMITH BARNEY
Massachusetts
Municipals
Fund
March 30, 1998
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PROSPECTUS
MARCH 30, 1998
Smith Barney Massachusetts Municipals Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Massachusetts Municipals Fund (the "Fund") is a non-diversified
municipal bond fund that seeks to provide Massachusetts investors with as high
a level of dividend income exempt from Federal income taxes and Massachusetts
state personal income taxes as is consistent with prudent investment manage-
ment and the preservation of capital.
This Prospectus concisely sets forth certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information (the "SAI") dated March 30, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The SAI has been filed
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- -------------------------------------------------
MASSACHUSETTS MUNICIPAL SECURITIES 19
- -------------------------------------------------
VALUATION OF SHARES 21
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 22
- -------------------------------------------------
PURCHASE OF SHARES 23
- -------------------------------------------------
EXCHANGE PRIVILEGE 30
- -------------------------------------------------
REDEMPTION OF SHARES 32
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 35
- -------------------------------------------------
PERFORMANCE 35
- -------------------------------------------------
MANAGEMENT OF THE FUND 36
- -------------------------------------------------
DISTRIBUTOR 37
- -------------------------------------------------
ADDITIONAL INFORMATION 38
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or representa-
tions must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securi-
ties offered hereby in any jurisdiction to any person to whom it is unlawful
to make such an offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in
this summary are to headings in the Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, non-diversified management
investment company that seeks to provide Massachusetts investors with as high
a level of dividend income exempt from Federal and Massachusetts personal
income taxes as is consistent with prudent investment management and the pres-
ervation of capital. Its investments consist primarily of intermediate- and
long-term investment grade municipal securities issued by the Commonwealth of
Massachusetts and certain other municipal issuers, political subdivisions,
agencies and public authorities that pay interest which is exempt from Massa-
chusetts personal income taxes ("Massachusetts Municipal Securities"). Inter-
mediate- and long-term municipal securities have remaining maturities at the
time of purchase from three to in excess of twenty years. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and by 1.00% each year thereafter to zero. This CDSC may
be waived for certain redemptions. Class B shares are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.50% of the average
daily net assets of this Class. The Class B shares' distribution fee may cause
that Class to have higher expenses and pay lower dividends than Class A
shares.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of this Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. This CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when combined
with current holdings of the Fund equal or exceed $500,000 in the aggregate,
should be made in Class A shares at net asset value with no sales charge, and
will be subject to a CDSC of 1.00% on redemptions made within 12 months of pur-
chase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates,
shareholders may qualify for reduced sales charges and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of these Classes. Because the Fund's future return can-
not be predicted, however, there can be no assurance that this would be the
case.
Finally, investors should consider the effect of the CDSC period and any con-
version rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature, and therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Reduced or No Initial Sales Charge. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases
of $500,000 or more will be made at net asset value with no initial sales
charge, but will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares held in funds sponsored by Smith
Barney Inc. ("Smith Barney") listed under "Exchange Privilege." Other Class A
share purchases may also be eligible for a reduced initial sales charge. See
"Purchases of Shares."
Smith Barney Financial Consultants may receive different compensation for sell-
ing different Classes of shares. See "Purchase of Shares" and "Management of
the Fund" for a complete description of the sales charges and service and dis-
tribution fees for each Class of shares and "Valuation of Shares," "Dividends,
Distributions and Taxes" and "Exchange Privilege" for other differences between
the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
There is no minimum investment requirement in Class A shares for unitholders
who invest distributions from a unit investment trust ("UIT") sponsored by
Smith Barney. The minimum investment requirements for purchases of fund shares
through the Systematic Investment Plan are described below. See "Purchase of
Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. (the "NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Mutual Management Corp., formerly known as Smith Barney
Mutual Funds Management, Inc. ("MMC" or the "Adviser") serves as the Fund's
investment adviser and administrator. The Adviser provides investment advisory
and management services to investment companies affiliated with Smith Barney.
The Adviser is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Fund."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized long- and short-term capital gains, if
any, are declared and paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. Assets of the Fund may be invested in
the municipal securities of both Massachusetts and non-Massachusetts municipal
issuers. Dividends derived from interest on obligations of non-Massachusetts
munici- pal issuers, as a general rule, will be exempt from Federal income tax-
es, but may be subject to Massachusetts state personal income taxes. Dividends
derived from certain municipal securities (including Massachusetts Municipal
Securities), however, may be a specific tax preference item for Federal alter-
native minimum tax purposes. The Fund may invest without limit in securities
subject to the Federal alternative minimum tax. See "Investment Objective and
Management Policies" and "Dividends, Distributions and Taxes."
The Fund is more susceptible to factors adversely affecting issuers of Massa-
chusetts Municipal Securities than is a municipal bond fund that does not
emphasize these issuers. See "Massachusetts Municipal Securities" in the Pro-
spectus and "Special Considerations Relating to Massachusetts Municipal Securi-
ties" in the SAI for further details about the risks of investing in Massachu-
setts obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that it
may invest in the obligations of a single issuer. The Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
Fund's share price to fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers. See "Investment Objective and Management Policies."
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The Fund generally will invest at least 75% of its assets in securities rated
investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by Stan-
dard & Poor's Corporation ("S&P"), which are often referred to as "junk
bonds," or in unrated obligations of comparable quality. Securities in the
fourth highest rating category, though considered to be investment grade, have
speculative characteristics. Securities rated as low as D are extremely specu-
lative and are in actual default of interest and/or principal payments.
There are several risks in connection with the use of certain portfolio strat-
egies by the Fund, such as the use of when-issued securities, municipal bond
index and interest rate futures contracts and put and call options thereon as
hedging devices, and municipal leases. See "Investment Objective and Manage-
ment Policies--Certain Portfolio Strategies."
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and, unless otherwise noted, the Fund's operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY
MASSACHUSETTS MUNICIPALS FUND CLASS A CLASS B CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None* 4.50% 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management fees (net of fee waivers) 0.42% 0.42% 0.42% 0.42%
12b-1 fees*** 0.15 0.65 0.70 --
Other expenses*** 0.23 0.24 0.22 0.23
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.80 1.31 1.34 0.65
- ------------------------------------------------------------------------------
</TABLE>
*Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
**"Management fees" have been restated to reflect the management fee waiver
currently in effect for the Portfolio. Absent the fee waiver, the management
fee would be incurred at the rate of 0.50% of each Class' average daily net
assets for the current fiscal period. Absent the fee waiver, total expenses
would be at the rates of 0.88%, 1.39%, 1.42% and 0.73% for Class A, Class B,
Class C and Class Y shares, respectively.
***Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc. For Class Y shares
"Other expenses" have been estimated because no Class Y shares were
outstanding during the period ended November 30, 1997.
Class A shares of the Fund purchased through the Smith Barney AssetOne Program
will be subject to an annual asset-based fee, payable quarterly, in lieu of the
initial sales charge. The fee will vary to a maximum of 1.50%, depending on the
amount of assets held through the Program. For more information, please contact
a Smith Barney Financial Consultant.
The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.15% of the value of average daily net
assets of Class A shares.
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Smith Barney also receives, with respect to Class B shares, an annual 12b-1
fee of 0.65% of the value of average daily net assets of that Class, consist-
ing of a 0.50% distribution fee and a 0.15% service fee. For Class C shares,
Smith Barney receives an annual 12b-1 fee of 0.70% of the value of average
daily net assets of that Class, consisting of a 0.55% distribution fee and a
0.15% service fee. "Other expenses" in the above table include fees for share-
holder services, custodial fees, legal and accounting fees, printing costs and
registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares," "Redemption of Shares"
and "Management of the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY
MASSACHUSETTS MUNICIPALS FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A..................................... $48 $65 $83 $135
Class B..................................... 58 72 82 144
Class C..................................... 24 42 73 161
Class Y..................................... 7 21 36 81
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A..................................... $48 $65 $83 $135
Class B..................................... 13 42 72 144
Class C..................................... 14 42 73 161
Class Y..................................... 7 21 36 81
- -------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the three-year period ended November 30, 1997 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report to Shareholders. The information
for the fiscal years ended November 30, 1988 through November 30, 1994 has been
audited by other auditors. The information set out below should be read in con-
junction with the financial statements and related notes that also appear in
the Fund's 1997 Annual Report, which is incorporated by reference into the SAI.
No information is presented for Class Y shares since no Class Y shares were
outstanding for the periods shown.
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
<TABLE>
<CAPTION>
CLASS A SHARES 1997 1996 1995 1994 1993(1) 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $12.99 $12.96 $11.35 $13.26 $12.63 $12.28
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income(2) 0.66 0.68 0.69 0.70 0.72 0.77
Net realized and unrealized
gains (loss) 0.32 0.02 1.61 (1.85) 0.72 0.43
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.98 0.70 2.30 (1.15) 1.44 1.20
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.67) (0.67) (0.69) (0.70) (0.74) (0.77)
Net realized gains (0.12) -- -- (0.06) (0.07) (0.04)
Capital -- -- -- -- -- (0.04)
- -------------------------------------------------------------------------------
Total Distributions (0.79) (0.67) (0.69) (0.76) (0.81) (0.85)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $13.18 $12.99 $12.96 $11.35 $13.26 $12.63
- -------------------------------------------------------------------------------
TOTAL RETURN(P) 7.85% 5.65% 20.73% (9.07)% 11.74% 10.06%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $33 $30 $29 $28 $33 $27
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(2) 0.80% 0.80% 0.83% 0.81% 0.82% 0.71%
Net investment income 5.07 5.32 5.42 5.55 5.49 6.12
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 58% 23% 10% 37% 10% 73%
- -------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed investment income method, because it
more accurately reflects the per share data for the period.
(2) The Adviser waived all or part of its fees for the six years ended November
30, 1997. If such fees had not been waived, the per share decrease in net
investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
----------------------------------- -----------------------------------
1997 1996 1995 1994 1993 1992 1977 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.01 $0.01 $0.03 $0.04 $0.05 $0.08 0.88% 0.91% 1.07% 1.09% 1.18% 1.32%
</TABLE>
(PTotal)returns do not reflect the deduction of applicable sales charges.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES 1991 1990 1989 1988*
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.81 $12.11 $11.88 $11.40
- ---------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.84 0.84 0.88 0.82
Net realized and unrealized gain (loss) 0.48 (0.27) 0.21 0.54
- ---------------------------------------------------------------------------
Total Income From Operations 1.32 0.57 1.09 1.36
- ---------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.84) (0.85) (0.86) (0.82)
Net realized gains -- (0.02) -- (0.06)
Capital (0.01) -- -- --
- ---------------------------------------------------------------------------
Total Distributions (0.85) (0.87) (0.86) (0.88)
- ---------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.28 $11.81 $12.11 $11.88
- ---------------------------------------------------------------------------
TOTAL RETURN(P) 11.57% 4.93% 9.43% 12.25%++
- ---------------------------------------------------------------------------
NET ASSETS, END OF YEAR (MILLIONS) $20 $18 $20 $15
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.66% 0.74% 0.58% 0.67%+
Net investment income/(loss) 6.89 7.00 7.24 7.00+
- ---------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 87% 51% 28% 128%
- ---------------------------------------------------------------------------
</TABLE>
(2) The Adviser waived all or part of its fees for the three years ended
November 30, 1991 and the period from December 21, 1987 through November
30, 1988. If such fees had not been waived, the per share decrease in net
investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
--------------------------- -----------------------
1991 1990 1989 1988 1991 1990 1989 1988
------ ------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.07 $0.04 $0.14 $0.16 1.28% 1.09% 1.92% 2.00%
</TABLE>
* The Fund commenced operations on December 21, 1987. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(PTotal)returns do not reflect the deduction of applicable sales charges.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS B SHARES 1997 1996 1995 1994 1993(1) 1992(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $12.99 $12.96 $11.35 $13.26 $12.63 $12.52
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income(3) 0.60 0.61 0.63 0.63 0.66 0.06
Net realized and
unrealized gains (loss) 0.31 0.03 1.61 (1.84) 0.72 0.10
- -------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.91 0.64 2.24 (1.21) 1.38 0.16
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.61) (0.61) (0.63) (0.64) (0.68) (0.05)
Net realized gains (0.12) -- -- (0.06) (0.07) --
- -------------------------------------------------------------------------------
Total Distributions (0.73) (0.61) (0.63) (0.70) (0.75) (0.05)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $13.17 $12.99 $12.96 $11.35 $13.26 $12.63
- -------------------------------------------------------------------------------
TOTAL RETURN(P) 7.25% 5.14% 20.15% (9.50)% 11.09% 1.29%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $28 $29 $29 $23 $22 $3
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(3) 1.31% 1.31% 1.35% 1.32% 1.31% 1.34%+
Net investment income 4.57 4.81 4.94 5.04 4.99 5.49+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 58% 23% 10% 37% 10% 73%
- -------------------------------------------------------------------------------
</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) For the period from November 6, 1992 (inception date) to November 30, 1992.
(3) The Adviser has waived all or part of its fees for the five years ended
November 30, 1997 and the period ended November 30, 1992. If such fees had
not been waived, the per share decrease in net investment income and the
expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN NET INVESTMENT INCOME WITHOUT FEE WAIVERS
------------------------------------ ------------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993 1992
------ ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $ 0.01 $0.01 $0.04 $0.03 $0.05 $0.01 1.39% 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.
(PTotal)returns do not reflect the deduction of applicable sales charges.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE 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(P) 7.21% 5.09% 20.04% 0.40%++
- ---------------------------------------------------------------------
NET ASSETS, END OF YEAR ($000'S) $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 had not been waived, the per share decrease in net investment
income and the ratios of expenses would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
IN 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>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(PTotal)returns do not reflect the deduction of applicable sales charges.
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to provide Massachusetts investors with
as high a level of dividend income exempt from Federal and Massachusetts per-
sonal income taxes as is consistent with prudent investment management and the
preservation of capital. This investment objective may not be changed without
the approval of the holders of a majority of the Fund's outstanding shares.
There can be no assurance that the Fund's investment objective will be
achieved.
The Fund operates subject to an investment policy providing that, under normal
market conditions, the Fund will invest at least 80% of its net assets in Mas-
sachusetts Municipal Securities. The Fund may invest up to 20% of its net
assets in municipal securities of non-Massachusetts municipal issuers, the
interest on which is excluded from gross income for Federal income tax purposes
(not including the possible applicability of a Federal alternative minimum
tax), but which is subject to Massachusetts personal income taxes. When the
Adviser believes that market conditions warrant adoption of a temporary defen-
sive posture, the Fund may invest without limit in non- Massachusetts municipal
issues and in "Temporary Investments" as described below.
The Fund generally will invest at least 75% of its total assets in investment-
grade debt obligations rated no lower than Baa, MIG 3 or Prime-1 by Moody's or
BBB, SP-2 or A-1 by S&P, or in unrated obligations of comparable quality.
Unrated securities will be considered to be of investment grade if deemed by
the Adviser to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers of the unrated securities are rated Baa
or better by Moody's or BBB or better by S&P. The balance of the Fund's assets
may be invested in securities rated as low as C by Moody's or D by S&P, or com-
parable unrated securities which are often referred to as "junk bonds." Securi-
ties in the fourth highest rating category, though considered to be investment
grade, have speculative characteristics. Securities rated as low as D are
extremely speculative and are in actual default of interest and/or principal
payments.
The Fund's average weighted maturity will vary from time to time based on the
judgment of the Adviser. The Fund intends to focus on intermediate- and long-
term obligations, that is, obligations with remaining maturities at the time of
purchase from three to in excess of twenty years. Obligations which are rated
Baa by Moody's or BBB by S&P and those which are rated lower than investment
grade are subject to greater market fluctuation and more uncertainty as to pay-
ment of principal and interest, and therefore generate higher yields than obli-
gations rated above Baa or BBB. A description of the rating systems of Moody's
and S&P is contained in the SAI.
Because many issuers of Massachusetts Municipal Securities may choose not to
have their obligations rated, it is possible that a large portion of the Fund's
portfolio may consist of unrated obligations. Unrated obligations are not nec-
essarily of lower quality than rated obligations, but to the extent the Fund
invests in unrated obligations, the Fund will be more reliant on the Adviser's
judgment, analysis and experience than would be the case if the Fund invested
only in rated obligations.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may invest without limit in "municipal leases," which generally are
participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for prop-
erty or equipment. Municipal leases may take the form of a lease or an install-
ment purchase contract issued by state or local government authority to obtain
funds to acquire a wide variety of equipment and facilities such as fire and
sanitation vehicles, computer equipment and other capital assets. Although
lease obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is ordi-
narily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease obli-
gations contain "non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments in future
years unless money is appropriated for such purpose on a yearly basis. In addi-
tion to the "non-appropriation" risk, these securities represent a relatively
new type of financing that has not yet developed the depth of marketability
associated with more conventional bonds. Although "non-appropriation" lease
obligations are often secured by the underlying property, disposition of the
property in the event of foreclosure might prove difficult. There is no limita-
tion on the percentage of the Fund's assets that may be invested in municipal
lease obligations. In evaluating municipal lease obligations, the Adviser will
consider such factors as it deems appropriate, which may include: (a) whether
the lease can be canceled; (b) the ability of the lease obligee to direct the
sale of the underlying assets; (c) the general creditworthiness of the lease
obligor; (d) the likelihood that the municipality will discontinue appropriat-
ing funding for the leased property in the event such property is no longer
considered essential by the municipality; (e) the legal recourse of the lease
obligee in the event of such a failure to appropriate funding; (f) whether the
security is backed by a credit enhancement such as insurance; and (g) any limi-
tations which are imposed on the lease obligor's ability to utilize substitute
property or services rather than those covered by the lease obligation.
The Fund may invest without limit in private activity bonds. Interest income on
certain types of private activity bonds issued after August 7, 1986 to finance
non-governmental activities is a specific tax preference item for purposes of
the Federal individual and corporate alternative minimum taxes. Individual and
corporate shareholders may be subject to a Federal alternative minimum tax to
the extent the Fund's dividends are derived from interest on those bonds. Divi-
dends derived from interest income on Massachusetts Municipal Securities are a
component of the "current earnings" adjustment item for purposes of the Federal
corporate alternative minimum tax.
The Fund is classified as a non-diversified investment company under the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in the obligations of a single issuer. The
Fund intends to con- duct its operations, however, so as to qualify as a "regu-
lated investment company"
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"),
which will relieve the Fund of any liability for Federal income tax to the
extent its earnings are distributed to shareholders. To so qualify, among other
requirements, the Fund will limit its investments so that, at the close of each
quarter of the taxable year, (a) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer and
(b) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities
of a single issuer and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. The Fund's assumption of large positions
in the obligations of a small number of issuers may cause the Fund's share
price to fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
The Fund may invest without limit in debt obligations that are repayable out of
revenue streams generated from economically-related projects or facilities.
Sizeable investments in such obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial dif-
ficulties. In addition, the Fund may invest up to an aggregate of 15% of its
total assets in securities with contractual or other restrictions on resale and
other instruments which are not readily marketable and up to 5% of its assets
in the securities of issuers which have been in continuous operation for less
than three years. Notwithstanding the foregoing, the Fund shall not invest more
than 10% of its assets in securities (excluding those subject to Rule 144A
under the Securities Act of 1933, as amended) that are restricted. The Fund
also is authorized to borrow an amount of up to 10% of its total assets (in-
cluding the amount borrowed) valued at market less liabilities (not including
the amount borrowed) in order to meet anticipated redemptions and to pledge its
assets to the same extent in connection with the borrowings.
Further information about the Fund's investment policies, including a list of
those restrictions on the Fund's investment activities that cannot be changed
without shareholder approval, appears in the SAI.
CERTAIN PORTFOLIO STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, the following portfolio strategies:
When-Issued Securities. New issues of Massachusetts Municipal Securities (and
other tax-exempt obligations) are frequently offered on a when-issued basis,
which means that delivery and payment for such securities normally take place
15 to 45 days after the date of the commitment to purchase. The payment obliga-
tion and the interest rate that will be received on when-issued securities are
fixed at the time the buyer enters into the commitment. Massachusetts Municipal
Securities, like other investments made by the Fund, may decline or appreciate
in value before their actual
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
delivery to the Fund. Due to the fluctuations in the value of securities pur-
chased and sold on a when-issued basis, the yields obtained on these securi-
ties may be higher or lower than the yields available in the market on the
date when the investments actually are delivered to the buyers. The Fund will
not accrue income with respect to a when-issued security prior to its stated
delivery date. The Fund will establish a segregated account with the Fund's
custodian consisting of cash, obligations issued or guaranteed by the United
States government or its agencies or instrumentalities ("U.S. government secu-
rities") or other liquid, high-grade debt obligations in an amount equal to or
greater than the amount of the purchase price of the when-issued securities.
Placing securities rather than cash in the segregated account may have a
leveraging effect on the Fund's net assets. The Fund generally will make com-
mitments to purchase Massachusetts Municipal Securities (and other tax-exempt
obligations) on a when-issued basis only with the intention of actually
acquiring the securities, but the Fund may sell these securities before the
delivery date if it is deemed advisable.
Temporary Investments. Under normal market conditions, the Fund may hold up to
20% of its total assets in cash or money market instruments, including taxable
money market instruments ("Temporary Investments"). In addition, when the
Adviser believes that market conditions warrant, including when acceptable
Massachusetts Municipal Securities are unavailable, the Fund may take a tempo-
rary defensive posture and invest without limitation in Temporary Investments.
Tax-exempt securities eligible for short-term investment by the Fund are
municipal notes rated at the time of purchase within the three highest grades
by Moody's or S&P or, if not rated, issued by issuers with outstanding debt
securities rated within the three highest grades by Moody's or S&P. The Fund
may also invest in certain taxable short-term instruments having quality char-
acteristics comparable to those for tax-exempt investments. To the extent the
Fund holds Temporary Investments, it may not achieve its investment objective.
Municipal Bond Index and Interest Rate Futures Contracts and Options on Munic-
ipal Bond Index and Interest Rate Futures Contracts. The Fund may enter into
municipal bond index and interest rate futures contracts and purchase and sell
options on these futures contracts that are traded on a United States exchange
or board of trade. Such investments, if any, by the Fund will be made solely
for the purpose of hedging against changes in the value of its portfolio secu-
rities and in the value of securities it intends to purchase due to antici-
pated changes in interest rates and market conditions and when the transac-
tions are economically appropriate to the reduction of risks inherent in the
management of the Fund.
A municipal bond index futures contract, which is based on an index of long-
term, tax-exempt municipal bonds, is an agreement in which two parties agree
to take or make delivery of an amount of cash equal to a specific dollar
amount times the difference between the value of the index at the close of the
last trading day of the contract
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and the price at which the index contract was originally written. Interest rate
futures contracts are contracts for the future purchase or sale of specified
interest rate sensitive debt securities such as United States Treasury bills,
bonds and notes, obligations of the Government National Mortgage Association
and bank certificates of deposit. Although most interest rate futures contracts
require the delivery of the underlying securities, some settle in cash. Each
contract designates the price, date, time and place of delivery. Entering into
a futures contract to deliver the index or instrument underlying the contract
is referred to as entering into a "short" position in the futures contract,
whereas entering into a futures contract to take delivery of the index or
instrument is referred to as entering into a "long" position in the futures
contract.
A put or call option on a municipal bond index or interest rate futures con-
tract gives the purchaser the right, in return for the premium paid, to assume
a short or long position, respectively, in the underlying futures contract at a
specified exercise price at any time prior to the expiration date of the
option. The Fund may purchase put and call options on both municipal bond index
and interest rate futures contracts. The Fund will sell options on these
futures contracts only as part of closing purchase transactions to terminate
its options positions, although no assurance can be given that closing transac-
tions can be effected.
Entering into a futures contract for a purchase or sale of a municipal bond
index or debt security or purchasing options on index or interest rate futures
contracts will enable the Fund to protect its assets from fluctuations in
interest rates on tax-exempt securities without initially buying or selling the
securities. The Fund may enter into futures contracts to sell an index or debt
security or may purchase put options when the Adviser believes that interest
rates will rise and consequently the value of the Fund's portfolio securities
will decrease. The Fund may enter into futures contracts to buy an index or
debt security or may purchase call options when the Adviser anticipates pur-
chasing portfolio securities at a time of declining interest rates.
There are several risks in connection with the use of municipal bond index and
interest rate futures contracts and options on those futures contracts as hedg-
ing devices. There can be no assurance that there will be a correlation between
price movements in the municipal bond index or interest rate futures, on the
one hand, and price movements in municipal bonds which are the subject of the
hedge, on the other hand. The lack of correlation could be pronounced with
respect to municipal bond index futures contracts because the Fund primarily
will hold Massachusetts Municipal Securities rather than a selection of the
bonds constituting an index. Positions in futures contracts and options on
futures contracts may be closed out only by entering into offsetting positions
on the exchange on which the contract was initiated, and no assurance can be
given that an active market will exist for the contract or the option at any
particular time. Consequently, the Fund may realize a loss on a futures con-
tract that is not offset by an increase in the price of the municipal bonds
that are being hedged or may not be able to close a futures position in the
event of adverse price
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
movements. Any income earned by the Fund from transactions in futures contracts
and options on futures contracts will be taxable. Accordingly, it is antici-
pated that such investments will be made only in unusual circumstances, such as
when the Adviser anticipates an extreme change in interest rates or market con-
ditions.
When the Fund enters into futures contracts to purchase an index or debt secu-
rity or purchases call options, an amount of cash, U.S. government securities
or other liquid, high-grade debt securities equal to the market value of the
contract will be deposited and maintained in a segregated account with the
Fund's custodian to collateralize the positions, thereby insuring that the use
of the contract is unleveraged.
Zero Coupon Bonds. The Fund may also invest in zero coupon securities. Such
bonds carry an additional risk in that, unlike bonds which pay interest
throughout the period to maturity, the Fund will realize no cash until the cash
payment date unless a portion of such securities is sold and, if the issuer
defaults, the Fund may obtain no return at all on its investment.
Year 2000. The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney, the Fund's
distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the Fund's
operations, including the handling of securities trades, pricing and account
services. The Adviser and Smith Barney have advised the Fund that they have
been reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Adviser has been
advised by the Fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same
goal. There can, however, be no assurance that the Adviser, Smith Barney or any
other service provider will be successful, or that interaction with other non-
complying computer systems will not impair Fund services at that time.
MASSACHUSETTS MUNICIPAL SECURITIES
As used in this Prospectus, the term "Massachusetts Municipal Securities" gen-
erally refers to intermediate- and long-term debt obligations issued by the
Commonwealth of Massachusetts and its political subdivisions, agencies and pub-
lic authorities (together with certain other governmental issuers such as
Puerto Rico, the Virgin Islands and Guam) to obtain funds for various public
purposes. The interest on such obligations is, in the opinion of bond counsel
to the issuers, excluded from gross income for Federal income tax purposes and
exempt from Massachusetts personal income taxes and, for that reason, generally
is fixed at a lower rate than it would be if it were subject to such taxes.
Interest income on certain Massachusetts Municipal
19
<PAGE>
MASSACHUSETTS MUNICIPAL SECURITIES (CONTINUED)
Securities is a specific tax preference item for purposes of the Federal indi-
vidual and corporate alternative minimum taxes.
CLASSIFICATIONS
The two principal classifications of Massachusetts Municipal Securities are
"general obligation bonds" and "revenue bonds." General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the rev-
enues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
related facilities experience financial difficulties. In addition, certain
types of private activity bonds issued by or on behalf of public authorities
to obtain funds for privately operated facilities are included in the term
Massachusetts Municipal Securities, provided that the interest paid on the
bonds qualifies as excluded from gross income for Federal income tax purposes
and as exempt from Massachusetts personal income taxes. Tax-exempt private
activity bonds do not generally carry the pledge of the credit of the issuing
municipality.
SPECIAL CONSIDERATIONS
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among Feder-
al, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value
of the municipal lease experiencing non-payment and a potential decrease in
the net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Fund could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and the Fund may
not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operat-
ing expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be tax-
exempt. In addition, the Fund's intention to qualify as a "regulated invest-
ment company" under the Code may limit the extent to which the Fund may exer-
cise its rights by taking possession of such assets, because as a regulated
investment company the Fund is subject to certain limitations on its invest-
ments and on the nature of its income.
Because it invests primarily in Massachusetts Municipal Securities, the Fund
may be affected by any political, economic, regulatory, legal or other devel-
opments that constrain the taxing, spending and revenue collection authority
of issuers of Massachu-
20
<PAGE>
MASSACHUSETTS MUNICIPAL SECURITIES (CONTINUED)
setts Municipal Securities or otherwise affect the ability of such issuers to
pay interest or repay principal or any premium. Several statutes limit the tax-
ing authority of certain Massachusetts governmental entities and may impair the
ability of some issuers of Massachusetts Municipal Securities to maintain debt
service on their obligations. It should be noted that the Commonwealth has
experienced fiscal difficulties, including an operating deficit in each of the
fiscal years ended June 30, 1989 through 1991. Budgeted operating funds for
fiscal 1992 through 1996 showed an excess of revenues and other sources over
expenditures and other uses. The Commonwealth is in the process of closing its
fiscal 1997 financial records. A preliminary financial report for fiscal 1997
estimates budgeted revenues and other sources to fall short of budgeted expen-
ditures. Any significant imbalance in revenues and expenditures is likely to
affect the bond ratings and credit standing of the public authorities and
municipalities within Massachusetts, as well as of the Commonwealth itself. Any
such imbalance could adversely affect the market values and marketability of
obligations issued by such entities, and could result in payment defaults on
outstanding obligations.
The financial conditions of the Commonwealth are affected by many social, eco-
nomic and environmental conditions beyond the control of the Commonwealth.
Additionally, many of the Commonwealth's programs are dependent upon federal
reimbursements, which have been declining in recent years. For additional
information concerning the Commonwealth's economic difficulties and other con-
siderations relating to investments in Massachusetts Municipal Securities, see
the SAI.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE, on each day that the NYSE is open, by dividing the value
of the Fund's net assets attributable to each Class by the total number of
shares of the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the absence
of a market value with respect to any securities, at fair value as determined
by or under the direction of the Fund's Board of Trustees. Short-term invest-
ments that mature in 60 days or less are valued at amortized cost whenever the
Fund's Board of Trustees determines that amortized cost reflects fair market
value of those investments. Amortized cost involves valuing an instrument at
its original cost to the Fund and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Further information
regarding the Fund's valuation policies is contained in the SAI.
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund pays dividends from its net investment income (that is, net income
other than its net realized long and short-term capital gains) monthly to
shareholders of record as of the preceding Tuesday. Distributions of net real-
ized long- and short-term capital gains, if any, are declared and paid annual-
ly.
If a shareholder does not otherwise instruct, dividends and capital gains dis-
tributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 of each year of any undistributed ordi-
nary income or capital gains and expects to pay any other distributions as are
necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net invest-
ment income and net realized capital gains, the excess distributions may be
treated as a tax-free return of capital (up to the amount of the shareholder's
tax basis in his or her shares). The amount treated as a tax-free return of
capital will reduce a shareholder's adjusted basis in his or her shares. Pursu-
ant to the requirements of the 1940 Act and other applicable laws, a notice
will accompany any distribution paid from sources other than net investment
income. In the event the Fund distributes amounts in excess of its net invest-
ment income and net realized capital gains, such distributions may have the
effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
The per share dividends on Class B and Class C shares may be lower than the per
share dividends on Class A and Class Y shares principally as a result of the
distribution fee applicable with respect to Class B and Class C shares. The per
share dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee applica-
ble to Class A shares. Distributions of capital gains, if any, will be in the
same amount for Class A, B, C and Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a regu-
lated investment company under the Code and will designate and pay exempt-
interest dividends derived from interest earned on qualifying tax-exempt obli-
gations. Such exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes although (a) all or a por-
tion of such exempt-interest dividends will be a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes to
the extent they are derived from certain types of private activity bonds issued
after August 7, 1986, and (b) all exempt-interest dividends will be a component
of the "current earnings" adjustment item for purposes of the Federal corporate
alternative minimum tax. Under Massachusetts law, exempt-
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
interest dividends paid by the Fund are exempt from Massachusetts personal
income tax for individuals who are otherwise subject to Massachusetts personal
income tax to the extent the dividends are derived from interest payments on
Massachusetts Municipal Securities and municipal leases.
Dividends paid from taxable net investment income, if any, and distributions
of any net realized short-term capital gains (whether from tax-exempt or tax-
able obligations) are taxable to shareholders as ordinary income regardless of
how long shareholders have held their Fund shares and whether such dividends
or distributions are received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains (whether from tax-exempt
or taxable securities) are taxable to shareholders as long-term capital gains
regardless of how long they have held Fund shares and whether such distribu-
tions are received in cash or reinvested in additional Fund shares. Further-
more, as a general rule, a shareholder's gain or loss on a sale or redemption
of his or her shares will be a long-term capital gain or loss if the share-
holder has held the shares for more than one year and will be a short-term
capital gain or loss if the shareholder has held the shares for one year or
less. The Fund's dividends and distributions will not qualify for the divi-
dends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and distribu-
tions are mailed annually. Each shareholder will also receive, if appropriate,
various written notices after the close of the Fund's prior taxable year as to
the Federal income tax status of his or her dividends and distributions which
were received from the Fund during the Fund's prior taxable year. These state-
ments may set forth the dollar amount of income excluded or exempt from Fed-
eral income taxes or exempt from Massachusetts personal income taxes and the
dollar amount, if any, subject to Federal income taxes or Massachusetts per-
sonal income taxes. Moreover, these statements will designate the amount of
exempt-interest dividends that is a specific preference item for purposes of
the Federal individual and corporate alternative minimum taxes. Shareholders
should consult their own tax advisers with specific reference to their own tax
situations.
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without
an initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $5,000,000 (except for pur-
chases of Class Y shares of Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary--Alterna-
tive Purchase Arrangements" for a discussion of factors to consider in select-
ing which Class of shares to purchase.
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class B, Class C or Class Y shares. Smith Barney
and other broker-dealers may charge their customers an annual account mainte-
nance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly by First Data Investor Serv-
ices Group, Inc. ("First Data" or the "Transfer Agent") are not subject to a
maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by making
an initial investment of at least $1,000 for each account in the Fund. Invest-
ors in Class Y shares may open an account by making an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment require-
ment for all classes is $25. For shareholders purchasing shares of the Fund
through the Systematic Investment Plan on a quarterly basis, the minimum ini-
tial investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all classes is $50. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Trustees of the Fund and their spouses
and children and unitholders who invest distributions from a UIT sponsored by
Smith Barney. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account
by First Data. Share certificates are issued only
upon a shareholder's written request to the First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular trad-
ing on the NYSE on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day, provided the order is
received by the Fund or Smith Barney prior to Smith Barney's close of business
(the "trade date"). For shares purchased though Smith Barney or Introducing
Brokers purchasing though Smith Barney, payment for Fund shares is due on the
third business day after the trade date (the "settlement date"). In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
basis to charge the account with a bank or other financial institution indi-
cated by the shareholder to provide systematic additions to the shareholder's
Fund account. A shareholder who has insufficient funds to complete the trans-
fer will be charged a fee of up to $25 by Smith Barney or the Transfer Agent.
The Systematic Investment Plan also authorizes Smith Barney to apply cash held
in the shareholder's Smith Barney brokerage account or redeem the sharehold-
er's shares of a Smith Barney money market fund to make additions to the
account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
DEALERS'
AMOUNT OF SALES CHARGE AS % SALES CHARGE AS % REALLOWANCE AS %
INVESTMENT OF OFFERING PRICE OF AMOUNT INVESTED OF OFFERING PRICE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.60%
$ 25,000 - 49,999 3.50 3.63 3.15
50,000 - 99,999 3.00 3.09 2.70
100,000 - 249,999 2.50 2.56 2.25
250,000 - 499,999 1.50 1.52 1.35
500,000 and over * * *
- ----------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more, will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and may
be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of all Class A shares held in funds sponsored by Smith Barney that are offered
with a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to (i)
Board Members and employees of Travelers and its subsidiaries and of any of
the Smith Barney Mutual Funds (including retired Board Members and employees);
the immediate families of such persons (including the surviving spouse of a
deceased Board Member or employee); and to a pension, profit-sharing or other
benefit plan for such persons and
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
(ii) employees of members of the National Association of Securities Dealers
Inc., provided such sales are made upon the assurance of the purchaser that
the purchase is made for investment purposes and that the security will not be
resold except through redemption or repurchase; (b) offers of Class A shares
to any other investment company to effect the combination of such company with
the Fund by merger, acquisition of assets or otherwise; (c) purchases of Class
A shares by any client of a newly employed Smith Barney Financial Consultant
(for a period up to 90 days from the commencement of the Financial Consul-
tant's employment with Smith Barney), on the condition the purchase of Class A
shares is made with the proceeds of the redemption of shares of a mutual fund
which (i) was sponsored by the Financial Consultant's prior employer, (ii) was
sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) purchases by shareholders who have redeemed Class A shares
in the Fund (or Class A shares of another Smith Barney Mutual Fund that are
offered with a sales charge) and who wish to reinvest their redemption pro-
ceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) purchases by separate accounts used to
fund certain unregistered variable annuity contracts; (g) investments of dis-
tributions from a UIT sponsored by Smith Barney; and (h) purchases by invest-
ors participating in a Smith Barney fee-based arrangement. In order to obtain
such discounts, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined above)
at a reduced sales charge or at net asset value determined by aggregating the
dollar amount of the new purchase and the total net asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or discon-
tinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds
offered with a sales charge to, and
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
share holdings of, all members of the group. To be eligible for such reduced
sales charges or to purchase at net asset value, all purchases must be pursu-
ant to an employer- or partnership-sanctioned plan meeting certain require-
ments. One such requirement is that the plan must be open to specified part-
ners or employees of the employer and its subsidiaries, if any. Such plan may,
but is not required to, provide for payroll deductions. Smith Barney may also
offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that Smith Barney will real-
ize economies of sales efforts and sales related expenses. An individual who
is a member of a qualified group may also purchase Class A shares at the
reduced sales charge applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the mem-
bers, and must agree to include sales and other materials related to the Fund
in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the dis-
cretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided the investor refers to such Let-
ter when placing orders. For purposes of a Letter of Intent, the "Amount
Invested" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge listed under "Exchange Privilege" over a 13-month
period based on the total amount of intended purchases plus the value of all
Class A shares previously purchased and still owned. An alternative is to com-
pute the 13-month period starting up to 90 days before the date of execution
of a Letter of Intent. Each investment made during the period receives the
reduced sales charge applicable to the total amount of the investment goal. If
the goal is not achieved within the period, the investor must pay the differ-
ence between the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed shares will be
redeemed. Please contact a Smith Barney Financial Consultant or the Transfer
Agent to obtain a Letter of Intent application.
Class Y shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors
must make
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
an initial minimum purchase of $5,000,000 in Class Y shares of the Fund and
agree to purchase a total of $15,000,000 of Class Y shares of the Fund within
13 months from the date of the Letter. If a total investment of $15,000,000 is
not made within the 13-month period, all Class Y shares purchased to date will
be transferred to Class A shares, where they will be subject to all fees (in-
cluding a service fee of 0.25%) and expenses applicable to the Fund's Class A
shares, which may include a CDSC of 1%. The Fund expects that such transfer
will not be subject to Federal income taxes. Please contact a Smith Barney
Financial Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at the net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase payment may
be immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. CDSC Shares are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C and Class A shares that are CDSC Shares are subject to a 1.00% CDSC if
redeemed within 12 months of purchase. In circumstances in which the CDSC is
imposed on Class B shares, the amount of the charge will depend on the number
of years since the shareholder made the purchase payment from which the amount
is being redeemed. Solely for purposes of determining the number of years since
a purchase payment, all purchase payments made during a month will be aggre-
gated and deemed to have been made on the last day of the preceding Smith Bar-
ney statement month. The following table sets forth the rates of the charge for
redemptions of Class B shares by shareholders.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class B shares will convert automatically to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. There also will be converted at that time such pro-
portion of Class B Dividend Shares owned by the shareholder as the total num-
ber of his or her Class B shares converting at the time bears to the total
number of Class B shares (other than Class B Dividend Shares) owned by the
shareholder. See "Prospectus Summary--Alternative Purchase Arrangements--Class
B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount realized on redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which repre-
sents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b) au-
tomatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) involun-
tary redemptions; and (e) redemptions of shares made to effect a combination
of the Fund with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer
Agent in the case of all other shareholders) of the shareholder's status or
holdings, as the case may be.
29
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares
are subject to the other requirements of the fund into which exchanges are
made.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Municipal High Income Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
*Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc. -- Cash Portfolio
++Smith Barney Money Funds, Inc. -- Government Portfolio
***Smith Barney Money Funds, Inc. -- Retirement Portfolio
***Smith Barney Municipal Money Market Fund, Inc.
***Smith Barney Muni Funds -- California Money Market Portfolio
***Smith Barney Muni Funds -- New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
31
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the fund that
have been exchanged.
Class A and Y Exchanges. Class A and Class Y shareholders of the Fund who
wish to exchange all or a portion of their shares for shares of the respective
class in any of the funds identified above may do so without imposition of any
charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may,
at its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15-day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in deter-
mining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable
32
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
CDSC. Redemption requests received after the close of regular trading on the
NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permit-
ted under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily
uninvested funds. Redemption proceeds for shares purchased by check, other than
a certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a writ-
ten request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Massachusetts Municipals Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the Transfer Agent together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $10,000, must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or member firm
of a national securities exchange. Written redemption requests of $10,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. The Transfer Agent may require additional
supporting documents for redemptions made by corporations, executors, adminis-
trators, trustees or guardians. A redemption request will not be deemed to be
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
properly received until the Transfer Agent receives all required documents in
proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact the Trans-
fer Agent at (800) 451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a sig-
nature guarantee, that will be provided by the Transfer Agent upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with a signature guarantee when making his/her initial
investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling the Transfer
Agent at (800) 451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemptions of shares
(i) by retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed to
his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the account
registration of the fund being acquired is identical to the registration of the
shares of the fund exchanged. Such exchange requests may be made by calling the
Transfer Agent at (800) 451-2010 between 9:00 a.m. and 4:00 p.m. (New York City
time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine. The
Fund and its agents will employ procedures designed to verify the identity of
the caller and legitimacy of instructions (for example, a shareholder's name
and account number will be required and phone calls may be recorded). The Fund
reserves the right to
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
suspend, modify or discontinue the telephone redemption and exchange program or
to impose a charge for this service at any time following at least seven days'
prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived
on amounts withdrawn that do not exceed 2.00% per month of the shareholder's
shares subject to the CDSC.) For further information regarding the automatic
cash withdrawal plan, shareholders should contact a Smith Barney Financial Con-
sultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size. The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30 day "yield" and "equivalent
taxable yield" of each Class of shares. The yield refers to the income gener-
ated by an investment in those shares over the 30 day period identified in the
advertisement and is computed by dividing the net investment income per share
earned by the Class during the period by the maximum public offering price per
share on the last day of the period. This income is "annualized" by assuming
that the amount of income is generated each month over a one year period and is
compounded semi-annually. The annualized income is then shown as a percentage
of the net asset value.
The Fund's equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's tax-
exempt yield for each Class. It is calculated by increasing the yield shown for
the Class to the extent necessary to reflect the payment of taxes at specified
tax rates. Thus, the equivalent taxable yield always will exceed the Fund's
yield.
35
<PAGE>
PERFORMANCE (CONTINUED)
TOTAL RETURN
From time to time, the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the invest-
ment at the end of the period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return which provides the ending redeemable
value. Such standard total return information may also be accompanied with non-
standard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund also may include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. or similar independent services that
monitor the performance of mutual funds, or other industry publications.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund, including
agreements with the Fund's distributor, investment adviser and administrator,
custodian and transfer agent. The day-to-day operations of the Fund are dele-
gated to the Fund's investment adviser and administrator. The SAI contains
background information regarding each Trustee and executive officer of the
Fund.
INVESTMENT ADVISER--MMC
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser pursuant to an investment advisory agreement. The
36
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
Adviser was incorporated in March, 1968 under the laws of Delaware and renders
investment advice to investment companies that had aggregate assets under man-
agement as of January 31, 1997 of approximately $98.5 billion.
Subject to the supervision and direction of the Fund's Board of Trustees, the
Adviser manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities and employs professional portfolio managers,
and securities analysts who provide research services to the Fund. For invest-
ment advisory services rendered, the Fund pays the Adviser an advisory fee cal-
culated at an annual rate of 0.30% of average daily net assets. For the fiscal
year ended November 30, 1997, the Fund paid the Adviser investment advisory
fees equal to 0.27% of the value of the average daily net assets of the Fund.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott has served as Vice President
and Investment Officer of the Fund since December 21, 1987 (commencement
of operations) and manages the day-to-day operations of the Fund, including
making all investment decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended November 30, 1997, is included
in the Annual Report dated November 30, 1997. A copy of the Annual Report may
be obtained upon request without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.
ADMINISTRATOR
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays a
fee computed daily and payable monthly at the following annual rates of average
daily net assets: 0.20% up to $500 million and 0.18% of the net assets in
excess of $500 million. For the fiscal year ended November 30, 1997, MMC was
paid administration fees equal to 0.15% of the value of the average daily net
assets of the Fund.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act
37
<PAGE>
DISTRIBUTOR (CONTINUED)
(the "Plan"), Smith Barney is paid a service fee with respect to Class A, Class
B and Class C shares of the Fund at the annual rate of 0.15% of the average
daily net assets of the respective Class. Smith Barney also is paid a distribu-
tion fee with respect to Class B and Class C shares at the annual rate of 0.50%
and 0.55%, respectively, of the average daily net assets attributable to those
Classes. Class B shares which automatically convert to Class A shares eight
years after the date of original purchase will no longer be subject to a dis-
tribution fee. The fees are used by Smith Barney to pay its Financial Consul-
tants for servicing shareholder accounts and, in the case of Class B and Class
C shares, to cover expenses primarily intended to result in the sale of those
shares. These expenses include: advertising expenses; the cost of printing and
mailing prospectuses to potential investors; payments to and expenses of Smith
Barney Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and share-
holder service expenses actually incurred by Smith Barney and the payments may
exceed distribution expenses actually incurred. The Fund's Board of Trustees
will evaluate the appropriateness of the Plan and its payment terms on a con-
tinuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and the pro-
ceeds of the CDSC.
ADDITIONAL INFORMATION
The Fund was organized on January 13, 1987 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." It is registered with the SEC as a non-diversified open-end
management investment company.
Each Class of the Fund represents an identical interest in the Fund's invest-
ment portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privilege of each Class; and
38
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
(g) the conversion feature of the Class B shares. The Fund's Board of Trustees
does not anticipate that there will be any conflicts among the interests of the
holders of the different Classes. The Trustees, on an ongoing basis, will con-
sider whether any such conflict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings of shareholders held for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. The Trustees will call a meeting for any purpose
upon the written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share held
and a proportionate, fractional vote for each fractional share held of that
Class. Generally, shares of the Fund will be voted on a Fund-wide basis on all
matters except matters affecting only the interests of one Class.
PNC Bank, National Association, located at 17th and Chestnut Streets, Philadel-
phia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
The Fund sends to each of its shareholders a semi-annual report and an audited
annual report, which include listings of the investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Fund plans to consolidate the mailing of its semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will receive
a single copy of each report. Shareholders who do not want this consolidation
to apply to their accounts should contact their Smith Barney Financial Consul-
tants or First Data.
39
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
-------------------------------
A Member of Travelersgroup LOGO
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
388 Greenwich Street
New York, New York 10013
FD0226 3/98
Smith Barney
Massachusetts Municipals Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional
Information
March 30, 1998
This Statement of Additional Information (the "SAI") expands
upon and supplements the information contained in the current
Prospectus of Smith Barney Massachusetts Municipals Fund (the
"Fund"), dated March 30, 1998, as amended or supplemented from
time to time, and should be read in conjunction with the Fund's
Prospectus. The Fund's Prospectus may be obtained from a Smith
Barney Financial Consultant or by writing or calling the Fund at
the address or telephone number set forth above. This SAI,
although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in
both the Prospectus and this SAI, except where shown below:
Management of the Fund 1
Investment Objective and Management Policies 4
Municipal Bonds (See in the Prospectus "Massachusetts
Municipal Securities") 12
Purchase of Shares 17
Redemption of Shares 17
Distributor 18
Valuation of Shares 20
Exchange Privilege 20
Performance Data (See in the Prospectus "Performance'') 21
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes'') 23
Additional Information 26
Financial Statements 27
Appendix A-1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain
of the organizations that provide services to the Fund. These
organizations are as follows:
Name Service
Smith Barney Inc. ("Smith Barney'') Distributor
Mutual Management Corp. ("MMC" or the "Investment
Adviser"), formerly known as Smith Barney Mutual Funds
Management Inc. Investment Adviser
and Administrator
PNC Bank, National Association ("PNC" or the "Custodian")
Custodian
First Data Investor Services Group, Inc. ("First Data" or the
"Transfer Agent") Transfer Agent
These organizations and the functions they perform for the
Fund are discussed in the Prospectus and in this SAI.
Trustees and Executive Officers of the Fund
The names of the Trustees and executive officers of the
Fund, together with information as to their principal business
occupations during the past five years, are shown below. Each
Trustee who is an "interested person'' of the Fund, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"),
is indicated by an asterisk.
Herbert Barg (Age 74). Private Investor. His address is
273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 74). Retired; formerly
Senior Consultant to Dean Witter Reynolds Inc. His address is 19
Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 76). Consultant, HMK Associates;
Retired Vice Chairman of the Board of Restaurant Associates Corp.
His address is c/o HMK Associates, 30 Columbia Turnpike, Florham
Park, New Jersey 07932.
Dwight B. Crane, Trustee (Age 59). Professor, Harvard
Business School. His address is c/o Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163.
Burt N. Dorsett, Trustee (Age 66). Managing Partner of
Dorsett McCabe Management. Inc., an investment counseling firm;
Trustee of Research Corporation Technologies, Inc., a nonprofit
patent clearing and licensing firm. His address is 201 East 62nd
Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (Age 71). Chairman of the Board
and President of The Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Trustee (Age 65). Attorney. His
address is 277 Park Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 67). Financial Consultant;
Retired Financial Executive, Ryan Homes, Inc. His address is 200
Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment
Officer (Age 64). Managing Director of Smith Barney, Chairman of
the Board of Smith Barney Strategy Advisers Inc. and President of
MMC and Travelers Investment Adviser, Inc. ("TIA"); prior to July
1993, Senior Executive Vice President of Shearson Lehman Brothers
Inc., Vice Chairman of Shearson Asset Management. Mr. McLendon is
Chairman of the Board of 42 Smith Barney Mutual Funds. His address
is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Trustee (Age 63). President,
Cornelius C. Rose Associates, Inc., financial consultants, and
Chairman and Trustee of Performance Learning Systems, an
educational consultant. His address is Fair Oaks, Enfield, New
Hampshire 03748.
James J. Crisona, Trustee Emeritus. Attorney; formerly
Justice of the Supreme Court of the State of New York. His
address is 118 East 60th Street, New York, New York 10022
Lewis E. Daidone, Senior Vice President and Treasurer (Age
40). Managing Director of Smith Barney, Chief Financial Officer
of the Smith Barney Mutual Funds; Trustee and Senior Vice
President of MMC and TIA. Mr. Daidone serves as Senior Vice
President and Treasurer of 42 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer
(Age 49). Investment Officer of MMC; Managing Director of Smith
Barney; prior to July 1993, Managing Director of Shearson Lehman
Advisors. Mr. McDermott serves as Investment Officer of 8 Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of
Smith Barney; General Counsel and Secretary of MMC and TIA. Ms.
Sydor serves as Secretary of 42 Smith Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, New York 10013.
No officer, Trustee or employee of Smith Barney or any
parent or subsidiary receives any compensation from the Fund for
serving as an officer or Trustee of the Fund. The Fund pays each
Trustee who is not an officer, Trustee or employee of Smith Barney
or of its affiliates a fee of $1,000 per annum plus $100 per
meeting attended and each Trustee emeritus $500 per annum plus $50
per meeting attended. All Trustees are reimbursed for travel and
out-of-pocket expenses.
For the fiscal year ended November 30, 1997, the Trustees of
the Fund were paid the following compensation:
<TABLE>
<CAPTION>
Pension Compensation
Aggregate Retirement Benefits from the Fund and
Compensation Accrued as Part of the Fund
Complex
Trustee (*) from the Fund+ of Fund Expenses Paid to
Trustees
<S> <C> <C> <C>
Herbert Barg (18) $1,600 $0 $101,600
Alfred Bianchetti (13) 1,600 0 49,600
Martin Brody (21) 1,400 0 119,814
Dwight B. Crane (24) 1,600 0 133,850
Burt N. Dorsett (13) 1,600 0 49,600
Elliot S. Jaffe (13) 1,500 0 48,500
Stephen E. Kaufman (15) 1,600 0 91,964
Joseph J. McCann (13) 1,600 0 49,600
Heath B. McLendon (41)**0 0 0
Cornelius C. Rose (13) 1,600 0 49,600
</TABLE>
+ Upon attainment of age 80, Fund Trustees are required to change
to emeritus status. Trustees Emeritus are entitled to serve in
emeritus status for a maximum of 10 years, during which time
they are paid 50% of the annual retainer fee and meeting fees
otherwise applicable to Fund Trustees, together with reasonable
out-of-pocket expenses for each meeting attended. During the
Fund's last fiscal year aggregate compensation paid by the Fund
to Trustees achieving emeritus status totaled $11,423.05.
* Indicates the total number of funds for which Trustee serves
within the fund complex.
** Designates an "interested" Trustee.
Investment Adviser and Administrator -- MMC
The Investment Adviser serves as investment adviser to the
Fund pursuant to a written investment advisory agreement (the
"Advisory Agreement") approved by the Fund's Board of Trustees,
including a majority of those Trustees who are not "interested
persons" of the Fund or Smith Barney (the "Independent Trustees").
The Investment Adviser is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc. ("Holdings"), which in turn is a wholly
owned subsidiary of Travelers Group Inc. The services provided by
the Investment Adviser under the Advisory Agreement are described
in the Prospectus under "Management of the Fund." The Investment
Adviser bears all expenses in connection with the performance of
its services and pays the salary of any officer or employee who is
employed by both it and the Fund.
As compensation for investment advisory services, the Fund
pays the Investment Adviser a fee computed daily and payable
monthly at 0.30% of the value of the Fund's average daily net
assets. For the fiscal years ended November 30, 1995, 1996 and
1997, the Fund paid the Investment Adviser net of fee waivers and
expense reimbursements, $190,675, $170,838 and $202,259,
respectively, in investment advisory fees. For the fiscal years
ended November 30, 1995, 1996 and 1997, the Investment Adviser
voluntarily waived investment advisory fees of $82,803, $36,129
and $26,561, respectively.
The Investment Adviser also serves as administrator to the
Fund pursuant to a written agreement (the "Administration
Agreement"). The services provided by the Investment Adviser
under the Administration Agreement are described in the Prospectus
under "Management of the Fund.'' The Investment Adviser pays the
salary of all officers and employees who are employed by both it
and the Fund and bears all expenses in connection with the
performance of its services.
As compensation for administrative services rendered to the
Fund, the Investment Adviser receives a fee computed daily and
payable monthly at the following annual rates of average daily net
assets: 0.20% up to $500 million; and 0.18% in excess of $500
million. For the fiscal year ended November 30, 1995, the Fund
paid $109,514 (net of fee waivers amounting to $47,369) in
administration fees. For the fiscal year ended November 30, 1996,
the Fund paid the Investment Adviser $113,892 (net of fee waivers
amounting to $24,086) in administration fees. For the fiscal year
ended November 30, 1997, the Fund paid the Investment Adviser
$117,518 (net of fee waivers amounting to $17,707) in
administration fees.
The Fund bears expenses incurred in its operation including:
taxes, interest, brokerage fees and commissions, if any; fees of
Trustees of the Fund who are not officers, directors, shareholders
or employees of Smith Barney or the Investment Adviser; Securities
and Exchange Commission (the "SEC") fees and state Blue Sky
qualification fees; charges of custodians; transfer and dividend
disbursing agent's fees; certain insurance premiums; outside
auditing and legal expenses; costs of maintaining corporate
existence; costs of investor services (including allocated
telephone and personnel expenses); costs of preparing and printing
of prospectuses for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and
shareholder meetings; and meetings of the officers or Board of
Trustees of the Fund.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the
Fund. The Independent Trustees of the Fund have selected Stroock &
Stroock & Lavan LLP as their legal counsel.
KPMG Peat Marwick LLP, independent auditors, 345 Park
Avenue, New York, New York 10154, serve as auditors of the Fund
and have rendered an opinion on the Fund's financial statements
for the fiscal year ended November 30, 1997.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and
the policies it employs to achieve that objective. The following
discussion supplements the description of the Fund's investment
policies in the Prospectus. For purposes of this SAI, obligations
of non-Massachusetts municipal issuers that pay interest which is
excluded from gross income for Federal income tax purposes ("Non-
Massachusetts Municipal Securities") and obligations of the
Commonwealth of Massachusetts and its political subdivisions,
agencies and public authorities (together with certain other
municipal issuers such as Puerto Rico, the Virgin Islands and
Guam) that pay interest which is excluded from gross income for
Federal income tax purposes and exempt from Massachusetts personal
income taxes ("Massachusetts Municipal Securities"), are
collectively referred to as "Municipal Bonds."
As noted in the Prospectus, the Fund is classified as a non-
diversified investment company under the 1940 Act, which means
that the Fund is not limited by the 1940 Act in the proportion of
its assets that may be invested in the obligations of a single
issuer. The identification of the issuer of Municipal Bonds
generally depends upon the terms and conditions of the security.
When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from
those of the government creating the issuing entity and the
security is backed only by the assets and revenues of such entity,
such entity would be deemed to be the sole issuer. Similarly, in
the case of a private activity bond, if that bond is backed only
by the assets and revenues of the nongovernmental user, then such
nongovernmental user is deemed to be the sole issuer. If in either
case, however, the creating government or some other entity
guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such
government or other entity.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc.
("Moody's'') and Standard & Poor's Ratings Group ("S&P") represent
the opinions of those agencies as to the quality of the Municipal
Bonds and short-term investments which they rate. It should be
emphasized, however, that such ratings are relative and
subjective, are not absolute standards of quality and do not
evaluate the market risk of securities. These ratings will be used
by the Fund as initial criteria for the selection of portfolio
securities, but the Fund also will rely upon the independent
advice of the Investment Adviser to evaluate potential
investments. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and
general economic trends. To the extent the Fund invests in lower-
rated and comparable unrated securities, the Fund's achievement of
its investment objective may be more dependent on the Investment
Adviser's credit analysis of such securities than would be the
case for a portfolio consisting entirely of higher-rated
securities. The Appendix contains information concerning the
ratings of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of
Municipal Bonds may cease to be rated or its rating may be reduced
below the rating given at the time the securities were acquired by
the Fund. Neither event will require the sale of such Municipal
Bonds by the Fund, but the Investment Adviser will consider such
event in its determination of whether the Fund should continue to
hold the Municipal Bonds. In addition, to the extent the ratings
change as a result of changes in such organizations or their
rating systems or due to a corporate restructuring of Moody's or
S&P, the Fund will attempt to use comparable ratings as standards
for its investments in accordance with its investment objective
and policies.
The Fund generally may invest up to 25% of its total assets
in securities rated below investment grade (i.e., lower than Baa,
MIG 3 or Prime-1 by Moody's or BBB, SP-2 or A-1 by S&P), or in
unrated securities of comparable quality. Such securities (a) will
likely have some quality and protective characteristics that, in
the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and
(b) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with
the terms of the obligation.
While the market values of low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate
levels than the market values of higher-rated securities, the
market values of certain low-rated and comparable unrated
municipal securities also tend to be more sensitive than higher-
rated securities to short-term corporate and industry developments
and changes in economic conditions (including recession) in
specific regions or localities or among specific types of issuers.
In addition, low-rated securities and comparable unrated
securities generally present a higher degree of credit risk.
During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of low-rated and comparable
unrated securities to service their payment obligations, meet
projected goals or obtain additional financing may be impaired.
The risk of loss due to default by such issuers is significantly
greater because low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. The Fund may incur
additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its
portfolio holdings.
While the market for municipal securities is considered
generally to be adequate, the existence of limited markets for
particular low-rated and comparable unrated securities may
diminish the Fund's ability to (a) obtain accurate market
quotations for purposes of valuing such securities and calculating
its net asset value and (b) sell the securities at fair value
either to meet redemption requests or to respond to changes in the
economy or in the financial markets. The market for certain low-
rated and comparable unrated securities has not fully weathered a
major economic recession. Any such economic downturn would
adversely affect the value of such securities and the ability of
the issuers of these securities to repay principal and pay
interest thereon.
Fixed-income securities, including low-rated securities and
comparable unrated securities, frequently have call or buy-back
features that permit their issuers to call or repurchase the
securities from their holders, such as the Fund. If an issuer
exercises these rights during periods of declining interest rates,
the Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to the Fund.
Temporary Investments
When the Fund is maintaining a defensive position, it may
invest in short-term investments ("Temporary Investments")
consisting of: (a) the following tax-exempt securities - notes of
municipal issuers having, at the time of purchase, a rating within
the three highest grades of Moody's or S&P or, if not rated,
having an issue of outstanding Municipal Bonds rated within the
three highest grades by Moody's or S&P; and (b) the following
taxable securities: obligations of the United States government,
its agencies or instrumentalities ("U.S. government securities"),
including repurchase agreements with respect to such securities;
other debt securities rated within the three highest grades by
Moody's and S&P, commercial paper rated in the highest grade by
either of such rating services; and certificates of deposit of
domestic banks with assets of $1 billion or more. The Fund may
invest in Temporary Investments for defensive reasons in
anticipation of a market decline. At no time will more than 20% of
the Fund's total assets be invested in Temporary Investments
unless the Fund has adopted a defensive investment policy. The
Fund intends, however, to purchase tax-exempt Temporary
Investments pending the investment of the proceeds of the sale of
portfolio securities or of the Fund's shares of beneficial
interest, or in order to have highly liquid securities available
to meet anticipated redemptions.
Investments in Municipal Bond Index and Interest Rate Futures
Contracts and Options on Municipal Bond Index and Interest Rate
Futures Contracts
Municipal Bond Index and Interest Rate Futures Contracts.
The purpose of entering into a municipal bond index or interest
rate futures contract by the Fund, as the holder of long-term
Municipal Bonds, is to protect the Fund from fluctuations in
interest rates on tax-exempt securities without buying or selling
the Municipal Bonds. If the Fund owns long-term Municipal Bonds
and interest rates are expected to increase, for example, the Fund
might enter into futures contracts to sell a municipal bond index
or the debt security underlying the interest rate future. Such a
transaction would have much the same effect as selling some of the
long-term Municipal Bonds in the Fund's portfolio. If interest
rates increase as anticipated, the value of certain long-term
Municipal Bonds in the Fund's portfolio would decline, but the
value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value
of the Fund from declining as much as it otherwise would have. Of
course, because the value of the Municipal Bonds in the Fund's
portfolio will far exceed the value of the futures contracts
entered into by the Fund, an increase in the value of the futures
contracts could only mitigate -- but not totally offset -- the
decline in the value of the portfolio.
When interest rates are expected to decline, futures
contracts to purchase a municipal bond index or debt security,
could be entered into to hedge against the Fund's anticipated
purchases of long-term Municipal Bonds at higher prices. Because
the rate of fluctuation in the value of the futures contracts
should be similar to that of long-term Municipal Bonds, the Fund
could enter into futures contracts at lower prices. At the time
the Fund deems it appropriate to purchase the Municipal Bonds, the
futures contracts could be liquidated and the Fund's cash could
then be used to buy long-term Municipal Bonds. The Fund could
accomplish similar results by selling Municipal Bonds with long
maturities and investing in Municipal Bonds with short maturities
when interest rates are expected to increase or by buying
Municipal Bonds with long maturities and selling Municipal Bonds
with short maturities when interest rates are expected to decline.
In circumstances when the market for Municipal Bonds may not be as
liquid as that for the futures contracts, however, the ability to
enter into such contracts could enable the Fund to react more
quickly to anticipated changes in market conditions or interest
rates.
Unlike the purchase or sale of a Municipal Bond, no
consideration is paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, the Fund will be required
to deposit in the name of the futures commission merchant
effecting the transaction an amount of cash or cash equivalents
equal to approximately 10% of the contract amount (this amount is
subject to change by the board of trade on which the contract is
traded and members of the board of trade may charge a higher
amount). This amount is known as initial margin and is in the
nature of a performance bond or good faith deposit on the contract
that is returned to the Fund upon termination of the futures
contract, assuming that all contractual obligations have been
satisfied. Subsequent payments, known as variation margin, to and
from the futures commission merchant will be made on a daily basis
as the price of the index or securities underlying the futures
contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as
marking-to-market. At any time prior to the expiration of the
contract, the Fund may elect to close the position by taking an
opposite position, which will operate to terminate the Fund's
existing position in the futures contract.
There are several risks in connection with the use of
municipal bond index and interest rate futures contracts as
hedging devices. Successful use of these futures contracts by the
Fund is subject to the Investment Adviser's ability to predict
correctly movements in the direction of interest rates. Such
predictions involve skills and techniques which may be different
from those involved in the management of a long-term municipal
bond portfolio. In addition, there can be no assurance that there
will be a correlation between movements in the price of the
municipal bond index or the debt security underlying the futures
contract and movements in the price of the Municipal Bonds which
are the subject of the hedge. The degree of imperfection of
correlation depends upon various circumstances, such as variations
in speculative market demand for futures contracts and Municipal
Bonds and technical influences on futures trading. The degree of
imperfection of correlation may be increased with respect to the
Fund, which will hold primarily Massachusetts Municipal Securities
rather than a selection of the bonds constituting any index. The
Fund's Municipal Bonds and the bonds in the index also may differ
in such respects as interest rate levels, maturities and
creditworthiness of issuers. A decision of whether, when and how
to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected trends in interest rates.
Although the Fund intends to enter into futures contracts
only if an active market exists for the contracts, there can be no
assurance that an active market will exist for the contracts at
any particular time. Most domestic futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's
settlement price at the end of a trading session. Once the daily
limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. Futures contract
prices may move to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures
traders to substantial losses. In such event, it might not be
possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash
payments of variation margin. In such circumstances, an increase
in the value of the portion of the portfolio being hedged, if any,
may partially or completely offset losses on the futures contract.
As described above, however, no assurance can be given that the
price of Municipal Bonds will, in fact, correlate with the price
movements in the municipal bond index or interest rate futures
contract and thus provide an offset to losses on a futures
contract.
If the Fund has hedged against the possibility of an
increase in interest rates adversely affecting the value of
Municipal Bonds held in its portfolio and rates decrease instead,
the Fund will lose part or all of the benefit of the increased
value of the Municipal Bonds it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales
of securities may, but will not necessarily, be at increased
prices which reflect the decline in interest rates. The Fund may
have to sell securities at a time when it may be disadvantageous
to do so.
Options on Municipal Bond Index and Interest Rate Futures
Contracts. Options on futures contracts are similar to options on
securities, which give the purchaser the right, in return for the
premium paid, to purchase securities. A call option gives the
purchaser of such option the right to assume a long position in a
specified underlying futures contract, and a put option gives the
purchaser the right to assume a short position in a specified
underlying futures contract, at a stated exercise price at any
time prior to the expiration date of the option. Upon exercise of
an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin
account, which represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on
the futures contract. The potential loss related to the purchase
of an option on a futures contract is limited to the premium paid
for the option (plus transaction costs). Because the value of the
option is fixed at the point of sale, no daily cash payments are
made to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
The Fund will purchase put and call options on municipal
bond index and interest rate futures contracts which are traded on
a United States exchange or board of trade as a hedge against
changes in interest rates, and will enter into closing
transactions with respect to such options to terminate existing
positions. The Fund may purchase put options on interest rate or
municipal bond index futures contracts if the Investment Adviser
anticipates a rise in interest rates. The purchase of put options
on these futures contracts is analogous to the purchase of put
options on debt securities so as to hedge a portfolio of debt
securities against the risk of rising interest rates. Because the
value of a municipal bond index or interest rate futures contract
moves inversely in relation to changes in interest rates, as is
the case with Municipal Bonds, a put option on such a contract
becomes more valuable as interest rates rise. By purchasing put
options on these futures contracts at a time when the Investment
Adviser expects interest rates to rise, the Fund would seek to
realize a profit to offset the loss in value of its portfolio
securities without the need to sell such securities.
The Fund may purchase call options on municipal bond index
or interest rate futures contracts if the Investment Adviser
anticipates a decline in interest rates. The purchase of a call
option on a municipal bond index or interest rate futures contract
represents a means of obtaining temporary exposure to market
appreciation at limited risk. It is analogous to the purchase of a
call option on an individual debt security, which can be used as a
substitute for a position in the debt security itself. Depending
upon the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the
underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities.
The Fund would purchase a call option on a futures contract to
hedge against a market advance when the Fund was holding cash in
anticipation of purchasing Municipal Bonds. The Fund could take
advantage of the anticipated rise in the value of long-term
securities without actually buying them until the market had
stabilized. At that time, the options could be liquidated and the
Fund's cash could be used to buy Municipal Bonds.
The Fund would sell put and call options on futures
contracts only as part of closing transactions to terminate its
options positions. No assurance can be given that such closing
transactions can be effected.
There are several risks relating to options on futures
contracts. The ability to establish and close out positions on
such options will be subject to the existence of a liquid market.
In addition, the Fund's purchase of put or call options will be
based upon predictions as to anticipated interest rate trends by
the Investment Adviser, which could prove to be inaccurate. Even
if the Investment Adviser's expectations are correct, there may be
an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities. The Fund's ability
to purchase and sell options on futures contracts and to trade in
these contracts may be limited to some extent by the requirements
of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to a regulated investment company. See "Taxes" below.
Repurchase Agreements. The Fund may enter into repurchase
agreements with banks which are the issuers of instruments
acceptable for purchase by the Fund and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers.
A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the
seller at an agreed-upon price on an agreed-upon date. Under the
terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually
not more than seven days) subject to an obligation of the seller
to repurchase, and the Fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during
the Fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during
the Fund's holding period. Under each repurchase agreement, the
selling institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than
their repurchase price. the Investment Adviser, acting under the
supervision of the Fund's Board of Trustees, reviews on an ongoing
basis the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase
agreements to evaluate potential risks. Repurchase agreements
could involve certain risks in the event of default or insolvency
of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities, the
risk of a possible decline in the value of the underlying
securities during the period in which the Fund seeks to assert its
rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the
income from the agreement.
Investment Restrictions
The Fund has adopted the following investment restrictions
for the protection of shareholders. Restrictions 1 through 6 below
cannot be changed without the approval of the holders of a
majority of the outstanding shares of the Fund, defined as the
lesser of (a) 67% of the Fund's shares present at a meeting, if
the holders of more than 50% of the outstanding shares are present
in person or by proxy, or (b) more than 50% of the Fund's
outstanding shares. The remaining restrictions may be changed by
the Fund's Board of Trustees at any time.
The Fund will not:
1. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as
permitted under the 1940 Act and the rules, regulations
and orders thereunder
2. Invest more than 25% of its total assets in securities,
the issuers of which are in the same industry. For
purposes of this limitation, U.S. government securities
and securities of state or municipal governments and
their political subdivisions are not considered to be
issued by members of any industry.
3. Borrow money, except that (a) the Fund may borrow from
banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of
securities, and (b) the Fund may, to the extent
consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions
and similar investment strategies and techniques. To the
extent that it engages in transactions described in (a)
and (b), the Fund will be limited so that no more than 33
1/3% of the value of its total assets (including the
amount borrowed), valued at the lesser of cost or market,
less liabilities (not including the amount borrowed)
valued at the time the borrowing is made, is derived from
such transactions.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Fund may invest
consistent with its investment objectives and policies;
(b) repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the
1940 Act.
5. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of
portfolio securities.
6. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the Fund from (a) investing in
securities of issuers engaged in the real estate business
or the business of investing in real estate (including
interests in limited partnerships owning or otherwise
engaging in the real estate business or the business of
investing in real estate) and securities which are
secured by real estate or interests therein; (b) holding
or selling real estate received in connection with
securities it holds or held; (c) trading in futures
contracts and options on futures contracts (including
options on currencies to the extent consistent with the
Funds' investment objective and policies); or (d)
investing in real estate investment trust securities.
7. Purchase any securities on margin (except for such short-
term credits as are necessary for the clearance of
purchases and sales of portfolio securities) or sell any
securities short (except "against the box"). For
purposes of this restriction, the deposit or payment by
the Fund of underlying securities and other assets in
escrow and collateral agreements with respect to initial
or maintenance margin in connection with futures
contracts and related options and options on securities,
indexes or similar items is not considered to be the
purchase of a security on margin.
8. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested
in securities that are illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets
in the securities of issuers having a record, including
predecessors, of less than three years of continuous
operation, except U.S. government securities. (For
purposes of this limitation, issuers include
predecessors, sponsors, controlling persons, general
partners, guarantors and originators of underlying
assets.)
11. Invest in companies for the purpose of exercising
control.
12. Invest in securities of other investment companies,
except as they may be acquired as part of a merger,
consolidation or acquisition of assets and except to the
extent permitted by Section 12 of the 1940 Act
(currently, up to 5% of the total assets of the Fund and
no more than 3% of the total outstanding voting stock of
any one investment company).
13. Engage in the purchase or sale of put, call, straddle
or spread options or in the writing of such options,
except that the Fund may make margin deposits in
connection with municipal bond index and interest rate
futures contracts and may purchase and sell options on
municipal bond index and interest rate futures contracts.
Certain restrictions listed above permit the Fund to engage
in investment practices that the Fund does not currently pursue.
The Fund has no present intention of altering its current
investment practices as otherwise described in the Prospectus and
this SAI and any future change in those practices would require
Board approval and appropriate notice to shareholders. If a
percentage restriction is complied with at the time of an
investment, a later increase or decrease in the percentage of
assets resulting from a change in the values of portfolio
securities or in the amount of the Fund's assets will not
constitute a violation of such restriction. In order to permit the
sale of the Fund's shares in certain states, the Fund may make
commitments more restrictive than the restrictions described
above. Should the Fund determine that any such commitment is no
longer in the best interests of the Fund and its shareholders, it
will revoke the commitment by terminating sales of its shares in
the state involved.
Portfolio Transactions
Newly issued securities normally are purchased directly from
the issuer or from an underwriter acting as principal. Other
purchases and sales usually are placed with those dealers from
which it appears that the best price or execution will be
obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters of
newly issued securities usually includes a concession paid by the
issuer to the underwriter, and purchases of after-market
securities from dealers normally are executed at a price between
the bid and asked prices. (The Fund has paid no brokerage
commissions since its commencement of operations.)
Allocation of transactions, including their frequency, to
various dealers is determined by the Investment Adviser in its
best judgment and in a manner deemed fair and reasonable to
shareholders. The primary considerations are availability of the
desired security and the prompt execution of orders in an
effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment
research and statistical or other services to the Investment
Adviser may receive orders for portfolio transactions by the Fund.
Information so received is in addition to, and not in lieu of,
services required to be performed by the Investment Adviser, and
the fees of the Investment Adviser are not reduced as a
consequence of their receipt of such supplemental information.
Such information may be useful to the Investment Adviser in
serving both the Fund and other clients and, conversely,
supplemental information obtained by the placement of business of
other clients may be useful to the Investment Adviser in carrying
out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the
existence of any underwriting or selling group relating thereto of
which Smith Barney is a member, except to the extent permitted by
the SEC. Under certain circumstances, the Fund may be at a
disadvantage because of this limitation in comparison with other
investment companies which have a similar investment objective but
which are not subject to such limitation. The Fund also may
execute portfolio transactions through Smith Barney and its
affiliates in accordance with rules promulgated by the SEC.
While investment decisions for the Fund are made
independently from those of the other accounts managed by the
Investment Adviser, investments of the type the Fund may make also
may be made by those other accounts. When the Fund and one or more
other accounts managed by the Investment Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a
manner believed by the Investment Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid
or received by the Fund or the size of the position obtained or
disposed of by the Fund.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of purchases
or sales of portfolio securities during the year, excluding
purchases or sales of short-term securities, divided by the
monthly average value of portfolio securities) generally is not
expected to exceed 100%, but the portfolio turnover rate will not
be a limiting factor whenever the Fund deems it desirable to sell
or purchase securities. Securities may be sold in anticipation of
a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and
later sold. In addition, a security may be sold and another
security of comparable quality may be purchased at approximately
the same time in order to take advantage of what the Fund believes
to be a temporary disparity in the normal yield relationship
between the two securities. These yield disparities may occur for
reasons not directly related to the investment quality of
particular issues or the general movement of interest rates, such
as changes in the overall demand for or supply of various types of
tax-exempt securities. For the 1995, 1996 and 1997 fiscal years,
the Fund's portfolio turnover rates were 10%, 23% and 58%,
respectively.
MUNICIPAL BONDS
General Information
Municipal Bonds generally are understood to include debt
obligations issued to obtain funds for various public purposes,
including construction of a wide range of public facilities,
refunding of outstanding obligations, payment of general operating
expenses and extensions of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf
of public authorities to finance various privately operated
facilities are included within the term Municipal Bonds if the
interest paid thereon qualifies as excluded from gross income (but
not necessarily from alternative minimum taxable income) for
Federal income tax purposes in the opinion of bond counsel to the
issuer.
The yields on Municipal Bonds are dependent upon a variety
of factors, including general economic and monetary conditions,
the financial condition of the issuer, general conditions of the
Municipal Bond market, the size of a particular offering, the
maturity of the obligation offered and the rating of the issue.
Municipal Bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any,
that may be enacted by Congress or state legislatures extending
the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of the obligations or
upon the ability of municipalities to levy taxes. The possibility
also exists that as a result of litigation or other conditions,
the power or ability of any one or more issuers to pay, when due,
principal of and interest on its, or their, Municipal Bonds may be
materially and adversely affected.
When-Issued Securities
The Fund may purchase Municipal Bonds on a "when-issued"
basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). The payment obligation and the interest
rate that will be received on the Municipal Bonds purchased on a
when-issued basis are each fixed at the time the buyer enters into
the commitment. Although the Fund will purchase Municipal Bonds on
a when-issued basis only with the intention of actually acquiring
the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of
investment strategy.
Municipal Bonds are subject to changes in value based upon
the public's perception of the creditworthiness of the issuers and
changes, real or anticipated, in the level of interest rates. In
general, Municipal Bonds tend to appreciate when interest rates
decline and depreciate when interest rates rise. Purchasing
Municipal Bonds on a when-issued basis, therefore, can involve the
risk that the yields available in the market when the delivery
takes place actually may be higher than those obtained in the
transaction itself. To account for this risk, a separate account
of the Fund consisting of cash or liquid debt securities equal to
the amount of the when-issued commitments will be established with
the Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market
or fair value of such securities declines, additional cash or
securities will be placed in the account daily so that the value
of the account will equal the amount of such commitments by the
Fund. Placing securities rather than cash in the segregated
account may have a leveraging effect on the Fund's net assets.
That is, to the extent the Fund remains substantially fully
invested in securities at the same time it has committed to
purchase securities on a when-issued basis, there will be greater
fluctuations in its net assets than if it had set aside cash to
satisfy its purchase commitment. Upon the settlement date of the
when-issued securities, the Fund will meet its obligations from
then-available cash flow, sale of securities held in the
segregated account, sale of other securities or, although it
normally would not expect to do so, from the sale of the when-
issued securities themselves (which may have a value greater or
less than the Fund's payment obligations). Sales of securities to
meet such obligations may involve the realization of capital
gains, which are not exempt from Federal or Massachusetts personal
income taxes.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do
so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Special Considerations Relating to Massachusetts Municipal
Securities
The Commonwealth of Massachusetts and certain of its cities
and towns have at certain times in the recent past undergone
serious financial difficulties which have adversely affected their
credit standing. The prolonged effects of such financial
difficulties could adversely affect the market value of the
Massachusetts Municipal Securities held by the Fund. The
information summarized below describes some of the more
significant factors that could affect the Fund or the ability of
the obligors to pay debt service on certain of these securities.
The sources of such information are the official statements of
issuers located in the Commonwealth of Massachusetts, as well as
other publicly available documents, and statements of public
officials. The Fund has not independently verified any of the
information contained in such statements and documents, but the
Fund is not aware of facts which would render such information
inaccurate.
Fiscal Matters
The Commonwealth's operating fund structure satisfies the
requirements of state finance law and is in accordance with
generally accepted accounting principles ("GAAP"), as defined by
the Government Accounting Standards Board. The General Fund and
those special revenue funds which are appropriated in the annual
state budget receive most of the non-bond and non-Federal grant
revenues of the Commonwealth. These funds are referred to herein
as the "budgeted operating funds" of the Commonwealth. They do
not include the capital projects funds of the Commonwealth, into
which the proceeds of Commonwealth bonds are deposited. The three
principal budgeted operating funds are the General Fund, the
Highway Fund and the Local Aid Fund. Expenditures from these
three funds generally account for approximately 96% of total
expenditures of the budgeted operating funds.
The Commonwealth's budgeted operating funds for fiscal 1993,
1994, 1995 and 1996 showed an excess of revenues and other sources
over expenditures and other uses of $13.1 million, $26.8 million,
$137 million and $446 million and positive fund balances of $562.5
million, $589.3 million, $726 million and $1.172 billion,
respectively. Over the same period, budgeted expenditures were
approximately $14.696 billion for fiscal year 1993, $15.523
billion for fiscal 1994, $16.251 billion for fiscal 1995 and
$16.881 billion for fiscal 1996. The Commonwealth is in the
process of closing its records for fiscal 1997. Based upon the
preliminary financial report of the Commonwealth, budgeted
revenues and other sources collected in fiscal 1997 were
approximately $17.386 billion, and budgeted expenditures and other
uses of funds in fiscal 1997 were approximately $17.702 billion.
The Commonwealth's fiscal 1998 budget is based on numerous
spending and revenue estimates, the achievement of which cannot be
assumed.
Limitations on Tax Revenues
In Massachusetts, efforts to limit and reduce levels of
taxation have been underway for several years. Limits were
established on state tax revenues by legislation enacted on
October 25, 1986 and by an initiative petition approved by the
voters on November 4, 1986. The two measures are inconsistent in
several respects.
Chapter 62F, which was added to the General Laws by
initiative petition in November 1986, establishes a state tax
revenue growth limit for each fiscal year equal to the average
positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the Federal government, during the
three calendar years immediately preceding the end of such fiscal
year. Chapter 62F also requires that allowable state tax revenues
be reduced by the aggregate amount received by local governmental
units from any newly authorized or increased local option taxes or
excises. Any excess in state tax revenue collections for a given
fiscal year over the prescribed limit, as determined by the State
Auditor, is to be applied as a credit against the then-current
personal income tax liability of all taxpayers in the Commonwealth
in proportion to the personal income tax liability of all
taxpayers in the Commonwealth for the immediately preceding tax
year. Unlike Chapter 29B, as described below, the initiative
petition did not exclude principal and interest payments on
Commonwealth debt obligations from the scope of its tax limit.
However, the preamble contained in Chapter 62F provides that
"although not specifically required by anything contained in this
chapter, it is assumed that from allowable state tax revenues as
defined herein the Commonwealth will give priority attention to
the funding of state financial assistance to local governmental
units, obligations under the state governmental pension systems,
and payment of principal and interest on debt and other
obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter
29B to the General Laws, also establishes an allowable state
revenue growth factor by reference to total wages and salaries in
the Commonwealth. However, rather than utilizing a three-year
average wage and salary growth rate as used by Chapter 62F,
Chapter 29B utilizes an allowable state revenue growth factor
equal to one-third of the positive percentage gain in
Massachusetts wages and salaries, as reported by the Federal
government, during the three calendar years immediately preceding
the end of a given fiscal year. Additionally, unlike Chapter 62F,
Chapter 29B allows for an increase in maximum state tax revenues
to fund an increase in local aid and excludes from its definition
of state tax revenues (i) income derived from local option taxes
and excises, and (ii) revenues needed to fund debt service costs.
Tax revenues in fiscal 1992 through fiscal 1996 were lower than
the limit set by either Chapter 62F or Chapter 29B, and the
Executive Office for Administration and Finance currently
estimates that state tax revenues in fiscal 1997 will not reach
the limit imposed by either of these statues.
Local Aid
Proposition 2 1/2. In November 1980, voters in the
Commonwealth approved a statewide tax limitation initiative
petition, commonly known as Proposition 2 1/2, to constrain levels
of property taxation and to limit the charges and fees imposed on
cities and towns by certain governmental entities, including
county governments. Proposition 2 1/2 is not a provision of the
state constitution and accordingly is subject to amendment or
repeal by the Legislature. Proposition 2 1/2, as amended to date,
limits the property taxes that may be levied by any city or town
in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein
and (ii) 2.5% over the previous year's levy limit plus any growth
in the tax base from certain new construction and parcel
subdivisions. Proposition 2 1/2 also limits any increase in the
charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of
(i) 2.5% of the total charges and fees imposed in the preceding
fiscal year and (ii) any increase in charges for services
customarily provided locally or services obtained by the city or
town at its option. The law contains certain override provisions
and, in addition, permits debt service on specific bonds and
notices and expenditures for identified capital projects to be
excluded from the limits by a majority vote at a general or
special election. At the time Proposition 2 1/2 was enacted, many
cities and towns had property tax levels in excess of the limit
and were therefore required to roll back property taxes with a
concurrent lost of revenues. Between fiscal 1981 and fiscal 1996,
the aggregate property tax levy grew from $3.347 billion to $5.924
billion, representing an increase of approximately 77%. By
contrast, according to Federal Bureau of Labor Statistics, the
consumer price index for all urban consumers in Boston grew during
the same period by approximately 92%.
Many communities have responded to the limitation imposed by
Proposition 2 1/2 through statutorily permitted overrides and
exclusions. Override activity steadily increased throughout the
1980's before peaking in fiscal 1991 and decreasing thereafter.
In fiscal 1992, 65 communities approved one of the three types of
referenda questions (override of levy limit, exclusion of debt
service, or exclusion of capital expenditures) adding $31.0
million to their levy limits. In fiscal 1993, 59 communities
added $16.3 million through override votes and in fiscal 1994,
only 48 communities had successful override referenda which added
$8.4 million to their levy limits. In fiscal 1995, 32 communities
added $8.8 million. In fiscal 1996, 30 communities added $5.8
million to their levy limits. Although Proposition 2 1/2 will
continue to constrain local property tax revenues, significant
capacity exists for overrides in nearly all cities and towns.
In addition to overrides, Proposition 2 1/2 allows a
community, through voter approval, to assess taxes in excess of
its levy limit for the payment of certain capital projects
(capital outlay expenditure exclusions) and for the payment of
specified debt service costs (debt exclusions). Capital
exclusions were passed by 19 communities in fiscal 1996 and
totaled $1.5 million. In fiscal 1996, the impact of successful
debt exclusion votes going back as far as fiscal 1983, was to
raise the levy limits of 229 communities by $125.8 million.
Commonwealth Financial Support for Local Governments.
During the 1980s, the Commonwealth increased payments to its
cities, towns and regional school districts ("Local Aid") to
mitigate the impact of Proposition 2 1/2 on local programs and
services. In fiscal 1997, approximately 19.9% of the
Commonwealth's budget is estimated to be allocated to direct Local
Aid. Local Aid payments to cities, towns and regional school
districts take the form of both direct and indirect assistance.
Direct Local Aid consists of general revenue sharing funds and
specific program funds sent directly to local governments and
regional school districts as reported on the so-called "cherry
sheet" prepared by the Department of Revenue, excluding certain
pension funds and nonappropriated funds.
As a result of comprehensive education reform legislation
enacted in June 1993, a large portion of general revenue sharing
funds are earmarked for public education and are distributed
through a formula designed to provide more aid to the
Commonwealth's poorer communities. The legislation established a
fiscal 1993 state spending base of approximately $1.288 billion
for local education purposes and required annual increases in
state expenditures for such purposes above that base, subject to
appropriation, estimated to be approximately $175 million in
fiscal 1994, approximately $396 million in fiscal 1995,
approximately $629 million in fiscal 1996 and approximately $881
million in fiscal 1997, with additional annual increases
anticipated in later years. The fiscal 1994, 1995, 1996 and 197
budgets have fully funded the requirements imposed by this
legislation.
Another component of general revenue sharing, the Lottery
and Additional Assistance programs, provides unrestricted funds
for municipal use. There are also several specific programs
funded through direct Local Aid, such as highway construction,
school building construction and police education incentives.
In addition to direct Local Aid, the Commonwealth has
provided substantial indirect aid to local governments, including,
for example, payments for the Massachusetts Bay Transportation
Authority ("MBTA") assistance and debt service, pensions for
teachers, pension cost-of-living allowances for municipal
retirees, housing subsidies and the cost of courts and district
attorneys that formerly had been paid by the counties.
Direct Local Aid decreased from $2.359 billion in fiscal
1992 to $2.547 billion in fiscal 1993 and to $2.727 billion in
fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were
$2.976 billion, which is an increase of approximately 9.1% above
the fiscal 1994 level. Fiscal 1996 expenditures for direct Local
Aid were $3.246 billion, an increase of approximately 9.1% above
the fiscal 1995 level. It is estimated that fiscal 1997
expenditures for direct Local Aid will be $3.538 billion, which is
an increase of approximately 9.0% above the fiscal 1996 level.
Initiative Law. A statute adopted by voter initiative
petition to the November 1990 statewide election regulates the
distribution of Local Aid to cities and towns. This statute
requires that, subject to annual appropriation, no less than 40%
of collections from personal income taxes, sales and use taxes,
corporate excise taxes and lottery fund proceeds be distributed to
cities and towns. Under the law, the Local Aid distribution to
each city or town would equal no less than 100% of the total Local
Aid received for fiscal 1989. Distributions in excess of fiscal
1989 levels would be based on new formulas that would replace the
current Local Aid distribution formulas. By its terms, the new
formula would have called for a substantial increase in direct
Local Aid in fiscal 1992 and subsequent years. However, Local Aid
payments expressly remain subject to annual appropriation, and
fiscal 1992, 1993, 1994, 1995 and 1996 appropriations for Local
Aid did not meet, and fiscal 1997 appropriations for Local Aid do
not meet, the levels set forth in the initiative law.
Commonwealth Expenditures
Fiscal 1993 budgeted expenditures were $14.696 billion, an
increase of 9.6% from fiscal 1992. Fiscal 1994 budgeted
expenditures were $15.523 billion, an increase of 5.6% from fiscal
1993. Fiscal 1995 budgeted expenditures were $16.251 billion, an
increase of 4.7% from fiscal 1994. Fiscal 1996 budgeted
expenditures were $16.881 billion, an increase of 3.9% from fiscal
1995. It is estimated that fiscal 1997 budgeted expenditures will
be $17.704 billion, an increase of 4.9% over fiscal 1996 levels.
Commonwealth expenditures since 1992 largely reflect
significant growth in several programs and services provided by
the Commonwealth, principally direct Local Aid, Medicaid, group
health insurance, debt service, pensions, higher education and
assistance to the MBTA and regional transit authorities.
The Commonwealth is responsible for the payment of pension
benefits for state employees and for school teachers throughout
the state, and for the cost-of-living increases payable to local
government retirees. In 1988, the Commonwealth adopted a funding
schedule under which it is required to fund future pension
liabilities currently and to amortize the accumulated unfunded
liabilities over 40 years. Since the adoption of this schedule,
the amount of unfunded liability has been reduced significantly.
Total pension expenditures increased at an average annual rate of
7.6% per year, rising from $751.5 million in fiscal 1992 to $1.005
billion in fiscal 1996. Total pension expenses include the costs
associated with an early retirement program for elementary and
secondary school teachers mandated by the 1993 education reform
legislation. In fiscal 1997, the anticipated pension expenditure
is $1.067 billion, an increase of 6.2% new fiscal 1996 costs. In
fiscal 1996, a number of reform measures affecting pensions were
enacted into law. Among the most notable were a measure
consolidating the assets of the state employees' and teachers'
retirement systems into a single investment fund and another that
will reform the disability pension system.
Other Factors
Many factors affect the financial condition of the
Commonwealth, including many social, environmental, and economic
conditions, which are beyond the control of the Commonwealth. As
with most urban states, the continuation of many of the
Commonwealth's programs, particularly its human service programs,
is in significant part dependent upon continuing Federal
reimbursements which have been declining.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in
the Prospectus applies to purchases made by any "purchaser," which
is defined to include the following: (a) an individual; (b) an
individual's spouse and his or her children purchasing shares for
their own account; (c) a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account; and
(d) a trustee or other professional fiduciary (including a bank,
or an investment adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended) purchasing shares of
the Fund for one or more trust estates or fiduciary accounts.
Purchasers who wish to combine purchase orders to take advantage
of volume discounts on Class A shares should contact a Smith
Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in
the Prospectus, apply to any purchase of Class A shares if the
aggregate investment in Class A shares of the Fund and in Class A
shares of other funds of the Smith Barney Mutual Funds that are
offered with a sales charge, including the purchase being made, of
any purchaser is $25,000 or more. The reduced sales charge is
subject to confirmation of the shareholder's holdings through a
check of appropriate records. The Fund reserves the right to
terminate or amend the combined right of accumulation at any time
after written notice to shareholders. For further information
regarding the right of accumulation, shareholders should contact a
Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous
basis. The public offering price per Class A and Class Y share of
the Fund is equal to the net asset value per share at the time of
purchase plus, for Class A shares, an initial sales charge based
on the aggregate amount of the investment. The public offering
price per Class B and Class C share (and Class A share purchases,
including applicable rights of accumulation, equaling or exceeding
$500,000) is equal to the net asset value per share at the time of
purchase and no sales charge is imposed at the time of purchase. A
contingent deferred sales charge ("CDSC"), however, is imposed on
certain redemptions of Class B and Class C, and on Class A shares
when purchased in amounts exceeding $500,000. The method of
computing the public offering price is shown in the Fund's
financial statements, incorporated by reference in their entirety
into this SAI.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of
payment postponed (a) for any period during which the New York
Stock Exchange, Inc. ("NYSE'') is closed (other than for customary
weekend or holiday closings), (b) when trading in the markets the
Fund normally utilizes is restricted, or an emergency, as
determined by the SEC, exists, so that disposal of the Fund's
investments or determination of net asset value is not reasonably
practicable or (c) for such other periods as the SEC by order may
permit for protection of the Fund's shareholders.
Distributions in Kind
If the Fund's Board of Trustees determines that it would be
detrimental to the best interests of the remaining shareholders of
the Fund to make a redemption payment wholly in cash, the Fund may
pay, in accordance with SEC rules, any portion of a redemption in
excess of the lesser of $250,000 or 1.00% of the Fund's net assets
by a distribution in kind of portfolio securities in lieu of cash.
Securities issued as a distribution in kind may incur brokerage
commissions when shareholders subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders who own shares with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly
or quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.
(With respect to Withdrawal Plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences.) To the extent
withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in
the value of the shareholder's investment, and continued
withdrawal payments will reduce the shareholder's investment and
may ultimately exhaust it. Withdrawal payments should not be
considered as income from investment in the Fund. Furthermore, as
it generally would not be advantageous to a shareholder to make
additional investments in the Fund at the same time he or she is
participating in the Withdrawal Plan, purchases by such
shareholder in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan
and who hold their shares in certificate form must deposit their
share certificates with the Transfer Agent as agent for Withdrawal
Plan members. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in
additional shares of the Fund. For additional information,
shareholders should contact a Smith Barney Financial Consultant.
Effective November 7, 1994, Withdrawal Plans should be set up with
a Smith Barney Financial Consultant. A shareholder who purchases
shares directly through the Transfer Agent may continue to do so
and applications for participation in the Withdrawal Plan must be
received by the Transfer Agent no later than the eighth day of the
month to be eligible for participation beginning with that month's
withdrawals.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best
efforts basis pursuant to a written agreement dated July 30, 1993
(the "Distribution Agreement"), which was most recently approved
by the Fund's Board of Trustees on July 7, 1996. For the fiscal
years ended November 30, 1995, 1996 and 1997, Smith Barney
received approximately $42,000, $45,000 and $68,000, respectively,
in sales charges from the sale of the Fund's Class A shares, and
did not reallow any portion thereof to dealers. For the fiscal
years ended November 30, 1995, 1996 and 1997, Smith Barney
received from shareholders approximately $61,000, $57,000 and
$48,000, respectively, in CDSCs on the redemptions of Class B and
Class C shares.
When payment is made by the investor before settlement date,
unless otherwise noted by the investor, the funds will be held as
a free credit balance in the investor's brokerage account, and
Smith Barney may benefit from the temporary use of the funds. The
investor may designate another use for the funds prior to
settlement date, such as an investment in a money market fund
(other than Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to
invest the funds in a Smith Barney money market fund, the amount
of the investment will be included as part of the average daily
net assets of both the Fund and the money market fund, and
affiliates of Smith Barney that serve the funds in an investment
advisory or administrative capacity will benefit from the fact
they are receiving fees from both such investment companies for
managing those assets, computed on the basis of their average
daily net assets. The Fund's Board of Trustees has been advised of
the benefits to Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when
reviewing the Advisory, Administration and Distribution Agreements
for continuance.
For the fiscal year ended November 30, 1997, Smith Barney
incurred distribution expenses totaling approximately $178,074,
consisting of approximately $11,820 for advertising, $1,899 for
printing and mailing of prospectuses, $90,557 for support
services, $72,507 to Smith Barney Financial Consultants, and
$1,290 in accruals for interest on the excess of Smith Barney
expenses incurred in distributing the Fund's shares over the sum
of the distribution fees and CDSCs received by Smith Barney from
the Fund.
Distribution Arrangements
To compensate Smith Barney for the services it provides and
for the expense it bears under the Distribution Agreement, the
Fund has adopted a services and distribution plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the
Fund pays Smith Barney a service fee, accrued daily and paid
monthly, calculated at the annual rate of 0.15% of the value of
the Fund's average daily net assets attributable to the Class A,
Class B and Class C shares. In addition, the Fund pays Smith
Barney a distribution fee with respect to the Class B and Class C
shares primarily intended to compensate Smith Barney for its
initial expense of paying its Financial Consultants a commission
upon sales of those shares. The Class B distribution fee is
calculated at the annual rate of 0.50% of the value of the Fund's
average daily net assets attributable to the shares of the Class.
The Class C distribution fee is calculated at the annual rate of
0.55% of the value of the Fund's average daily net assets
attributable to the shares of the Class. The following tables set
out the service and distribution fees paid by the Fund to Smith
Barney for the fiscal years ended November 30, 1995, 1996 and
1997:
Service Fees
<TABLE>
<CAPTION>
Fiscal Year Ended: Class A Class B Class C
<S> <C> <C> <C>
1995 $42,539 $39,517 $ 79
1996 42,635 42,585 199
1997 45,984 41,664 491
</TABLE>
Distribution Fees
<TABLE>
<CAPTION>
Fiscal Year Ended: Class B Class C
<S> <C> <C>
1995 $131,725 $293
1996 141,951 730
1997 138,881 1,800
</TABLE>
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote of the
Fund's Board of Trustees, including a majority of the Independent
Trustees who have no direct or indirect financial interest in the
operation of the Plan or in the Distribution Agreement. The Plan
may not be amended to increase the amount of the service and
distribution fees without shareholder approval, and all amendments
of the Plan also must be approved by the Trustees and the
Independent Trustees in the manner described above. The Plan may
be terminated with respect to a Class at any time, without
penalty, by vote of a majority of the Independent Trustees or by
vote of a majority of the outstanding voting securities of the
Class (as defined in the 1940 Act). Pursuant to the Plan, Smith
Barney will provide the Fund's Board of Trustees with periodic
reports of amounts expended under the Plan and the purpose for
which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each
day, Monday through Friday, except days on which the NYSE is
closed. The NYSE currently is scheduled to be closed on New Year's
Day, Presidents' Day, Martin Luther King Jr. Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when
one of these holidays falls on a Saturday or Sunday, respectively.
Because of the differences in distribution fees and Class-specific
expenses, the per share net asset value of each Class may differ.
The following is a description of the procedures used by the Fund
in valuing its assets.
Securities listed on a national securities exchange will be
valued on the basis of the last sale on the date on which the
valuation is made or, in the absence of sales, at the mean between
the closing bid and asked prices. Over-the-counter securities
will be valued on the basis of the bid price at the close of
business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined
in good faith by the Fund's Board of Trustees. Short-term
obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the
Fund's Board of Trustees. Amortized cost involves valuing an
instrument at its original cost to the Fund and thereafter
assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on
the market value of the instruments. All other securities and
other assets of the Fund will be valued at fair value as
determined in good faith by the Fund's Board of Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Smith Barney
Mutual Fund may exchange all or part of their shares for shares of
the same Class of other funds of the Smith Barney Mutual Funds, to
the extent such shares are offered for sale in the shareholder's
state of residence, on the basis of relative net asset value per
share at the time of exchange, as follows:
A. Class A shares of the Fund may be exchanged without a sales
charge for Class A shares of any of the Smith Barney Mutual
Funds.
B. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B
shares of another Smith Barney Mutual Fund will be subject
to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates and conversion periods,
will be deemed to have been held since the date the shares
being exchanged were deemed to be purchased.
C. Class C shares of any fund may be exchanged without a sales
charge. For purposes of CDSC applicability, Class C shares
of the Fund exchanged for Class C shares of another Smith
Barney Mutual Fund will be deemed to have been owned since
the date the shares being exchanged were deemed to be
purchased.
Dealers other than Smith Barney must notify the Transfer
Agent of the investor's prior ownership of Class A shares of Smith
Barney High Income Fund and the account number in order to
accomplish an exchange of shares of Smith Barney High Income Fund
under Paragraph B above. The exchange privilege enables
shareholders to acquire shares of the same Class in a fund with
different investment objectives when they believe that a shift
between funds is an appropriate decision. This privilege is
available to shareholders residing in any state in which the fund
shares being acquired may legally be sold. Prior to any exchange,
the shareholder would obtain and review a copy of the current
prospectus of each fund into which an exchange is being
considered. Prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and, subject to any applicable
CDSC, the proceeds are immediately invested, at a price as
described above, in shares of the fund being acquired. Smith
Barney reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return
of a Class in advertisements or in reports and other
communications to shareholders. The Fund may include comparative
performance information in advertising or marketing the Fund's
shares. Such performance information may include the following
industry and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Time, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual
Fund Values, The New York Times, USA Today and The Wall Street
Journal. To the extent any advertisement or sales literature of
the Fund describes the expenses or performance of any Class it
will also disclose such information for the other Classes.
Average Annual Total Return
"Average annual total return," as described below, is
computed according to a formula prescribed by the SEC. The formula
can be expressed as follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
N = number of years.
ERV= Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or
10-year period at the end of a 1-, 5-, or 10-
year period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
The Fund's average annual total return for Class A shares
assuming the maximum applicable sales charge was as follows for
the periods indicated (reflecting the waiver of the Fund's
investment advisory and administration fees and reimbursement of
expenses):
3.54% for the one-year period from December 1, 1996
through November 30, 1997.
6.05% for the five-year period from December 1, 1992
through November 30, 1997.
7.87% per annum during the period from the Fund's
commencement of operations on December 21, 1987 through
November 30, 1997.
A Class' average annual total return assumes that the
maximum applicable sales charge or CDSC assessed by the Fund has
been deducted from the hypothetical investment. Had the maximum
4.00% sales charge had not been deducted, Class A's average annual
total return would have been 7.85%, 6.93% and 8.31%, respectively,
for those same periods.
The Fund's average annual total return for Class B shares
assuming the maximum applicable CDSC was as follows for the
periods indicated (reflecting the waiver of the Fund's investment
advisory and administration fees and reimbursement of expenses):
2.75% for the one-year period from December 1, 1996
through November 30, 1997.
6.22% for the five-year period from December 1, 1992
through November 30, 1997.
6.56% per annum during the period from the Fund's
commencement of operations on November 6, 1992 through
November 30, 1997.
Had the maximum applicable CDSC had not been deducted at the
time of redemption, Class B's average annual total return would
have been 7.25%, 6.37% and 6.56%, respectively, for the same
periods.
The Fund's average annual total return for Class C shares
assuming the maximum applicable CDSC was as follows for the
periods indicated (reflecting the waiver of the Fund's investment
advisory and administration fees and reimbursement of expenses):
6.21% for the one-year period from December 1, 1996
through November 30, 1997.
10.53% per annum during the period from the Fund's
commencement of operations on November 10, 1994 through
November 30, 1997.
Had the maximum applicable CDSC had not been deducted at the
time of redemption, Class B's average annual total return for the
one-year period from December 1, 1996 through November 30, 1997
would have been 7.21%.
Aggregate Total Return
"Aggregate total return" represents the cumulative change in
the value of an investment in the Class for the specified period
and are computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV= Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of a 1-
, 5-, or 10-year period at the end of a 1-, 5-,
or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends
and distributions.
The Fund's aggregate total return for Class A shares was as
follows for the periods indicated (reflecting the waiver of the
Fund's investment advisory and administration fees and
reimbursement of expenses):
3.54% for the one-year period from December 1, 1996
through November 30, 1997.
34.14% for the five-year period from December 1, 1992
through November 30, 1997.
112.26% for the period from the Fund's commencement of
operations on December 21, 1987 through November 30,
1997.
A Class' aggregate total return assumes that the maximum
applicable sales charge or maximum applicable CDSC has been
deducted from the investment. If the maximum sales charge had not
been deducted at the time of purchase, Class A's aggregate total
return for the same periods would have been 7.85%, 39.77% and
121.20%, respectively.
The Fund's aggregate total return for Class B shares was as
follows for the periods indicated (reflecting the waiver of the
Fund's investment advisory and administration fees and
reimbursement of expenses):
2.75% for the one-year period from December 1, 1996
through November 30, 1997.
35.21% for the five-year period from December 1, 1992
through November 30, 1997.
37.97% for the period from commencement of operations on
November 6, 1992 through November 30, 1997.
If the maximum applicable CDSC had not been deducted at the
time of redemption, Class B's aggregate total return for the same
periods would have been 7.25%, 36.21% and 37.97%, respectively.
The Fund's aggregate total return for Class C shares was as
follows for the period indicated (reflecting the waiver of the
Fund's investment advisory and administration fees and
reimbursement of expenses):
6.21% for the one-year period from December 1, 1996
through November 30, 1997.
35.80% for the period from commencement of operations on
November 10, 1994 through November 30, 1997.
Performance will vary from time to time depending on market
conditions, the composition of the Fund's portfolio and operating
expenses and the expenses exclusively attributable to the Class.
Consequently, any given performance quotation should not be
considered as representative of the Class' performance for any
specified period in the future. Because performance will vary, it
may not provide a basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a fixed
yield for a stated period of time. Investors comparing a Class'
performance with that of other mutual funds should give
consideration to the quality and maturity of the respective
investment companies' portfolio securities.
It is important to note that the total return figures set
forth above are based on historical earnings and are not intended
to indicate future performance. Each Class' net investment income
changes in response to fluctuations in interest rates and the
expenses of the Fund.
TAXES
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders. The
summary is not intended as a substitute for individual tax advice
and investors are urged to consult their own tax advisors as to
the tax consequences of an investment in the Fund.
As described above and in the Fund's Prospectus, the Fund is
designed to provide shareholders with current income which is
excluded from gross income for Federal income tax purposes and
which is exempt from Massachusetts personal income taxes. The Fund
is not intended to constitute a balanced investment program and is
not designed for investors seeking capital gains or maximum tax-
exempt income irrespective of fluctuations in principal.
Investment in the Fund would not be suitable for tax-exempt
institutions, qualified retirement plans, H.R. 10 plans and
individual retirement accounts because such investors would not
gain any additional tax benefit from the receipt of tax-exempt
income.
The Fund has qualified and intends to continue to qualify
each year as a regulated investment company under the Code.
Provided that the Fund (a) is a regulated investment company and
(b) distributes at least 90% of its taxable net investment income
(including, for this purpose, net realized short-term capital
gains) and 90% of its tax-exempt interest income (reduced by
certain expenses), the Fund will not be liable for Federal income
taxes to the extent its taxable net investment income and its net
realized long- and short-term capital gains, if any, are
distributed to its shareholders.
Because the Fund will distribute exempt-interest dividends,
interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for Federal income tax
purposes and Massachusetts personal income tax purposes. If a
shareholder receives exempt-interest dividends with respect to any
share and if such share is held by the shareholder for six months
or less, then, for Federal income tax purposes, any loss on the
sale or exchange of such share may, to the extent of exempt-
interest dividends, be disallowed. In addition, the Code may
require a shareholder, if he or she receives exempt-interest
dividends, to treat as Federal taxable income a portion of certain
otherwise non-taxable social security and railroad retirement
benefit payments. Furthermore, that portion of any exempt-interest
dividend paid by the Fund which represents income derived from
private activity bonds held by the Fund may not retain its Federal
tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by such bonds or a
"related person" thereof. Moreover, as noted in the Fund's
Prospectus, (a) some or all of the Fund's dividends may be a
specific preference item, or a component of an adjustment item,
for purposes of the Federal individual and corporate alternative
minimum taxes and (b) the receipt of the Fund's dividends and
distributions may affect a corporate shareholder's Federal
"environmental" tax liability. In addition, the receipt of the
Fund's dividends and distributions may affect a foreign corporate
shareholder's Federal "branch profits" tax liability and the
Federal "excess net passive income'' tax liability of a
shareholder of a Subchapter S corporation. Shareholders should
consult their own tax advisors to determine whether they are (a)
substantial users with respect to a facility or related to such
users within the meaning of the Code or (b) subject to a Federal
alternative minimum tax, the Federal environmental tax, the
Federal branch profits tax or the Federal "excess net passive
income" tax.
As described above and in the Fund's Prospectus, the Fund
may invest in municipal bond index and interest rate futures
contracts and options on these futures contracts. The Fund
anticipates that these investment activities will not prevent the
Fund from qualifying as a regulated investment company; however,
in order to continue to qualify as a regulated investment company,
the Fund might have to limit its investments in such municipal
bond index and interest rate futures contracts and options on
these futures contracts. As a general rule, these investment
activities will increase or decrease the amount of long- and
short-term capital gains or losses realized by the Fund and,
accordingly, will affect the amount of capital gains distributed
to the Fund's shareholders.
For Federal income tax purposes, gain or loss on municipal
bond index and interest rate futures contracts and options on
these futures contracts described above (collectively referred to
as "section 1256 contracts") is taxed pursuant to a special "mark-
to-market'' system. Under the mark-to-market system, these
instruments are treated as if sold at the Fund's fiscal year end
for their fair market value. As a result, the Fund may be treated
as realizing a greater or lesser amount of gains or losses than
actually realized. As a general rule, gain or loss on section 1256
contracts is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss, and, accordingly, the mark-to-
market system generally will affect the amount of capital gains or
losses taxable to the Fund and the amount of distributions taxable
to a shareholder. Moreover, if the Fund invests in both section
1256 contracts and offsetting positions, which together constitute
a straddle, then the Fund may be required to defer certain
realized losses. The Fund expects that its activities with respect
to section 1256 contracts and offsetting positions in those
contracts will not cause it to be treated as receiving a
materially greater amount of capital gains than actually realized
and will permit it to use substantially all of the losses for the
fiscal years in which such losses actually occur.
While the Fund does not expect to realize a significant
amount of net long-term capital gains, any such gains realized
will be distributed as described in the Fund's Prospectus. Such
distributions ("capital gain dividends"), if any, will be taxable
to shareholders as long-term capital gains, regardless of how long
they have held Fund shares, and will be designated as capital gain
dividends in a written notice mailed by the Fund to shareholders
after the close of the Fund's taxable year. If a shareholder
receives a capital gain dividend with respect to any share and if
the share has been held by the shareholder for six months or less,
then any loss (to the extent not disallowed pursuant to the six-
month rule described above relating to exempt-interest dividends)
on the sale or exchange of such share, to the extent of the
capital gain dividend, will be treated as a long-term capital
loss.
If a shareholder incurs a sales charge in acquiring shares
of the Fund, disposes of those shares within 90 days and then
acquires shares in a mutual fund for which the otherwise
applicable sales charge is reduced by reason of a reinvestment
right (that is, exchange privilege), the original sales charge
will not be taken into account in computing gain or loss on the
original shares to the extent the subsequent sales charge is
reduced. Instead, it will be added to the tax basis in the newly
acquired shares. Furthermore, the same rule also applies to a
disposition of the newly acquired or redeemed shares made within
90 days of the second acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by
shifting his or her investment in a family of mutual funds.
Each shareholder will receive after the close of the
calendar year an annual statement as to the Federal income tax and
Massachusetts personal income tax status of his or her dividends
and distributions from the Fund for the prior calendar year. These
statements also will designate the amount of exempt-interest
dividends that is a preference item for purposes of the Federal
individual and corporate alternative minimum taxes. Each
shareholder also will receive, if appropriate, various written
notices after the close of the Fund's prior taxable year as to the
Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's
prior taxable year. Shareholders should consult their tax advisors
as to any other state and local taxes that may apply to these
dividends and distributions. The dollar amount of dividends
excluded or exempt from Federal income taxation and Massachusetts
personal income taxation and the dollar amount of dividends
subject to Federal income taxation and Massachusetts personal
income taxation, if any, will vary for each shareholder depending
upon the size and duration of each shareholder's investment in the
Fund. To the extent the Fund earns taxable net investment income,
it intends to designate as taxable dividends the same percentage
of each day's dividend as its taxable net investment income bears
to its total net investment income earned on that day. Investors
considering buying shares of the Fund just prior to a record date
for a capital gain distribution should be aware that, regardless
of whether the price of the Fund shares to be purchased reflects
the amount of the forthcoming distribution payment, any such
payment will be a taxable payment.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest
income, or fails to certify that he or she has provided a correct
taxpayer identification number and that he or she is not subject
to "backup withholding,'' then the shareholder may be subject to a
31% backup withholding tax with respect to (a) taxable dividends
and distributions and (b) the proceeds of any redemptions of Fund
shares. An individual's taxpayer identification number is his or
her social security number. The backup withholding tax is not an
additional tax and may be credited against a taxpayer's regular
Federal income tax liability.
Massachusetts Taxes
Individual shareholders who are otherwise subject to
Massachusetts personal income tax will not be subject to
Massachusetts personal income tax on exempt-interest dividends
received from the Fund to the extent the dividends are
attributable to interest on obligations of the Commonwealth of
Massachusetts and its political subdivisions, agencies and public
authorities (or on obligations of certain other governmental
issuers such as Puerto Rico, the Virgin Islands and Guam) that pay
interest which is excluded from gross income for Federal income
tax purposes and exempt from Massachusetts personal income taxes.
Other distributions from the Fund, including those related to
long- and short-term capital gains, other than certain gains from
certain Massachusetts Municipal Securities identified by the
Massachusetts Department of Revenue, generally will not be exempt
from Massachusetts personal income tax. Businesses should note
that the Fund's distributions derived from Massachusetts Municipal
Securities are not exempt from Massachusetts corporate excise tax.
The foregoing is only a summary of certain tax
considerations generally affecting the Fund and its shareholders
and is not intended as a substitute for careful tax planning.
Investors are urged to consult their tax advisors with specific
reference to their own Federal, state and local tax situations.
ADDITIONAL INFORMATION
PNC, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, serves as the Fund's custodian. Under the
custody agreement, PNC holds the Fund's portfolio securities and
keeps all necessary accounts and records. For its services, PNC
receives a monthly fee based upon the month-end market value of
securities held in custody and also receives securities
transaction charges. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
First Data, located at Exchange Place, Boston, Massachusetts
02109, serves as the Fund's transfer agent. Under the transfer
agency agreement, the Transfer Agent maintains the shareholder
account records for the Fund, handles certain communications
between shareholders and the Fund, and distributes dividends and
distributions payable by the Fund. For these services, the
Transfer Agent receives a monthly fee computed on the basis of the
number of shareholder accounts it maintains for the Fund during
the month, and is reimbursed for out-of-pocket expenses.
The Fund is a business trust established under the laws of
the Commonwealth of Massachusetts pursuant to a Master Trust
Agreement dated January 13, 1987, as amended from time to time.
The Fund commenced operations on December 21, 1987, under the name
Shearson Lehman Massachusetts Municipals. On December 7, 1988,
August 27, 1990, July 30, 1993 and October 14, 1994, the Fund
changed its name to SLH Massachusetts Municipals Fund, Shearson
Lehman Brothers Massachusetts Municipals Fund, Smith Barney
Shearson Massachusetts Municipals Fund and Smith Barney
Massachusetts Municipals Fund, respectively.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. The Master Trust Agreement disclaims shareholder
liability for acts or obligations of the Fund, however, and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
the Fund or a Trustee. The Master Trust Agreement provides for
indemnification from Fund property for all losses and expenses of
any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss
on account of shareholder liability is limited to circumstances in
which the Fund itself would be unable to meet its obligations, a
possibility which management of the Fund believes is remote. Upon
payment of any liability incurred by the Fund, a shareholder
paying such liability will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the
operation of the Fund in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities
of the Fund.
Description of Shares
The Master Trust Agreement of the Fund permits the Trustees
of the Fund to issue an unlimited number of full and fractional
shares of a single class and to divide or combine the shares into
a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. Each share in the
Fund represents an equal proportional interest in the Fund with
each other share. Shareholders of the Fund are entitled upon its
liquidation to share pro rata in its net assets available for
distribution. No shareholder of the Fund has any preemptive or
conversion rights. Shares of the Fund are fully paid and non-
assessable.
Pursuant to the Master Trust Agreement, the Fund's Trustees
may authorize the creation of additional series of shares (the
proceeds of which would be invested in separate, independently
managed portfolios) and additional classes of shares within any
series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by
future regulations or other unforeseen circumstances).
Voting Rights
The shareholders of the Fund are entitled to a full vote for
each full share held (and a fractional vote for any fractional
share held). The Trustees of the Fund have the power to alter the
number and the terms of office of the Trustees, and have terms of
unlimited duration (subject to certain removal procedures) and may
appoint their own successors, provided at least a majority of the
Trustees at all times have been elected by the shareholders of the
Fund. The voting rights of the shareholders of the Fund are not
cumulative, so that the holders of more than 50% of the shares
can, if they choose, elect all of the Trustees of the Fund; the
holders of the remaining shares of the Fund would be unable to
elect any of the Trustees.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended November
30, 1997 is incorporated herein by reference in its entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue bonds.
General obligation bonds are usually secured by all resources available to the
municipality and the factors outlined in the rating definitions below are
weighed in determining the rating. Because revenue bonds in general are
payable from specifically pledged revenues, the essential element in the
security for a revenue bond is the quantity and quality of the pledged
revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality of
general obligation bond credit is usually appropriate in the rating analysis
of a revenue bond, other factors are important, including particularly the
competitive position of the municipal enterprise under review and the basic
security covenants. Although a rating reflects S&P's judgment as to the
issuer's capacity for the timely payment of debt service, in certain instances
it may also reflect a mechanism or procedure for an assured and prompt cure of
a default, should one occur, i.e., an insurance program, Federal or state
guarantee or the automatic withholding and use of state aid to pay the
defaulted debt service.
AAA
Prime - These are obligations of the highest quality. They have the strongest
capacity for timely payment of debt service.
General Obligation Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong,
due to the competitive position of the municipal enterprise or to the nature
of the revenues. Basic security provisions (including rate covenant, earnings
test for issuance of additional bonds, and debt service reserve requirements)
are rigorous. There is evidence of superior management.
AA
High Grade - The investment characteristics of general obligation and revenue
bonds in this group are only slightly less marked than those of the prime
quality issues. Bonds rated "AA'' have the second strongest capacity for
payment of debt service.
A
Good Grade - Principal and interest payments on bonds in this category are
regarded as safe. This rating describes the third strongest capacity for
payment of debt service. It differs from the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer to
meet debt obligations at some future date.
Revenue Bonds - Debt service coverage is good, but not exceptional. Stability
of the pledged revenues could show some variations because of increased
competition or economic influences on revenues. Basic security provisions,
while satisfactory, are less stringent. Management performance appears
adequate.
BBB
Medium Grade - Of the investment grade ratings, this is the lowest.
General Obligation Bonds - Under certain adverse conditions, several of the
above factors could contribute to a lesser capacity for payment of debt
service. The difference between "A'' and "BBB" ratings is that the latter
shows more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds - Debt coverage is only fair. Stability of the pledged revenues
could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, -2 or -3) by S&P to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge.'' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds that are rated A possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured; interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in default
or present elements of danger may exist with respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a high
degree. These issues are often in default or have other marked short-comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction is in recognition of the differences between short- and long-term
credit risk. Loans bearing the designation MIG 1 or VMIG 1 are of the best
quality, enjoying strong protection by established cash flows of funds for
their servicing, from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2 or VMIG 2 are of
high quality, with margins of protection ample although not as large as the
preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may be
narrow and market access for refinancing is likely to be less well
established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial paper
rating assigned by S&P. Paper rated A-1+ must have either the direct credit
support of an issuer or guarantor that possesses excellent long-term operating
and financial strengths combined with strong liquidity characteristics
(typically, such issuers or guarantors would display credit quality
characteristics which would warrant a senior bond rating of "AA-'' or higher),
or the direct credit support of an issuer or guarantor that possesses above-
average long-term fundamental operating and financing capabilities combined
with ongoing excellent liquidity characteristics. Paper rated A-1 by S&P has
the following characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated "A'' or better; the issuer has
access to at least two additional channels of borrowing; basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances;
typically, the issuer's industry is well established and the issuer has a
strong position within the industry; and the reliability and quality of
management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
Smith Barney
Massachusetts
Municipals Fund
Statement of
Additional
Information
March 30, 1998
Smith Barney
Massachusetts Municipals Fund
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
