March 30, 1999
As amended on July 28, 1999
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is
meant to be read in conjunction with the Prospectus of
the Smith Barney Massachusetts Municipals Fund (the
"fund") dated March 30, 1999, as amended or supplemented
from time to time (the "prospectus"), and is
incorporated by reference in it entirety into the
prospectus. Additional information about the fund's
investments is available in the fund's annual and semi-
annual reports to shareholders which are incorporated
herein by reference. The prospectus and copies of the
reports may be obtained free of charge by contacting a
Salomon Smith Barney Financial Consultant, or by writing
or calling Salomon Smith Barney at the address or
telephone number above.
TABLE OF CONTENTS
Trustees and Executive Officers of the Fund 2
Investment Objective and Management Policies 5
Risk Factors.17
Special Considerations Relating to Massachusetts
Municipal Securities...18
Investment
Restrictions...33
Portfolio Transactions..35
Portfolio
Turnover..36
Purchase of Shares36
Determination of Net Asset
Value..42
Redemption of Shares 43
Investment Management and Other Services 46
Valuation of Shares 49
Exchange Privilege 50
Performance Information 51
Dividends, Distributions and Taxes 55
Additional Information 60
Financial Statements61
Appendix A 62
TRUSTEES AND EXECUTIVE OFFICERS OF THE FUND
The names of the trustees of the trust and executive
officers of the fund, together with information as to
their principal business occupations, are set forth
below. The executive officers of the fund are employees
of organizations that provide services to the fund.
Each trustee who is an "interested person" of the trust,
as defined in the 1940 Act, is indicated by an asterisk.
The address of the "non-interested" trustees and
executive officers of the fund is 388 Greenwich Street,
New York, New York 10013.
Herbert Barg (Age 75). Private Investor. His address
is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania
19004.
Alfred J. Bianchetti (Age 76). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is
19 Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody (Age 77). 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 (Age 61). Professor, Harvard Business
School. His address is c/o Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163.
Burt N. Dorsett (Age 68). Managing Partner of Dorsett
McCabe Management. Inc., an investment counseling firm;
Director 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 (Age 72). Chairman of the Board and
President of The Dress Barn, Inc. His address is 30
Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 67). Attorney. His address is
277 Park Avenue, New York, New York 10172.
Joseph J. McCann (Age 68). Financial Consultant;
Retired Financial Executive, Ryan Homes, Inc. His
address is 200 Oak Park Place, Pittsburgh, Pennsylvania
15243.
*Heath B. McLendon (Age 65). Chairman of the Board and
Investment Officer; Managing Director of Salomon Smith
Barney Inc.; President of SSBC and Travelers Investment
Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the
Board of 59 investment companies managed by affiliates
of Salomon Smith Barney. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr. (Age 65). President, Cornelius
C. Rose Associates, Inc., financial consultants, and
Chairman and Director of Performance Learning Systems,
an educational consultant. His address is Meadowbrook
Village, Building 4, Apt 6, West Lebanon, New Hampshire
03784.
Lewis E. Daidone (Age 41). Senior Vice President and
Treasurer; Managing Director of Salomon Smith Barney;
Chief Financial Officer of the Smith Barney Mutual
funds; Director and Senior Vice President of SSBC and
TIA.
Peter Coffey (Age 54). Vice President and Investment
Officer; Investment Officer of SSBC; Managing Director
of Salomon Smith Barney.
Paul Brook (Age 45). Controller; Director of Salomon
Smith Barney; from 1997-1998 Managing Director of AMT
Capital Services Inc.; prior to 1997 Partner with Ernst
& Young LLP.
Christina T. Sydor (Age 48). Secretary; Managing
Director of Salomon Smith Barney; General Counsel and
Secretary of SSBC and TIA.
As of March 22, 1999, the trustees and officers of the
funds, as a group, owned less than 1% of the outstanding
shares of beneficial interest of the fund.
To the best knowledge of the trustees, as of March 22,
1999, the following shareholders or "groups" (as such
term is defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended) owned beneficially or
of record more than 5% of the shares of the following
classes:
Class A Percentage
East West Enterprises Inc. 6.3381
Attn: Reverend Raymond C. Lee
675 Massachusetts Ave.
Cambridge, MA 02139-3309
Class L
Phillip J. Cade 12.9910
Margaret P. Cade
JTWROS
24 Ginn Rd.
Winchester, MA 01890-2607
Lilla M. Pond TTEE 11.7892
Lilla M. Pond Trust
U/A/D 5/13/93
80 Lincoln Street
Norwood, MA 02062-1352
Helen D'Alelio and 8.4664
Ralph D'Alelio JTWROS
9 Stillings Rd.
Saugus, MA 01906-1928
Myron Pulier 7.5155
Anita Pulier JTWROS
c/o Salzman & Salzman
32 Court Street
Brooklyn, NY 11201-4404
Neil S. Taylor and 7.3613
Susan E. Taylor JTWROS
5 Belle Haven Drive
Andover, MA 01810-4253
No officer, trustee or employee of Salomon Smith Barney
or any of its affiliates receives any compensation from
the trust for serving as an officer of the funds or
trustee of the trust. The trust pays each trustee who
is not an officer, trustee or employee of Salomon Smith
Barney or any of its affiliates a fee of $1,000 per
annum plus $100 per in-person meeting and $100 per
telephonic meeting. Each trustee emeritus who is not an
officer, director or employee of Salomon Smith Barney or
its affiliates receives a fee of $500 per annum plus $50
per in-person meeting and $50 per telephonic meeting.
All trustees are reimbursed for travel and out-of-
pocket expenses incurred to attend such meetings.
For the fiscal year ended November 30, 1998, the
trustees of the trust were paid the following
compensation:
Name of Person
Aggregate
Compensati
on
from Fund
Total
Pension or
Retirement
Benefits
Accrued
as part of
Fund
Expenses
Compensati
on
From Fund
And Fund
Complex
Paid to
Trustees
Number of
Funds for
Which
Trustees
Serves
Within
Fund Complex
Herbert Barg **
$1,600
$0
$101,600
18
Alfred
Bianchetti * **
1,600
0
49,600
13
Martin Brody **
1,600
0
119,814
21
Dwight B. Crane
**
1,600
0
133,850
24
Burt N. Dorsett
**
1,500
0
49,600
13
Elliot S. Jaffe
**
1,600
0
48,500
13
Stephen E.
Kaufman **
1,600
0
91,964
15
Joseph J. McCann
**
1,600
0
49,600
13
Heath B.
McLendon *
0
- -
0
59
Cornelius C.
Rose, Jr. **
1,600
0
49,600
13
* Designates an "interested" trustee.
** Designates member of Audit Committee.
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. A trustee emeritus
may attend meetings but has no voting rights.
During the fund's last fiscal year, aggregate
compensation paid by the fund to trustees
achieving emeritus status totaled $700.
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 "Exempt Obligations." Under
normal market conditions, the fund will invest at least
80% of its net assets in Massachusetts Municipal
Securities. The Fund may invest up to 20% of its net
assets in non-Massachusetts Municipal Securities. SSBC
Fund Management Inc. ("SSBC" or the "manager") serves as
investment adviser and administrator to the fund.
Non-Diversified Classification. The fund is classified
as a non-diversified fund under the Investment Company
Act of 1940, as amended (the "1940 Act") which means
the fund is not limited by the Act in the proportion of
its assets it may invest in the obligations of a single
issuer. The fund intends to conduct its operations,
however, so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the
fund of any liability for the Federal income tax and
Massachusetts franchise tax, as applicable, to the
extent its earnings are distributed to shareholders. To
qualify as a regulated investment company, the fund
will, among other things, 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.
As a result of the fund's non-diversified status, an
investment in the fund may present greater risks to
investors than an investment in a diversified fund. The
investment return on a non-diversified fund typically is
dependent upon the performance of a smaller number of
securities relative to the number of securities held in
a diversified fund. The fund's assumption of large
positions in the obligations of a small number of
issuers will affect the value of its portfolio to a
greater extent than that of a diversified fund in the
event of changes in the financial condition, or in the
market's assessment, of the issuers.
The identification of the issuer of Exempt Obligations
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 Exempt Obligations 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 manager 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 manager'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
Exempt Obligations 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 Exempt Obligations by the fund,
but the manager will consider such event in its
determination of whether the fund should continue to
hold the Exempt Obligations. 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 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. These securities, commonly referred to as
"junk bonds," (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. Securities rated as low as C by Moody's or
D by S&P are extremely speculative and may be in actual
default of interest and/or principal payments.
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.
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 necessarily 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.
Maturity of Obligations Held By The Fund. The fund's
average weighted maturity will vary from time to time
based on the judgment of the manager. The fund intends
to focus on intermediate and long-term obligations,
generally with maturities at the time of purchase from
three to more than twenty years.
Exempt Obligations. Exempt Obligations are classified
as general obligation bonds, revenue bonds and notes.
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 revenue derived from a particular
facility or class of facilities or, in some cases, from
the proceeds of a special excise or other specific
revenue source, but not from the general taxing power.
Notes are short-term obligations of issuing
municipalities or agencies and are sold in anticipation
of a bond sale, collection of taxes or receipt of other
revenues. Exempt Obligations bear fixed, floating and
variable rates of interest, and variations exist in the
security of Exempt Obligations, both within a particular
classification and between classifications.
The yields on, and values of, Exempt Obligations depend
on a variety of factors, including general economic and
monetary conditions, conditions in the Exempt Obligation
markets, size of a particular offering, maturity of the
obligation and rating of the issue. Consequently,
Exempt Obligations with the same maturity, coupon and
rating may have different yields or values.
Issuers of Exempt Obligations may be subject to the
provisions of bankruptcy, insolvency and other laws,
such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. In
addition, the obligations of those issuers may become
subject to laws enacted in the future by Congress, state
legislatures or referenda extending the time for payment
of principal and/or interest, 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 issuer
to pay, when due, the principal of, and interest on, its
obligations may be materially affected.
Private Activity Bonds. The fund may invest without
limit in Exempt Obligations that are "private activity
bonds," as defined in the Internal Revenue Code of 1986,
as amended (the "Code"), which are in most cases revenue
bonds. Private activity bonds generally do not carry
the pledge of the credit of the issuing municipality,
but are guaranteed by or payable from funds provided by
the corporate entity on whose behalf they are issued.
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 these bonds.
Dividends derived from interest income on Exempt
Obligations are a "current earnings" adjustment item for
purposes of the federal corporate alternative minimum
tax. See "Taxes." Private activity bonds held by the
fund will be included in the term Exempt Obligations for
purposes of determining compliance with the fund's
policy of investing at least 80% of its total assets in
Exempt Obligations.
Related Instruments. The fund may invest without limit
in Exempt Obligations that are repayable out of revenues
generated from economically related projects or
facilities or debt obligations whose issuers are located
in the same state. Sizable investments in these
obligations could involve an increased risk to the fund
should any of the related projects or facilities
experience financial difficulties.
U.S. Government Securities. The fund may invest in debt
obligations of varying maturities issued or guaranteed
by the United States government, its agencies or
instrumentalities ("U.S. Government Securities"). Direct
obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates,
maturities and dates of issuance. U.S. Government
Securities also include securities issued or guaranteed
by the Federal Housing Administration, Farmers Home Loan
Administration, Export-Import Bank of the United States,
Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal
Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks, Federal Land Banks, Federal
National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of
Columbia Armory Board and Student Loan Marketing
Association. The fund may also invest in instruments
supported by the right of the issuer to borrow from the
U.S. Treasury and instruments supported by the credit of
the instrumentality. Because the U.S. government is not
obligated by law to provide support to an
instrumentality it sponsors, a fund will invest in
obligations issued by such an instrumentality only if
the manager determines that the credit risk with respect
to the instrumentality does not make its securities
unsuitable for investment by the fund.
Municipal Obligations. The fund invests principally in
debt obligations, issued by, or on behalf of, states,
territories and possessions of the United States and the
District of Columbia and their political subdivisions,
agencies and instrumentalities or multistate agencies or
authorities, the interest from which is, in the opinion
of bond counsel to the issuer, excluded from gross
income for Federal income tax purposes ("Municipal
Obligations"). Municipal Obligations 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
issued by or on behalf of public authorities to finance
privately operated facilities are considered to be
Municipal Obligations if the interest paid on them
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. Municipal Obligations may be
issued to finance life care facilities, which are an
alternative form of long-term housing for the elderly
that offer residents the independence of a condominium
life-style and, if needed, the comprehensive care of
nursing home services. Bonds to finance these facilities
have been issued by various state industrial development
authorities. Because the bonds are secured only by the
revenues of each facility and not by state or local
government tax payments, they are subject to a wide
variety of risks, including a drop in occupancy levels,
the difficulty of maintaining adequate financial
reserves to secure estimated actuarial liabilities, the
possibility of regulatory cost restrictions applied to
health care delivery and competition from alternative
health care or conventional housing facilities.
Municipal Leases. The fund may invest without limit in
"municipal leases." Municipal leases may take the form
of a lease or an installment purchase contract issued by
state or local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such
as fire and sanitation vehicles, computer equipment and
other capital assets. Interest payments on qualifying
municipal leases are exempt from Federal income taxes
and state income taxes within the state of issuance.
Although lease obligations do not constitute general
obligations of the municipality for which the
municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the
payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no
obligation to make lease or installment purchase
payments in future years unless money is appropriated
for such purpose on a yearly basis. In addition to the
"non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet
developed the depth of marketability associated with
more conventional bonds. Although "non-appropriation"
lease obligations are often secured by the underlying
property, disposition of the property in the event of
foreclosure might prove difficult. The fund may invest
in municipal leases without non-appropriation clauses
only when the municipality is required to continue the
lease under all circumstances except bankruptcy. There
is no limitation on the percentage of the fund's assets
that may be invested in municipal lease obligations. In
evaluating municipal lease obligations, the manager will
consider such factors as it deems appropriate, which my
include: (a) whether the lease can be canceled; (b) the
ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of
the lease obligor; (d) the likelihood that the
municipality will discontinue appropriating funding for
the leased property in the event such property is no
longer considered essential by the municipality; (e) the
legal recourse of the lease obligee in the event of such
a failure to appropriate funding; (f) whether the
security is backed by a credit enhancement such as
insurance; and (g) any limitations which are imposed on
the lease obligor's ability to utilize substitute
property or services other than those covered by the
lease obligation.
Municipal leases the fund may acquire will be both rated
and unrated. Rated leases include those rated
investment grade at the time of investment or those
issued by issuers whose senior debt is rated investment
grade at the time of investment. The fund may acquire
unrated issues the manager deems to be comparable in
quality to rated issues in which the fund is authorized
to invest. A determination that an unrated lease
obligation is comparable in quality to a rated lease
obligation will be subject to oversight and approval by
the trust's board of trustees.
Municipal leases held by the fund will be considered
illiquid securities unless the trust's board of trustees
determines on an ongoing basis that the leases are
readily marketable. An unrated municipal lease with a
non-appropriation risk that is backed by an irrevocable
bank letter of credit or an insurance policy issued by
a bank or insurer deemed by the manager to be of high
quality and minimal credit risk, will not be deemed to
be illiquid solely because the underlying municipal
lease is unrated, if the manager determines that the
lease is readily marketable because it is backed by the
letter of credit or insurance policy.
Zero Coupon Securities. The fund may invest in zero
coupon Exempt Obligations. Zero coupon Exempt
Obligations are generally divided into two categories:
pure zero obligations, which pay no interest for their
entire life and zero/fixed obligations, which pay no
interest for some initial period and thereafter pay
interest currently. In the case of a pure zero
obligation, the failure to pay interest currently may
result from the obligation's having no stated interest
rate, in which case the obligation pays only principal
at maturity and is issued at a discount from its stated
principal amount. A pure zero obligation may, in the
alternative, carry a stated interest rate, but provide
that no interest is payable until maturity. The value to
the investor of a zero coupon Exempt Obligation consists
of the economic accretion either of the difference
between the purchase price and the nominal principal
amount (if no interest is stated to accrue) or of
accrued, unpaid interest during the Exempt Obligation's
life or payment deferral period.
Custodial Receipts. The fund may acquire custodial
receipts or certificates underwritten by securities
dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on
certain Exempt Obligations. The underwriter of these
certificates or receipts typically purchases Exempt
Obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian
bank, which then issues receipts or certificates
evidencing ownership of the periodic unmatured coupon
payments and the final principal payment on the
obligations. Custodial receipts evidencing specific
coupon or principal payments have the same general
attributes as zero coupon Exempt Obligations described
above. Although under the terms of a custodial receipt
the fund would typically be authorized to assert its
rights directly against the issuer of the underlying
obligations, the fund could be required to assert
through the custodian bank those rights as may exist
against the underlying issuer. Thus, if the underlying
issuer fails to pay principal and/or interest when due,
the fund may be subject to delays, expenses and risks
that are greater than those that would have been
involved if the fund had purchased a direct obligation
of the issuer. In addition, if the trust or custodial
account in which the underlying security has been
deposited is determined to be an association taxable as
a corporation, instead of a non-taxable entity, the
yield on the underlying security would be reduced in
recognition of any taxes paid.
Exempt Obligation Components. The fund may invest in
Exempt Obligations, the interest rate on which has been
divided by the issuer into two different and variable
components, which together result in a fixed interest
rate. Typically, the first of the components (the
"Auction Component") pays an interest rate that is reset
periodically through an auction process; whereas the
second of the components (the "Residual Component") pays
a residual interest rate based on the difference between
the total interest paid by the issuer on the Exempt
Obligation and the auction rate paid on the Auction
Component. The fund may purchase both Auction and
Residual Components.
Because the interest rate paid to holders of Residual
Components is generally determined by subtracting from
a fixed amount the interest rate paid to the holders of
Auction Components, the interest rate paid to Residual
Component holders will decrease as the Auction
Component's rate increases and increase as the Auction
Component's rate decreases. Moreover, the magnitude of
the increases and decreases in market value of Residual
Components may be larger than comparable changes in the
market value of an equal principal amount of a fixed
rate Exempt Obligation having similar credit quality,
redemption provisions and maturity.
Floating and Variable Rate Instruments. The fund may
purchase floating and variable rate demand notes and
bonds, which are Exempt Obligations normally having a
stated maturity in excess of one year, but which permit
their holder to demand payment of principal at any time,
or at specified intervals. The maturity of a floating
or variable rate demand note or bond will be deemed
shortened by virtue of a demand feature.
The issuer of floating and variable rate demand
obligations normally has a corresponding right, after a
given period, to prepay at its discretion the
outstanding principal amount of the obligations plus
accrued interest upon a specified number of days' notice
to the holders of these obligations. The interest rate
on a floating rate demand obligation is based on a known
lending rate, such as a bank's prime rate, and is
adjusted automatically each time that rate is adjusted.
The interest rate on a variable rate demand obligation
is adjusted automatically at specified intervals.
Frequently, floating and variable rate obligations are
secured by letters of credit or other credit support
arrangements provided by banks. Use of letters of
credit or other credit support arrangements will not
adversely affect the tax-exempt status of these
obligations. Because they are direct lending
arrangements between the lender and borrower, floating
and variable rate obligations generally will not be
traded. In addition, generally no secondary market
exists for these obligations, although their holders may
demand payment at face value. For these reasons, when
floating and variable rate obligations held by the fund
are not secured by letters of credit or other credit
support arrangements, the fund's rights to demand
payment is dependent on the ability of the borrower to
pay principal and interest on demand. The manager, on
behalf of the fund, will consider on an ongoing basis
the creditworthiness of the issuers of floating and
variable rate demand obligations held by the fund.
Participation Interests. The fund may purchase from
financial institutions tax-exempt participation
interests in Exempt Obligations. A participation
interest gives the fund an undivided interest in the
Exempt Obligation in the proportion that the fund's
participation interest bears to the total amount of the
Exempt Obligation. These instruments may have floating
or variable rates of interest. If the participation
interest is unrated, it will be backed by an irrevocable
letter of credit or guarantee of a bank that the trust's
board of trustees has determined meets certain quality
standards, or the payment obligation otherwise will be
collateralized by U.S. government securities. The fund
will have the right, with respect to certain
participation interests, to demand payment, on a
specified number of days' notice, for all or any part of
the fund's interest in the Exempt Obligation, plus
accrued interest. The fund intends to exercise its
right with respect to these instruments to demand
payment only upon a default under the terms of the
Exempt Obligation or to maintain or improve the quality
of its investment portfolio.
Taxable Investments. Under normal conditions, the fund
may hold up to 20% of its total assets in cash or money
market instruments, including taxable money market
instruments (collectively, "Taxable Investments"). In
addition, when the manager believes that market
conditions warrant, the fund may take a temporary
defensive posture and invest without limitation in
short-term Exempt Obligations and Taxable Investments.
To the extent the fund holds Taxable Investments and,
under certain market conditions, certain floating and
variable rate demand obligations or Auction Components,
the fund may not achieve its investment objective.
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 Exempt Obligations
rated within the three highest grades by Moody's or S&P;
and (b) the following taxable securities: 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.
Investment Techniques
The fund may employ, among others, the investment
techniques described below, which may give rise to
taxable income or gain:
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
is to protect the fund from fluctuations in interest
rates on tax-exempt securities without buying or selling
the Exempt Obligations. If the fund owns long-term
Exempt Obligations 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 Exempt Obligations in the fund's
portfolio. If interest rates increase as anticipated,
the value of certain long-term Exempt Obligations 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 Exempt
Obligations 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 Exempt
Obligations at higher prices. Because the rate of
fluctuation in the value of the futures contracts should
be similar to that of long-term Exempt Obligations, the
fund could enter into futures contracts at lower prices.
At the time the fund deems it appropriate to purchase
the Exempt Obligations, the futures contracts could be
liquidated and the fund's cash could then be used to buy
long-term Exempt Obligations. The fund could accomplish
similar results by selling Exempt Obligations with long
maturities and investing in Exempt Obligations with
short maturities when interest rates are expected to
increase or by buying Exempt Obligations with long
maturities and selling Exempt Obligations with short
maturities when interest rates are expected to decline.
When the market for Exempt Obligations when it is not
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 manager's
ability to predict correctly movements in the direction
of interest rates. Such predictions involve skills and
techniques which may be different from those involved in
the management of a long-term municipal bond 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
Exempt Obligations 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 Exempt
Obligations 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 Exempt Obligations 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 Exempt
Obligations 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 Exempt Obligations held in its portfolio and rates
decrease instead, the fund will lose part or all of the
benefit of the increased value of the Exempt Obligations
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 manager 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 Exempt Obligations, 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 manager 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 manager
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 Exempt Obligations. 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 Exempt Obligations.
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 manager, which could prove to be inaccurate. Even
if the manager'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.
When-Issued Securities and Delayed-Delivery
Transactions. The fund may purchase securities on a
"when-issued" basis or for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement
date at a stated price and yield). The fund does not
intend to engage in these transactions for speculative
purposes, but only in furtherance of its investment
goal. These transactions occur when securities are
purchased or sold by the fund with payment and delivery
taking place in the future to secure what is considered
an advantageous yield and price to the fund at the time
of entering into the transaction. The payment
obligation and the interest rate that will be received
on when-issued securities are fixed at the time the
buyer enters into the commitment. Because of
fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the
prices obtained on such securities may be higher or
lower than the prices available in the market on the
dates when the investments are actually delivered to the
buyers.
When the fund agrees to purchase when-issued or delayed-
delivery securities, the fund will set aside cash or
liquid securities equal to the amount of the commitment
in a segregated account. Normally, the fund will set
aside portfolio securities to satisfy a purchase
commitment, and in such a case the fund may be required
subsequently to place additional assets in the
segregated account in order to ensure that the value of
the account remains equal to the amount of the fund's
commitment. The assets contained in the segregated
account will be marked-to-market daily. It may be
expected that the fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities
to cover such purchase commitments than when it sets
aside cash. When the fund engages in when-issued or
delayed-delivery transactions, it relies on the other
party 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
advantageous.
Stand-by Commitments. The fund may acquire "stand-by
commitments" with respect to Exempt Obligations held in
its portfolio. Under a stand-by commitment, a broker,
dealer or bank is obligated to repurchase at the fund's
option specified securities at a specified price and, in
this way, a stand-by commitment is subject to the
ability of the seller to make payment on demand. The
fund will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to
exercise the rights afforded by the commitments for
trading purposes. The fund anticipates that stand-by
commitments will be available from brokers, dealers and
banks without the payment of any direct or indirect
consideration. The fund may pay for stand-by
commitments if payment is deemed necessary, thus
increasing to a degree the cost of the underlying Exempt
Obligations and similarly decreasing the security's
yield to the fund.
Illiquid Securities. The fund may invest up to 15% of
its net assets in illiquid securities, which term
includes securities subject to contractual or other
restrictions on resale and other instruments that lack
readily available markets. In addition, up to 5% of the
value of each fund's assets may be invested in
securities of entities that have been in continuous
operation for fewer than three years. Notwithstanding
the foregoing, the fund will not invest more than 10% of
its assets (excluding those subject to Rule 144A under
the Securities Act of 1933, as amended) that are
restricted. The fund also is authorized to borrow up to
10% of its total assets (including 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.
Repurchase Agreements. The fund may agree to purchase
securities from a bank or recognized securities dealer
and simultaneously commit to resell the securities to
the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities
("repurchase agreements"). The fund would maintain
custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to would
be, in effect, secured by such securities. If the value
of such securities were less than the repurchase price,
plus interest, the other party to the agreement would be
required to provide additional collateral so that at all
times the collateral is at least 102% of the repurchase
price plus accrued interest. Default by or bankruptcy
of a seller would expose the fund to possible loss
because of adverse market action, expenses and/or delays
in connection with the disposition of the underlying
obligations. The financial institutions with which a
fund may enter into repurchase agreements will be banks
and non-bank dealers of U.S. Government securities on
the Federal Reserve Bank of New York's list of reporting
dealers, if such banks and non-bank dealers are deemed
creditworthy by the fund's manager. The manager will
continue to monitor creditworthiness of the seller under
a repurchase agreement, and will require the seller to
maintain during the term of the agreement the value of
the securities subject to the agreement to equal at
least 102% of the repurchase price (including accrued
interest). In addition, the manager will require that
the value of this collateral, after transaction costs
(including loss of interest) reasonably expected to be
incurred on a default, be equal to 102% or greater than
the repurchase price (including accrued premium)
provided in the repurchase agreement or the daily
amortization of the difference between the purchase
price and the repurchase price specified in the
repurchase agreement. The manager will mark-to-market
daily the value of the securities. Repurchase
agreements are considered to be loans by a Fund under
the 1940 Act.
RISK FACTORS
The following summaries are included for the purpose of
providing certain information regarding the economic
climate and financial condition of the Commonwealth of
Massachusetts and Puerto Rico, and are based primarily
on information from official statements made available
in connection with the issuance of certain securities
and other documents and sources and does not purport to
be complete. The trust has not undertaken to verify
independently such information and the trust assumes no
responsibility for the accuracy of such information.
These summaries do not provide information regarding
most securities in which the fund is permitted to invest
and in particular do not provide specific information on
the issuers or types of municipal securities in which
the fund invests or the private business entities whose
obligations support the payments on AMT-Subject bonds in
which the fund will invest. Therefore, the general risk
factors as to the credit of the state or its political
subdivisions discussed herein may not be relevant to the
fund. Although revenue obligations of a state or its
political subdivisions may be payable from a specific
project or source, there can be no assurance that future
economic difficulties and the resulting impact on state
and local government finances will not adversely affect
the market value of the fund or the ability of the
respective obligors to make timely payments of principal
and interest on such obligations. In addition, a number
of factors may adversely affect the ability of the
issuers of municipal securities to repay their
borrowings that are unrelated to the financial or
economic condition of a state, and that, in some cases,
are beyond their control. Furthermore, issuers of
municipal securities are generally not required to
provide ongoing information about their finances and
operations to holders of their debt obligations,
although a number of cities, counties and other issuers
prepare annual reports.
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.
Economic Climate
The Commonwealth of Massachusetts is a densely populated
urban state with a well-educated population,
comparatively high income levels, low rates of
unemployment and a relatively diversified economy.
According to the 1990 census, Massachusetts had a
population density of 768 persons per square mile, as
compared to 70.3 for the United States as a whole. It
thus had the third greatest population density following
Rhode Island and New Jersey. Massachusetts experienced
a modest increase in population between 1980 and 1990.
In 1997, the population of Massachusetts was
approximately 6,118,000.
Per capita personal income for Massachusetts residents,
unadjusted for differentials in the cost of living, was
$29,792 in 1996, as compared to the national average of
$24,426. While per capita personal income is, on a
relative scale, higher in Massachusetts than in the
United States as a whole, this is offset to some extent
by the higher cost of living in Massachusetts.
The Massachusetts service sector, which constituted 35.6
percent of the total non-agricultural work force in
February 1998, is the largest sector in the
Massachusetts economy. Government employment represents
13.2 percent of total non-agricultural employment in
Massachusetts. While total employment in construction,
manufacturing, trade, government, services, finance,
insurance and real estate declined between 1988 and
1992, the economic recovery that began in 1993 has been
accompanied by increased employment levels. Since 1994,
total employment levels in Massachusetts have increased
at yearly rates greater than 2.0 percent. In 1997,
employment levels in every industry increased, including
manufacturing employment, which had declined in every
year since 1983. The most rapid growth in 1997 came in
the construction sector and the services sector, which
grew at rates of 6.7 percent and 4.1 percent,
respectively. Total non-agricultural employment in
Massachusetts grew at a rate of 2.7 percent in 1997.
Between 1982 and 1988, the economies of Massachusetts
and New England were among the strongest performers in
the nation. Between 1989 and 1992, however, both
Massachusetts and New England have experienced growth
rates significantly below the national average. An
economic recession in the early 1990s caused
unemployment rates in Massachusetts to rise
significantly above the national average. In the first
three quarters of 1996, the gross state product for
Massachusetts grew at a rate of 2.9 percent,
approximately the same rate as the national average.
Massachusetts' unemployment rate averaged 8.6 percent in
1992, 6.9 percent in 1993, 6.0 percent in 1994, 5.4
percent in 1995, 4.3 percent in 1996 and 4.0 percent in
1997.
The unemployment rate in Massachusetts has fallen almost
consistently since the peak of 9.6% in mid 1991, and has
remained at or below that of the nation for the past
three years. Monthly unemployment in Massachusetts in
Fiscal Year 1997 averaged a low 4.0% as compared to a
national rate of 5.2%. Unemployment is projected at
3.7% through Fiscal Year 1998 and to remain steady at
3.7% to 3.9% annually through calendar year 2000.
Growth in personal income is expected to decline from
the Fiscal Year 1997 rate of about 6.0% to approximately
5.7% in Fiscal 1998. It is expected to fall further in
Fiscal Year 1999 to 4.3% from 4.5%, and to remain at
that rate through the following few years. However, the
rate of inflation (as measured by consumer prices), at
least in metropolitan Boston, should continue to outpace
that of the nation by approximately 0.5%. The risks for
Massachusetts include a continued shortage of skilled
labor, low net population growth, which will further
constrain job creation, and the prominence of the
financial services industry in the economy coupled with
a relatively high proportion of non-wage income, both of
which are sensitive to the performance of the financial
markets.
Financial Condition
Under its constitution, the Commonwealth may borrow
money (a) for defense or in anticipation of receipts
from taxes or other sources, any such loan to be paid
out of the revenue of the year in which the loan is
made, or (b) by a two-thirds vote of the members of each
house of the Legislature present and voting thereon.
Certain independent authorities and agencies within the
Commonwealth are statutorily authorized to issue bonds
and notes for which the Commonwealth is either directly,
in whole or in part, or indirectly liable. The
Commonwealth's liabilities with respect to these bonds
and notes are classified as either (a) Commonwealth-
supported debt, (b) Commonwealth-guaranteed debt or (c)
indirect obligations.
Debt service expenditures of the Commonwealth in Fiscal
Year 1992 totaled $898.3 million, representing a 4.7
percent decrease from Fiscal Year 1991. Debt service
expenditures for Fiscal Year 1993, Fiscal Year 1994,
Fiscal Year 1995, Fiscal Year 1996 and Fiscal Year 1997
were $1.140 billion, $1.149 billion, $1.231 billion,
$1.183 billion and $1.276 billion, respectively, and are
projected to be $1.224 billion for Fiscal Year 1998. In
January 1990, legislation was enacted which imposes a 10
percent limit on the total appropriations in any fiscal
year that may be expended for payment of interest on
general obligation debt (excluding Fiscal Recovery
Bonds) of Massachusetts.
Also, Wall Street demonstrated its confidence in the
Commonwealth's fiscal policies by again raising the bond
rating for Massachusetts. The long-term debt service
obligations are projected to decrease by 2 percent, or
$26.24 million, from Fiscal Year 1997. Short-term debt
service obligations are expected to increase to
approximately $49 million in Fiscal Year 1999, as
Central Artery/Tunnel Project cash flow requirements
begin to outpace the inflow of federal and other third-
party revenues. The Commonwealth will fund this interim
cash shortfall with Grant Anticipation Notes to be
repaid as federal reimbursements are received and Bond
Anticipation Notes on third-party financing.
In Fiscal Year 1998, legislation was approved to
construct a new convention center in Boston and to
expand existing facilities in Worcester and Springfield.
The projects will be financed with increases in certain
taxes on hotels and vehicle rentals, and the dedication
of state taxes on new businesses in Boston's Convention
Center Finance District. These new revenue sources will
be sufficient to pay the interest on the general
obligation notes that will be sold to finance
construction. The notes will be permanently financed
with special obligation revenue bonds when construction
of the new facility is completed, which is scheduled for
2002.
Fiscal 1999
The House of Representatives approved its version of the
fiscal 1999 budget on May 7, 1998, and the Senate
approved its version on June 3, 1998. After passage of
two interim, partial budgets to provide for expenditures
during the first 30 days of the fiscal year, the
legislative conference committee appointed to reconcile
the two versions of the fiscal 1999 budget released its
report on July 20, 1998, and the budget was enacted by
the Legislature on the same day. Acting Governor
Cellucci approved it on July 30, 1998. The Governor
vetoed or reduced appropriations totaling approximately
$100.9 million. On July 31, 1998 the Legislature
overrode several of these vetoes, restoring
approximately $63.1 million of appropriations. After
accounting for the value of vetoes and subsequent
overrides, the budget provides for total appropriations
of approximately $19.5 billion.
The fiscal 1999 appropriation for pension funding is
approximately $965.3 million. This amount is consistent
with the amount requested by the Acting Governor, but is
approximately $93.9 million less than the amount
required by the most recently approved pension funding
schedule. The small appropriation is based on the
assumption that a revised funding schedule will require
reduced funding because of the 1997 change in law
eliminating Commonwealth responsibility for funding
cost-of-living adjustments incurred by local pension
systems. A revised funding schedule has not yet been
submitted to the Legislature.
The fiscal 1999 budget is based on a consensus tax
revenue forecast of $14.4 billion, as agreed by both
houses of the Legislature in May. The tax cuts
incorporated into the budget, valued by the Department
of Revenue at $990 million in fiscal 1999, had the
effect of reducing the consensus forecast to $13.41
billion. Tax collections in July 1998 totaled $895.5
million, an increase of $96.4 million, or 12.1%, over
July 1997. On August 19, 1998 the Executive Office for
Administration and Finance raised the fiscal 1999 tax
estimate by $200 million to $13.61 billion. This
estimate does not reflect the Acting Governor's
recommendation of an additional $287.5 million tax
reduction pursuant to legislation he filed on August 10,
1998.
Fiscal 1998
Preliminary results indicate that tax collections for
fiscal 1998 totaled approximately $14.026 billion, an
increase of $1.161 billion or 9.0%, over fiscal 1997,
and approximately $326 million higher than the final
estimate for the year made by the Executive Office for
Administration and Finance. On May 5, 1998 the estimate
for the year was raised from $13.154 billion to $13.3
billion, and on June 10, 1998 it was raised to $13.7
billion. Projected total fiscal 1998 expenditures are
$18.887 billion, including approximately $123 million in
anticipated additional fiscal 1998 supplemental
appropriations. Among the anticipated appropriations
are $46.1 million for Medicaid and $8 million for
environmental remediation of certain underground storage
tanks in the Commonwealth. If such remediation efforts
are not underway by December 23, 1998, the Commonwealth
may be liable for substantial penalties imposed by the
federal Environmental Protection Agency.
The Legislature has enacted several bills providing for
disposition of the fiscal 1998 surplus, but it has not
completed action on final fiscal 1998 appropriations.
The final fiscal 1998 supplemental appropriation bill
or bills are expected to authorize certain additional
post-fiscal 1998 spending to be charged to fiscal 1998.
Acting Governor Cellucci has also filed a bill calling
for a one-time tax cut of $287.5 million to be charged
to fiscal 1998.
Medicaid
Although the Commonwealth has undertaken a number of
successful Medicaid savings and cost control initiatives
in the last five years, the Commonwealth has also
expanded the income eligibility ceiling for the Medicaid
program from 100% to 133% of the federal poverty level.
In fiscal 1998, due to changes in state law and in the
state's federal waiver, the Medicaid program enrolled
more than 150,000 new members. The original
appropriations for this expansion, based on census data
that was several years old, were estimated to fund
services for 83,000 new members. As a result of this
higher than expected enrollment, the Acting Governor has
filed a request for supplemental appropriations of $46.1
million for the health care expansion portion of the
Medicaid program. The requested appropriations were
expected to bring fiscal 1998 Medicaid spending to
approximately $3.652 billion, an increase of 5.7% over
fiscal 1997. Traditional Medicaid spending has remained
within the appropriated spending amounts and expected
population growth projections.
Fiscal 1998 Year-End Surplus
Legislation approved by the Acting Governor on July 21,
1998 increased the ceiling, effective June 30, 1998, on
the amount that can be maintained in the Stabilization
Fund from 5% to 7.5% of budgeted revenues. Based on
current estimates of fiscal 1998 results, this change
increased the statutory ceiling from approximately
$984.8 million to approximately $1.477 billion. The
current projected fiscal 1998 ending balance in the
Stabilization Fund is $972.2 million, assuming enactment
of additional tax cuts aggregating $287.5 million as
proposed by the Acting Governor.
The fiscal 1999 budget approved by the Acting Governor
on July 30, 1998 contains a provision calling for the
Comptroller to transfer $162.5 million, as of June 30,
1998, from the General Fund to a newly established Tax
Exemption Escrow Trust Fund. By June 30, 1999 the
Comptroller is to transfer $162.5 million plus interest
from the new fund back to the General Fund. The effect
of this provision is to charge to fiscal 1998 the
approximate cost allocable to fiscal 1998 of the
retroactive income tax reductions approved by the Acting
Governor on July 21, 1998.
On August 5, 1998, the Acting Governor approved
legislation establishing a new Brownfields
Revitalization Fund and providing for the transfer of
$45 million to that fund, to be used through fiscal year
2001 to fund a $15 million access-to-capital program to
be administered by the Massachusetts Office of Business
Development and a $30 million Brownfields Redevelopment
Fund to be administered by the Massachusetts Development
Finance Agency. The legislation also contains an
additional $12 million in fiscal 1998 appropriations,
which are made available through fiscal 2001, to fund
Brownfields-related costs of the Attorney General and
the Department of Environmental Protection.
On August 10, 1998 the Acting Governor approved
legislation establishing a $60 million Teacher Quality
Endowment Fund. Earnings from the investment of moneys
credited to the new fund are to be used by the
Commissioner of Education to pay signing bonuses to
incoming teachers and salary bonuses to existing
teachers under a new master teacher corps program. The
corpus of the fund is to be left intact. The
legislation also provided for the transfer from the
General Fund of $200 million to the Tax Reduction Fund
(to be applied to a temporary increase in the personal
exemptions applicable to 1998 income taxes) and $150
million to the Stabilization Fund (in addition to any
other transfer required by state finance law). In
addition, the legislation authorized approximately $62.9
million in additional revenues from the state lottery to
be distributed to cities and towns on account of fiscal
1998.
Also on August 10, 1998, the Acting Governor gave his
partial approval to legislation providing for a variety
of capital appropriations to be charged to fiscal 1998.
The bill enacted by the Legislature called for the
transfer of approximately $272.4 million from the
General Fund and approximately $106.9 million from the
Highway Fund to a Capital Improvement and Investment
Trust Fund to finance various specified capital
expenditures through fiscal 2000. The Acting Governor
vetoed many of the proposed capital expenditures,
reducing the amount of the General Fund transfer to
approximately $96.2 million and the amount of the
Highway Fund transfer to $93 million. The Acting
Governor filed legislation on the same day calling for
an additional $287.5 million to be transferred to the
Tax Reduction Fund. That bill has been referred to the
House Committee on Ways and Means. Under existing law,
the effect of the vetoes is to increase the amount of
the fiscal 1998 surplus that will be credited to the
Stabilization Fund and the Capital Projects Fund.
On August 12, 1998, the Acting Governor approved a
fiscal 1998 supplemental appropriations bill providing
for approximately $70.9 million in fiscal 1998
appropriations to be made available in fiscal 1999 to
fund various collective bargaining agreements.
In November 1980, voters in the Commonwealth approved a
state-wide 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 government
entities, including county governments. The law is not
a constitutional provision and accordingly is subject to
amendment or repeal by the legislature. Proposition 2
limits the property taxes that a Massachusetts city or
town may assess in any fiscal year to the lesser of (i)
2.5% of the full and fair cash value of real estate and
personal property therein and (ii) 2.5% over the
previous fiscal year's levy limit plus any growth in the
base from certain new construction and parcel
subdivisions. In addition, Proposition 2 1/2 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. The law contains certain override
provisions and, in addition, permits certain debt
servicings and expenditures for identified capital
projects to be excluded from the limits by a majority
vote, in a general or special election.
During the 1980's, Massachusetts 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 year 1998,
approximately 20.6% of Massachusetts' budget is
estimated to be allocated to Local Aid. Direct Local Aid
increased from $2.359 billion in fiscal year 1992 to
$2.547 billion in fiscal year 1993, to $2.727 billion in
fiscal year 1994 and to $2.976 billion in fiscal year
1995. Fiscal year 1996 expenditures for direct Local Aid
were $3.246 billion, a 9.1% increase over 1995. It is
estimated that fiscal year 1997 expenditures for Local
Aid will be $3.534 billion, which will be an increase of
approximately 8.9% above the fiscal year 1996 level. In
addition to direct Local Aid, Massachusetts provides
substantial indirect aid to local governments.
In November 1990, voters approved a petition which
regulates the distribution of Local Aid by requiring,
subject to appropriation, distribution to cities and
towns of no less than 40% of collection from personal
income taxes, sales and use taxes, corporate excise
taxes, and lottery fund proceeds. The Local Aid
distribution to each city or town would equal no less
than 100% of the total Local Aid received for fiscal
year 1989. Distributions in excess of fiscal year 1989
levels would be based on new formulas that would replace
the current Local Aid distribution formulas. By its
terms, the new formulas would have called for a
substantial increase in direct Local Aid in fiscal year
1992, and would call for such an increase in fiscal year
1993 and in subsequent years. However, Local Aid
payments expressly remain subject to annual
appropriation, and appropriations for Local Aid in
fiscal years 1992 through 1998 have not met the levels
set forth in the initiative law.
During Fiscal Years 1993, 1994, 1995, 1996 and 1997
Medicaid expenditures of the Commonwealth were $3.151
billion, $3.313 billion, $3.898 billion, $3.416 billion
and $3.456 billion, respectively. The average annual
growth rate from Fiscal Year 1993 to Fiscal Year 1997
was 2.3 percent. The Executive Office for
Administration and Finance estimates that Fiscal Year
1998 Medicaid expenditures will be approximately $3.620
billion, an increase of 4.7% from fiscal 1997.
The Division of Medical Assistance has implemented a
number of savings and cost control initiatives including
managed care, utilization review and the identification
of third party liabilities. In spite of increasing
caseloads, Massachusetts has managed a substantial
reduction in the Medicaid growth rate in expenditures
over the last six years. From fiscal 1993 through
fiscal 1997, per capita costs grew on average less than
0.6% annually. The total Medicaid caseload for fiscal
1997 was approximately 676,323 (approximately 11.1% of
the most recently estimated population of the
Commonwealth), as compared to approximately 630,902 in
fiscal 1993.
Litigation
There are pending in courts within the Commonwealth
various suits in which the Commonwealth is a defendant.
In the opinion of the Attorney General, as of September
2, 1998, no litigation was pending or, to his knowledge,
threatened which was likely to result, either
individually or in the aggregate, in final judgments
against the Commonwealth that would affect materially
its financial condition. Listed below are certain
litigation affecting the Commonwealth.
In Massachusetts Wholesalers of Malt Beverages v.
Commonwealth, associations of bottlers challenged as an
unconstitutional taking the 1990 amendments to the
bottle bill which escheat abandoned deposits to the
Commonwealth. In August 1994, the Superior Court ruled
that the Commonwealth is liable for certain amounts. In
February 1996, the Commonwealth settled all remaining
issues with one group of plaintiffs. Payments to that
group will total approximately $7 million. The
Legislature appropriated the funds necessary for these
payments in its final supplemental budget for fiscal
1996. The Legislature has appropriated approximately $8
million to implement the terms of the settlement with
the remaining group of plaintiffs.
Year 2000
In June 1997, the Executive Office for Administration
and Finance established a Year 2000 Program Management
Office within its Information Technology Division. The
purpose of the office is to ensure accurate monitoring
of the Commonwealth's progress in achieving year 2000
compliance, i.e., remediating or replacing and
redeploying affected systems, as well as to identify
risk areas and risk mitigation activities and serve as
a resource for all state agencies and departments.
Legislation approved by the Acting Governor on August
10, 1998 appropriated $20.4 million for expenditure by
the Information Technology Division to achieve year 2000
compliance for the six Executive Offices and other
departments that report directly to the Governor. This
amount, together with previously appropriated amounts
and expenditures at the departmental level from existing
funds, is anticipated to be sufficient to meet most of
the remediation efforts for such Executive Offices and
departments. The Secretary of Administration and
Finance is to report quarterly to the Legislature on the
progress being made to address the year 2000 compliance
efforts, and to assess the sufficiency of funding
levels.
Special Considerations Relating to Puerto Rico
The following highlights some of the more significant
financial trends and problems affecting the Commonwealth
of Puerto Rico (the "Commonwealth" or "Puerto Rico"),
and is based on information drawn from official
statements and prospectuses relating to the securities
offerings of Puerto Rico, its agencies and
instrumentalities, as available on the date of this SAI.
SSBC has not independently verified any of the
information contained in such official statements,
prospectuses, and other publicly available documents,
but is not aware of any fact that would render such
information materially inaccurate.
The economy of Puerto Rico is fully integrated with that
of the United States. In fiscal 1997, trade with the
United States accounted for approximately 88% of Puerto
Rico's exports and approximately 62% of its imports. In
this regard, in fiscal 1997 Puerto Rico experienced a
$2.7 billion positive adjusted merchandise trade
balance.
Since fiscal 1985, personal income, both aggregate and
per capita, has increased consistently each fiscal year.
In fiscal 1997, aggregate personal income was $32.1
billion ($30.0 billion in 1992 prices) and personal per
capita income was $8,509 ($7,957 in 1992 prices). Gross
product in fiscal 1993 was $25.1 billion ($24.5 billion
in 1992 prices) and gross product in fiscal 1997 was
$32.1 billion ($27.7 billion in 1992 prices). This
represents an increase in gross product of 27.7% from
fiscal 1993 to 1997 (13.0% in 1992 prices).
Puerto Rico's economic expansion, which has lasted over
ten years, continued throughout the five-year period
from fiscal 1993 through fiscal 1997. Almost every
sector of the economy participated, and record levels of
employment were achieved. Factors behind the continued
expansion included Government-sponsored economic
development programs, periodic declines in the exchange
value of the U.S. dollar, increases in the level of
federal transfers, and the relatively low cost of
borrowing funds during the period.
Average employment increased from 999,000 in fiscal 1993
to 1,128,300 in fiscal 1997. Unemployment, although at
relatively low historical levels, remains above the U.S.
average. Average unemployment decreased from 16.8% in
fiscal 1993 to 13.1% in fiscal 1997.
Manufacturing is the largest sector in the economy
accounting for $19.8 billion or 41.2% of gross domestic
product in fiscal 1997. The manufacturing sector
employed 153,273 workers as of March 1997. Manufacturing
in Puerto Rico is now more diversified than during
earlier phases of industrial development. In the last
two decades industrial development has tended to be more
capital intensive and dependent on skilled labor. This
gradual shift is best exemplified by heavy investment in
pharmaceuticals, scientific instruments, computers,
microprocessors, and electrical products over the last
decade. The service sector, which includes wholesale and
retail trade and finance, insurance, real estate, hotels
and related services, and other services, ranks second
in its contribution to gross domestic product and is the
sector that employs the greatest number of people.
In fiscal 1997, the service sector generated $18.4
billion in gross domestic product or 38.2% of the total.
Employment in this sector grew from 467,000 in fiscal
1993 to 551,000 in fiscal 1997, a cumulative increase of
17.8%. This increase was greater than the 12.9%
cumulative growth in employment over the same period
providing 48% of total employment. The Government sector
of the Commonwealth plays an important role in the
economy of the island. In fiscal year 1997, the
Government accounted for $5.2 billion of Puerto Rico's
gross domestic product and provided 10.9% of the total
employment. The construction industry has experienced
real growth since fiscal 1987. In fiscal 1997,
investment in construction rose to $4.7 billion, an
increase of 14.7% as compared to $4.1 billion for fiscal
1996. Tourism also contributes significantly to the
island economy, accounting for $2.0 billion of gross
domestic product in fiscal 1997.
The present administration has developed and is
implementing a new economic development program which is
based on the premise that the private sector should
provide the primary impetus for economic development and
growth. This new program, which is referred to as the
New Economic Model, promotes changing the role of the
Government from one of being a provider of most basic
services to that of a facilitator for private sector
initiatives and encourages private sector investment by
reducing Government-imposed regulatory restraints.
The New Economic Model contemplates the development of
initiatives that will foster private investment in, and
private management of, sectors that are served more
efficiently and effectively by the private enterprise.
One of these initiatives has been the adoption of a new
tax code intended to expand the tax base, reduce top
personal and corporate tax rates, and simplify the tax
system. Another initiative is the improvement and
expansion of Puerto Rico's infrastructure to facilitate
private sector development and growth, such as the
construction of the water pipeline and cogeneration
facilities described below and the construction of a
light rail system for the San Juan metropolitan area.
The New Economic Model also seeks to identify and
promote areas in which Puerto Rico can compete more
effectively in the global markets. Tourism has been
identified as one such area because of its potential for
job creation and contribution to the gross product. In
1993, a new Tourism Incentives Act and a Tourism
Development Fund were implemented in order to provide
special tax incentives and financing for the development
of new hotel projects and the tourism industry. As a
result of these initiatives, new hotels have been
constructed or are under construction which have
increased the number of hotel rooms on the island from
8,415 in fiscal 1992 to 10,877 at the end of fiscal 1997
and to a projected 11,972 by the end of fiscal 1998.
The New Economic Model also seeks to reduce the size of
the Government's direct contribution to gross domestic
product. As part of this goal, the Government has
transferred certain Governmental operations and sold a
number of its assets to private parties. Among these
are: (i) the Government sold the assets of the Puerto
Rico Maritime Authority; (ii) the Government executed a
five-year management agreement for the operation and
management of the Aqueducts and Sewer Authority by a
private company; (iii) the Aqueducts and Sewer Authority
executed a construction and operating agreement with a
private consortium for the design, construction, and
operation of an approximately 75 million gallon per day
water pipeline to the San Juan metropolitan area from
the Dos Bocas reservoir in Utuado; (iv) the Electric
Power Authority executed power purchase contracts with
private power producers under which two cogeneration
plants (with a total capacity of 800 megawatts) will be
constructed; (v) the Corrections Administration entered
into operating agreements with two private companies for
the operation of three new correctional facilities; (vi)
the Government entered into a definitive agreement to
sell certain assets of a pineapple juice processing
business and sold certain mango growing operations;
(vii) the Government is in the process of transferring
to local sugar cane growers certain sugar processing
facilities; (viii) the Government sold two hotel
properties and is currently negotiating the sale of a
complex consisting of two hotels and a convention
center; and (ix) the Government has announced its
intention to sell the Puerto Rico Telephone Company and
is currently involved in the sale process.
One of the goals of the Rossello administration is to
change Puerto Rico's public health care system from one
in which the Government provides free health services to
low income individuals through public health facilities
owned and administered by the Government to one in which
all medical services are provided by the private sector
and the Government provides comprehensive health
insurance coverage for qualifying (generally low income)
Puerto Rico residents. Under this new system, the
Government selects, through a bidding system, one
private health insurance company in each of several
designated regions of the island and pays such insurance
company the insurance premium for each eligible
beneficiary within such region. This new health
insurance system is now covering 61 municipalities out
of a total of 78 on the island. It is expected that 11
municipalities will be added by the end of fiscal 1998
and 5 more by the end of fiscal 1999. The total cost of
this program will depend on the number of municipalities
included in the program, the number of participants
receiving coverage, and the date coverage commences. As
of December 31, 1997, over 1.1 million persons were
participating in the program at an estimated annual cost
to Puerto Rico for fiscal 1998 of approximately $672
million. In conjunction with this program, the operation
of certain public health facilities has been transferred
to private entities. The Government's current
privatization plan for health facilities provides for
the transfer of ownership of all health
facilities to private entities. The Government sold six
health facilities to private companies and is currently
in negotiations with other private companies for the
sale of thirteen health facilities to such companies.
One of the factors assisting the development of the
manufacturing sector in Puerto Rico has been the federal
and Commonwealth tax incentives available, particularly
those under the Puerto Rico Industrial Incentives
Program and Sections 30A and 936 of the Internal Revenue
Code 1986, as amended (the "Code").
Since 1948, Puerto Rico has promulgated various
industrial incentives laws designed to stimulate
industrial investment. Under these laws, companies
engaged in manufacturing and certain other designated
activities were eligible to receive full or partial
exemption from income, property, and other taxes. The
most recent of these laws is Act No. 135 of December 2,
1997 (the "1998 Tax Incentives Law").
The benefits provided by the 1998 Tax Incentives Law are
available to new companies as well as companies
currently conducting tax-exempt operations in Puerto
Rico that choose to renegotiate their existing tax
exemption grant. Activities eligible for tax exemption
include manufacturing, certain services performed for
markets outside Puerto Rico, the production of energy
from local renewable sources for consumption in Puerto
Rico, and laboratories for scientific and industrial
research. For companies qualifying thereunder, the 1998
Tax Incentives Law imposes income tax rates ranging from
2% to 7%. In addition, it grants 90% exemption from
property taxes, 100% exemption from municipal license
taxes during the first eighteen months of operation and
between 80% and 60% thereafter, and 100% exemption from
municipal excise taxes. The 1998 Tax Incentives Law also
provides various special deductions designated to
stimulate employment and productivity, research and
development, and capital investment in Puerto Rico.
Under the 1998 Tax Incentives Law, companies are able to
repatriate or distribute their profits free of tollgate
taxes. In addition, passive income derived from
designated investments will continue to be fully exempt
from income and municipal license taxes. Individual
shareholders of an exempted business will be allowed a
credit against their Puerto Rico income taxes equal to
30% of their proportionate share in the exempted
business' income tax liability. Gain from the sale or
exchange of shares of an exempted business by its
shareholders during the exemption period will be subject
to a 4% income tax rate.
For many years, U.S. companies operating in Puerto Rico
enjoyed a special tax credit that was available under
Section 936 of the Code. Originally, the credit provided
an effective 100% federal tax exemption for operating
and qualifying investment income from Puerto Rico
sources. Amendments to Section 936 made in 1993 (the
"1993 Amendments") instituted two alternative methods
for calculating the tax credit and limited the amount of
the credit that a qualifying company could claim. These
limitations are based on a percentage of qualifying
income (the "percentage of income limitation") and on
qualifying expenditures on wages and other wage related
benefits (the "economic activity limitation", also known
as the "wage credit limitation"). As a result of
amendments incorporated in the Small Business Job
Protection Act of 1996 enacted by the U.S. Congress and
signed into law by President Clinton on August 20, 1996
(the "1996 Amendments"), the tax credit, as described
below, is now being phased out over a ten-year period
for existing claimants and is no longer available for
corporations that established operations in Puerto Rico
after October 13, 1995 (including existing Section 936
Corporations (as defined below) to the extent
substantially new operations are established in Puerto
Rico). The 1996 Amendments also moved the credit based
on the economic activity limitation to Section 30A of
the Code and phased it out over 10 years. In addition,
the 1996 Amendments eliminated the credit previously
available for income derived from certain qualified
investments in Puerto Rico. The Section 30A credit and
the remaining Section 936 credit are discussed below.
Section30A. The 1996 Amendments added a new Section 30A
to the Code. Section 30A permits a "qualifying domestic
corporation" ("QDC") that meets certain gross income
tests (which are similar to the 80% and 75% gross income
tests of Section 936 of the Code discussed below) to
claim a credit (the "Section 30A credit") against the
federal income tax imposed on taxable income derived
from sources outside the United States from the active
conduct of a trade or business in Puerto Rico or from
the sale of substantially all the assets used in such
business ("possession income").
A QDC is a U.S. corporation which (i) was actively
conducting a trade or business in Puerto Rico on October
13, 1995, (ii) had a Section 936 election in effect for
its taxable year that included October 13, 1995, (iii)
does not have in effect an election to use the
percentage limitation of Section 936(a)(4)(B) of the
Code, and (iv) does not add a "substantial new line of
business."
The Section 30A credit is limited to the sum of (i) 60%
of qualified possession wages as defined in the Code,
which includes wages up to 85% of the maximum earnings
subject to the OASDI portion of Social Security taxes
plus an allowance for fringe benefits of 15% of
qualified possession wages, (ii) a specified percentage
of depreciation deductions ranging between 15% and 65%,
based on the class life of tangible property, and (iii)
a portion of Puerto Rico income taxes paid by the QDC,
up to a 9% effective tax rate (but only if the QDC does
not elect the profit-split method for allocating income
from intangible property).
A QDC electing Section 30A of the Code may compute the
amount of its active business income, eligible for the
Section 30A Credit, by using either the cost sharing
formula, the profit-split formula, or the cost-plus
formula, under the same rules and guidelines prescribed
for such formulas as provided under Section 936 (see
discussion below). To be eligible for the first two
formulas, the QDC must have a significant presence in
Puerto Rico.
In the case of taxable years beginning after December
31, 2001, the amount of possession income that would
qualify for the Section 30A credit would be subject to
a cap based on the QDC's possession income for an
average adjusted base period ending before October 14,
1995.
Section 30A applies only to taxable years beginning
after December 31, 1995 and before January 1, 2006.
Section 936. Under Section 936 of the Code, as amended
by the 1996 Amendments, and as an alternative to the
Section 30A credit, U.S. corporations that meet certain
requirements and elect its application ("Section 936
Corporations") are entitled to credit against their U.S.
corporate income tax, the portion of such tax
attributable to income derived from the active conduct
of a trade or business within Puerto Rico ("active
business income") and from the sale or exchange of
substantially all assets used in the active conduct of
such trade or business. To qualify under Section 936 in
any given taxable year, a corporation must derive for
the three-year period immediately preceding the end of
such taxable year (i) 80% or more of its gross income
from sources within Puerto Rico and (ii) 75% or more of
its gross income from the active conduct of a trade or
business in Puerto Rico.
Under Section 936, a Section 936 Corporation may elect
to compute its active business income, eligible for the
Section 936 credit, under one of three formulas: (A) a
cost-sharing formula, whereby it is allowed to claim all
profits attributable to manufacturing intangibles, and
other functions carried out in Puerto Rico, provided it
contributes to the research and development expenses of
its affiliated group or pays certain royalties; (B) a
profit-split formula, whereby it is allowed to claim 50%
of the net income of its affiliated group from the sale
of products manufactured in Puerto Rico; or (C) a cost-
plus formula, whereby it is allowed to claim a
reasonable profit on the manufacturing costs incurred in
Puerto Rico. To be eligible for the first two formulas,
the Section 936 Corporation must have a significant
business presence in Puerto Rico for purposes of the
Section 936 rules.
As a result of the 1993 Amendments and the 1996
Amendments, the Section 936 credit is only available to
companies that elect the percentage of income limitation
and is limited in amount to 40% of the credit allowable
prior to the 1993 Amendments, subject to a five-year
phase-in period from 1994 to 1998 during which period
the percentage of the allowable credit is reduced from
60% to 40%.
In the case of taxable years beginning on or after 1998,
the possession income subject to the Section 936 credit
will be subject to a cap based on the Section 936
Corporation's possession income for an average adjusted
base period ending on October 14, 1995. The Section 936
credit is eliminated for taxable years beginning in
2006.
Proposal to Extend the Phaseout of Section 30A. During
1997, the Government of Puerto Rico proposed to Congress
the enactment of a new permanent federal incentive
program similar to that provided under Section 30A. Such
a program would provide U.S. companies a tax credit
based on qualifying wages paid and other wage-related
expenses, such as fringe benefits, as well as
depreciation expenses for certain tangible assets and
research and development expenses. Under the Governor's
proposal, the credit granted to qualifying companies
would continue in effect until Puerto Rico shows, among
other things, substantial economic improvements in terms
of certain economic parameters. The fiscal 1998 budget
submitted by President Clinton to Congress in February
1997 included a proposal to modify Section 30A to (i)
extend the availability of the Section 30A credit
indefinitely; (ii) make it available to companies
establishing operations in Puerto Rico after October 13,
1995; and (iii) eliminate the income cap. Although this
proposal, was not included in the final fiscal 1998
federal budget, President Clinton's fiscal 1999 budget
submitted to Congress again included these modifications
to Section 30A. While the Government of Puerto Rico
plans to continue lobbying for this proposal, it is not
possible at this time to predict whether the Section 30A
credit will be so modified.
Outlook. It is not possible at this time to determine
the long-term effect on the Puerto Rico economy of the
enactment of the 1996 Amendments. The Government of
Puerto Rico does not believe there will be short-term or
medium-term material adverse effects on Puerto Rico's
economy as a result of the enactment of the 1996
Amendments. The Government of Puerto Rico further
believes that during the phase-out period sufficient
time exists to implement additional incentive programs
to safeguard Puerto Rico's competitive position.
Alternative Minimum Tax
Under current federal income tax law, (1) interest on
tax-exempt municipal securities issued after August 7,
1986 which are "specified private activity bonds," and
the proportionate share of any exempt-interest dividend
paid by a regulated investment company which receives
interest from such specified private activity bonds,
will be treated as an item of tax preference for
purposes of the alternative minimum tax ("AMT") imposed
on individuals and corporations, though for regular
Federal income tax purposes such interest will remain
fully tax-exempt, and (2) interest on all tax-exempt
obligations will be included in "adjusted current
earnings" of corporations for AMT purposes. Such
private activity bonds ("AMT-Subject bonds"), which
include industrial development bonds and bonds issued to
finance such projects as airports, housing projects,
solid waste disposal facilities, student loan programs
and water and sewage projects, have provided, and may
continue to provide, somewhat higher yields than other
comparable municipal securities.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with
taxing power will be obligated with respect to AMT-
Subject bonds. AMT-Subject bonds are in most cases
revenue bonds and do not generally have the pledge of
the credit or the taxing power, if any, of the issuer of
such bonds. AMT-Subject bonds are generally limited
obligations of the issuer supported by payments from
private business entities and not by the full faith and
credit of a state or any governmental subdivision.
Typically the obligation of the issuer of AMT-Subject
bonds is to make payments to bond holders only out of
and to the extent of, payments made by the private
business entity for whose benefit the AMT-Subject bonds
were issued. Payment of the principal and interest on
such revenue bonds depends solely on the ability of the
user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real
and personal property so financed as security for such
payment. It is not possible to provide specific detail
on each of these obligations in which Fund assets may be
invested.
Risk of Concentration In a Single State
The primary purpose of investing in a portfolio of a
single state's municipal securities is the special tax
treatment accorded the state's resident individual
investors. However, payment of interest and
preservation of principal is dependent upon the
continuing ability of the state's issuers and/or
obligors on state, municipal and public authority debt
obligations to meet their obligations thereunder.
Investors should be aware of certain factors that might
affect the financial condition of issuers of municipal
securities, consider the greater risk of the
concentration of a fund versus the safety that comes
with a less concentrated investment portfolio and
compare yields available in portfolios of the relevant
state's issues with those of more diversified
portfolios, including out-of-state issues, before making
an investment decision.
Municipal securities in which a fund's assets are
invested may include debt obligations of the
municipalities and other subdivisions of the relevant
state issued to obtain funds for various public
purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways,
schools, streets and water and sewer works. Other
purposes for which municipal securities may be issued
include the obtaining of funds to lend to public or
private institutions for the construction of facilities
such as educational, hospital, housing, and solid waste
disposal facilities. The latter, including most AMT-
Subject bonds, are generally payable from private
sources which, in varying degrees, may depend on local
economic conditions, but are not necessarily affected by
the ability of the state and its political subdivisions
to pay their debts. It is not possible to provide
specific detail on each of these obligations in which
fund assets may be invested. However, all such
securities, the payment of which is not a general
obligation of an issuer having general taxing power,
must satisfy, at the time of an acquisition by the fund,
the minimum rating(s). See "Appendix A: Bond and
Commercial Paper Ratings" for a description of ratings
and rating criteria. Some municipal securities may be
rated based on a "moral obligation" contract which
allows the municipality to terminate its obligation by
deciding not to make an appropriation. Generally, no
legal remedy is available against the municipality that
is a party to the "moral obligation" contract in the
event of such non-appropriation
Municipal Market Volatility. Municipal securities can
be significantly affected by political changes as well
as uncertainties in the municipal market related to
taxation, legislative changes, or the rights of
municipal security holders. Because many municipal
securities are issued to finance similar projects,
especially those relating to education, health care,
transportation and utilities, conditions in those
sectors can affect the overall municipal market. In
addition, changes in the financial condition of an
individual municipal insurer can affect the overall
municipal market.
Interest Rate Changes. Debt securities have varying
levels of sensitivity to changes in interest rates. In
general, the price of a debt security can fall when
interest rates rise and can rise when interest rates
fall. Securities with longer maturities can be more
sensitive to interest rate changes. In other words, the
longer the maturity of a security, the greater the
impact a change in interest rates could have on the
security's price. In addition, short-term and long-term
interest rates do not necessarily move in the same
amount or the same direction. Short-term securities tend
to react to changes in short-term interest rates, and
long-term securities tend to react to changes in long-
term interest rates.
Issuer-Specific Changes. Changes in the financial
condition of an issuer, changes in specific economic or
political conditions that affect a particular type of
security or issuer, and changes in general economic or
political conditions can affect the credit quality or
value of an issuer's securities. Lower-quality debt
securities (those of less than investment-grade quality)
tend to be more sensitive to these changes than higher-
quality debt securities. Entities providing credit
support or a maturity-shortening structure also can be
affected by these types of changes. Municipal securities
backed by current or anticipated revenues from a
specific project or specific assets can be negatively
affected by the discontinuance of the taxation
supporting the project or assets or the inability to
collect revenues for the project or from the assets. If
the Internal Revenue Service determines an issuer of a
municipal security has not complied with applicable tax
requirements, interest from the security could become
taxable and the security could decline significantly in
value. In addition, if the structure of a security fails
to function as intended, interest from the security
could become taxable or the security could decline in
value.
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 fund's
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.
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. For the 1996, 1997 and
1998 fiscal years, the fund has paid no brokerage
commissions.
Allocation of transactions, including their frequency,
to various dealers is determined by the manager 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 manager 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
manager, and the fees of the manager are not reduced as
a consequence of its of such supplemental information.
Such information may be useful to the manager 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 manager
in carrying out its obligations to the fund.
The fund will not purchase Exempt Obligations during the
existence of any underwriting or selling group relating
thereto of which Salomon 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 Salomon 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 manager, 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
manager 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 manager 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 1996, 1997 and 1998
fiscal years, the fund's portfolio turnover rates were
23%, 58% and 51%, respectively.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for
purchase. See the prospectus for a discussion of
factors to consider in selecting which Class of shares
to purchase.
Class A Shares. Class A shares are sold to investors at
the public offering price, which is the net asset value
plus an initial sales charge as follows:
Amount of
Investment
Sales Charge as
a %
Of Transaction
Sales Charge as
a %
of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
4.00%
4.17%
3.60%
$ 25,000 - 49,999
3.50
3.63
3.15
50,000 99,999
3.00
3.09
2.70
100,000 249,999
2.50
2.56
2.25
250,000 499,999
1.50
1.52
1.35
500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more will
be made at net asset value without any initial sales
charge, but will be subject to a deferred sales charge
of 1.00% on redemptions made within 12 months of
purchase. The deferred sales charge on Class A shares
is payable to Salomon Smith Barney, which compensates
Salomon Smith Barney Financial Consultants and other
dealers whose clients make purchases of $500,000 or
more. The deferred sales charge is waived in the same
circumstances in which the deferred sales charge
applicable to Class B and Class L shares is waived.
See "Purchase of Shares-Deferred Sales Charge
Alternatives" and "Purchase of Shares-Waivers of
Deferred Sales Charge."
Members of 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. 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.
Class B Shares. Class B shares are sold without an
initial sales charge but are subject to a deferred sales
charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial
sales charge of 1.00% (which is equal to 1.01% of the
amount invested) and are subject to a deferred sales
charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below. Until June 22, 2001
purchases of Class L shares by investors who were
holders of Class C shares of the fund on June 12, 1998
will not be subject to the 1% initial sales charge.
Class Y Shares. Class Y shares are sold without an
initial sales charge or deferred sales charge and are
available only to investors investing a minimum of
$15,000,000 (except purchases of Class Y shares by Smith
Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount).
General
Investors may purchase shares from a Salomon Smith
Barney Financial Consultant or a Dealer Representative.
In addition, certain investors, including qualified
retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the
fund. When purchasing shares of the fund, investors
must specify whether the purchase is for Class A, Class
B, Class L or Class Y shares. Salomon Smith Barney and
Dealer Representatives may charge their customers an
annual account maintenance fee in connection with a
brokerage account through which an investor purchases or
holds shares. Accounts held directly at First Data
Investor Services Group, Inc. ("First Data" or "transfer
agent") are not subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may
open an account in the fund by making an initial
investment of at least $1,000 for each account, in the
fund. Investors in Class Y shares may open an account by
making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the fund through
the Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A,
Class B and Class L shares and subsequent investment
requirement for all Classes is $25. For shareholders
purchasing shares of the fund through the Systematic
Investment Plan on a quarterly basis, the minimum
initial investment required for Class A, Class B and
Class L shares and the subsequent investment requirement
for all Classes is $50. There are no minimum investment
requirements for Class A shares for employees of
Citigroup and its subsidiaries, including Salomon Smith
Barney, unitholders who invest distributions from a Unit
Investment Trust ("UIT") sponsored by Salomon Smith
Barney, and Directors/Trustees of any of the Smith
Barney Mutual Funds, and their spouses and children. 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 First Data. It is not
recommended that the Fund be used as a vehicle for
Keogh, IRA or other qualified retirement plans.
Purchase orders received by the fund or a Salomon Smith
Barney Financial Consultant prior to the close of
regular trading on the NYSE, on any day the fund
calculates its net asset value, are priced according to
the net asset value determined on that day (the ''trade
date''). Orders received by a Dealer Representative
prior to the close of regular trading on the NYSE on any
day the fund calculates its net asset value, are priced
according to the net asset value determined on that day,
provided the order is received by the fund or the fund's
agent prior to its close of business. For shares
purchased through Salomon Smith Barney or a Dealer
Representative purchasing through Salomon Smith Barney,
payment for shares of the fund is due on the third
business day after the trade date. In all other cases,
payment must be made with the purchase order.
Systematic Investment Plan. Shareholders may make
additions to their accounts at any time by purchasing
shares through a service known as the Systematic
Investment Plan. Under the Systematic Investment Plan,
Salomon Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly
basis or at least $50 on a quarterly basis to charge the
shareholder's account held with a bank or other
financial institution on a monthly or quarterly basis as
indicated by the shareholder, to provide for systematic
additions to the shareholder's fund account. A
shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon
Smith Barney or First Data. The Systematic Investment
Plan also authorizes Salomon Smith Barney to apply cash
held in the shareholder's Salomon Smith Barney brokerage
account or redeem the shareholder's shares of a Smith
Barney money market fund to make additions to the
account. Additional information is available from the
fund or a Salomon Smith Barney Financial Consultant or
a Dealer Representative.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A
shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i)
Board Members and employees of Citigroup and its
subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including
retired Board Members and employees); the immediate
families of such persons (including the surviving spouse
of a deceased Board Member or employee); and to a
pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such
sales are made upon the assurance of the purchaser that
the purchase is made for investment purposes and that
the securities will not be resold except through
redemption or repurchase; (b) offers of Class A shares
to any other investment company to effect the
combination of such company with the fund by merger,
acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Salomon
Smith Barney Financial Consultant (for a period up to 90
days from the commencement of the Financial Consultant's
employment with Salomon Smith Barney), on the condition
the purchase of Class A shares is made with the proceeds
of the redemption of shares of a mutual fund which (i)
was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d)
purchases by shareholders who have redeemed Class A
shares in the fund (or Class A shares of another Smith
Barney Mutual Fund that is offered with a sales charge)
and who wish to reinvest their redemption proceeds in
the fund, provided the reinvestment is made within 60
calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory
subsidiaries of Citigroup; (f) investments of
distributions from a UIT sponsored by Salomon Smith
Barney; and (g) purchases by investors participating in
a Salomon 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 other Smith Barney Mutual Funds that are
offered with a sales charge as currently listed under
''Exchange Privilege'' then held by such person and
applying the sales charge applicable to such aggregate.
In order to obtain such discount, the purchaser must
provide sufficient information at the time of purchase
to permit verification that the purchase qualifies for
the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time
with respect to all shares purchased thereafter.
Letter of Intent - Class A Shares. A Letter of Intent
for an amount of $50,000 or more provides an opportunity
for an investor to obtain a reduced sales charge by
aggregating investments over a 13 month period, provided
that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the
''Amount of Investment'' as referred to in the preceding
sales charge table includes (i) all Class A shares of
the fund and other Smith Barney Mutual Funds offered
with a sales charge acquired during the term of the
letter plus (ii) the value of all Class A shares
previously purchased and still owned. Each investment
made during the period receives the reduced sales charge
applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the
investor must pay the difference between the sales
charges applicable to the purchases made and the charges
previously paid, or an appropriate number of escrowed
shares will be redeemed. The term of the Letter will
commence upon the date the Letter is signed, or at the
options of the investor, up to 90 days before such date.
Please contact a Salomon Smith Barney Financial
Consultant or First Data to obtain a Letter of Intent
application.
Letter of Intent - Class Y Shares. A Letter of Intent
may also be used as a way for investors to meet the
minimum investment requirement for Class Y shares
(except purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no
minimum purchase amount). Such investors must make an
initial minimum purchase of $5,000,000 in Class Y shares
of the fund and agree to purchase a total of $15,000,000
of Class Y shares of the fund within 13 months from the
date of the Letter. If a total investment of $15,000,000
is not made within the 13-month period, all Class Y
shares purchased to date will be transferred to Class A
shares, where they will be subject to all fees
(including a service fee of 0.15%) and expenses
applicable to the fund's Class A shares, which may
include a deferred sales charge of 1.00%. Please contact
a Salomon Smith Barney Financial Consultant or First
Data for further information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are: (a) Class B
shares; (b) Class L shares; and (c) Class A shares that
were purchased without an initial sales charge but are
subject to a deferred sales charge. A deferred sales
charge may be imposed on certain redemptions of these
shares.
Any applicable deferred sales charge will be assessed on
an amount equal to the lesser of the original cost of
the shares being redeemed or their net asset value at
the time of redemption. Deferred Sales Charge Shares
that are redeemed will not be subject to a deferred
sales charge to the extent the value of such shares
represents: (a) capital appreciation of fund assets; (b)
reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more
than five years after their purchase; or (d) with
respect to Class L shares and Class A shares that are
Deferred Sales Charge Shares, shares redeemed more than
12 months after their purchase.
Class L shares and Class A shares that are Deferred
Sales Charge Shares are subject to a 1.00% deferred
sales charge if redeemed within 12 months of purchase.
In circumstances in which the deferred sales charge is
imposed on Class B shares, the amount of the charge will
depend on the number of years since the shareholder made
the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the number
of years since a purchase payment, all purchase payments
made during a month will be aggregated and deemed to
have been made on the last day of the preceding Salomon
Smith Barney statement month. The following table sets
forth the rates of the charge for redemptions of Class
B shares by shareholders.
Year Since Purchase Payment Was Made
Deferred sales charge
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A
shares eight years after the date on which they were
purchased and thereafter will no longer be subject to
any distribution fees. There will also be converted at
that time such proportion of Class B Dividend Shares
owned by the shareholders as the total number of his or
her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder.
The length of time that Deferred Sales Charge Shares
acquired through an exchange have been held will be
calculated from the date the shares exchanged were
initially acquired in one of the other Smith Barney
Mutual Funds, and fund shares being redeemed will be
considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income
tax purposes, the amount of the deferred sales charge
will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount
of any deferred sales charge will be paid to Salomon
Smith Barney.
To provide an example, assume an investor purchased 100
Class B shares of the fund at $10 per share for a cost
of $1,000. Subsequently, the investor acquired 5
additional shares of the fund through dividend
reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or
her investment. Assuming at the time of the redemption
the net asset value had appreciated to $12 per share,
the value of the investor's shares would be $1,260 (105
shares at $12 per share). The deferred sales charge
would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested
dividend shares ($60). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged
at a rate of 4.00% (the applicable rate for Class B
shares) for a total deferred sales charge of $9.60.
Waivers of Deferred Sales Charge
The deferred sales charge will be waived on: (a)
exchanges (see ''Exchange Privilege''); (b) automatic
cash withdrawals in amounts equal to or less than 1.00%
per month of the value of the shareholder's shares at
the time the withdrawal plan commences (see ''Automatic
Cash Withdrawal Plan'') (however, automatic cash
withdrawals in amounts equal to or less than 2.00% per
month of the value of the shareholder's shares will be
permitted for withdrawal plans established prior to
November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the
shareholder; (d) involuntary redemptions; and
(e) redemptions of shares to effect a combination of the
fund with any investment company by merger, acquisition
of assets or otherwise. In addition, a shareholder who
has redeemed shares from other Smith Barney Mutual Funds
may, under certain circumstances, reinvest all or part
of the redemption proceeds within 60 days and receive
pro rata credit for any deferred sales charge imposed on
the prior redemption.
Deferred sales charge waivers will be granted subject to
confirmation (by Salomon Smith Barney in the case of
shareholders who are also Salomon Smith Barney clients
or by First Data in the case of all other shareholders)
of the shareholder's status or holdings, as the case may
be.
Volume Discounts
The schedule of sales charges on Class A shares
described in the prospectus applies to purchases made by
any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual's spouse
and his or her children purchasing shares for their own
account; (c) a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary
account; and (d) a trustee or other professional
fiduciary (including a bank, or an investment adviser
registered with the SEC under the Investment Advisers
Act of 1940, as amended) purchasing shares of the fund
for one or more trust estates or fiduciary accounts.
Purchasers who wish to combine purchase orders to take
advantage of volume discounts on Class A shares should
contact a Salomon Smith Barney Financial Consultant.
DETERMINATION OF NET ASSET VALUE
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, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when
one of these holidays falls on a Saturday or Sunday,
respectively. Because of the differences in
distribution fees and class-specific expenses, the per
share net asset value of each class may differ. The
following is a description of the procedures used by the
fund in valuing its assets.
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 Board of Trustees. A security
that is primarily traded on a domestic or foreign
exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at
the mean between the bid and asked price. Over-the-
counter securities are valued at the mean between the
bid and asked price. If market quotations for those
securities are not readily available, they are valued at
fair value, as determined in good faith by the fund's
Board of Trustees. An option is generally valued at the
last sale price or, in the absence of a last sale price,
the last offer price.
U.S. government securities will be valued at the mean
between the closing bid and asked prices 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 investments maturing in 60 days or less are
valued at amortized cost whenever the Board of Trustees
determines that amortized cost reflects fair value of
those investments. Amortized cost valuation involves
valuing an instrument at its cost initially 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
instrument.
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.
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 L 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. 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 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 deferred
sales charge. 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 redemption must specify the Class being
redeemed. In the event of a failure to specify which
Class, or if the investor owns fewer shares of the Class
than specified, the redemption request will be delayed
until the transfer agent receives further instructions
from Salomon Smith Barney, or if the shareholder's
account is not with Salomon Smith Barney, from the
shareholder directly. The redemption proceeds will be
remitted on or before the third business day following
receipt of proper tender, except on any days on which
the NYSE is closed or as permitted under the 1940 Act in
extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Salomon Smith
Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific
instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or
more.
Shares held by Salomon Smith Barney as custodian must be
redeemed by submitting a written request to a Salomon
Smith Barney Financial Consultant. Shares other than
those held by Salomon Smith Barney as custodian may be
redeemed through an investor's Financial Consultant,
Dealer Representative or by submitting a written request
for redemption to:
Smith Barney Massachusetts Municipals Fund
Class A, B, L 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 registered. If the shares to be redeemed were issued
in certificate form, the certificates must be endorsed
for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the 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.
Redemption proceeds will be mailed to an investor's
address of record. The transfer agent may require
additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed
properly received until the transfer agent receives all
required documents in proper form.
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. Retirement plan
accounts are eligible for automatic cash withdrawal
plans only where the shareholder is eligible to receive
qualified distributions and has an account value of at
least $5,000. The withdrawal plan will be carried over
on exchanges between Classes of a fund. Any applicable
deferred sales charge 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
deferred sales charge at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect
prior to November 7, 1994, any applicable deferred sales
charge will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the shareholder's
shares subject to the deferred sales charge.) For
further information regarding the automatic cash
withdrawal plan, shareholders should contact a Salomon
Smith Barney Financial Consultant.
Telephone Redemption and Exchange Program. Shareholders
who do not have a brokerage account may be eligible to
redeem and exchange shares by telephone. To determine if
a shareholder is entitled to participate in this
program, he or she should contact the transfer agent at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire
Authorization Form, along with a signature guarantee,
that will be provided by the transfer agent upon
request. (Alternatively, an investor may authorize
telephone redemptions on the new account application
with the applicant's signature guarantee when making
his/her initial investment in a fund.)
Redemptions. Redemption requests of up to $10,000 of
any class or classes of shares of a fund may be made by
eligible shareholders by calling the transfer agent at
1-800-451-2010. Such requests may be made between 9:00
a.m. and 5:00 p.m. (Eastern 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 complete 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 shares 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 1-
800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern
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 instructions communicated
by telephone that are reasonably believed to be genuine.
The fund and its agents will employ procedures designed
to verify the identity of the caller and legitimacy of
instructions (for example, a shareholder's name and
account number will be required and phone calls may be
recorded). The fund reserves the right to suspend,
modify or discontinue the telephone redemption and
exchange program or to impose a charge for this service
at any time following at least seven (7) days' prior
notice to shareholders.
Redemptions in Kind. In conformity with applicable
rules of the SEC, redemptions may be paid in portfolio
securities, in cash or any combination of both, as the
Board of Trustees may deem advisable; however, payments
shall be made wholly in cash unless the Board of
Trustees believes economic conditions exist that would
make such a practice detrimental to the best interests
of the fund and its remaining shareholders. If a
redemption is paid in portfolio securities, such
securities will be valued in accordance with the
procedures described under "Determination of Net Asset
Value" in the Prospectus and a shareholder would incur
brokerage expenses if these securities were then
converted to cash.
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 deferred sales charge 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 deferred sales charge 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 Salomon Smith
Barney Financial Consultant. Withdrawal Plans should be
set up with a Salomon 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. For additional
information, shareholders should contact a Salomon Smith
Barney Financial Consultant.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser and Administrator - SSBC
SSBC (formerly known as Mutual Management Corp.) serves
as investment adviser to the fund pursuant to an
investment advisory agreement (the "Investment Advisory
Agreement") with the trust which was approved by the
Board of Trustees, including a majority of trustees who
are not "interested persons" of the trust or the
manager. The manager is a wholly owned subsidiary of
Salomon Smith Barney Holdings Inc. ("Holdings"), which
in turn, is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). Subject to the supervision and direction
of the trust's Board of Trustees, the manager manages
the fund's portfolio in accordance with the fund's
stated 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. The manager pays the
salary of any officer and employee who is employed by
both it and the trust. The manager bears all expenses in
connection with the performance of its services. SSBC
(through its predecessor entities) has been in the
investment counseling business since 1968 and renders
investment advice to a wide variety of individual,
institutional and investment company clients that had
aggregate assets under management as of January 31, 1999
in excess of $115 billion.
As compensation for investment advisory services, the
fund pays the manager 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, 1996, 1997 and 1998, the fund paid the manager net
of fee waivers and expense reimbursements, $134,709,
$202,259 and $189,712, respectively, in investment
advisory fees. For the fiscal years ended November 30,
1996 and 1997, the manager voluntarily waived investment
advisory fees of $36,129 and $26,561, respectively.
The manager also serves as administrator to the fund
pursuant to a written agreement (the "Administration
Agreement"). The services provided by the manager under
the Administration Agreement are described in the
prospectus under "Management.'' The manager 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 administrator SSBC: (a) assists in supervising all
aspects of the Fund's operations except those performed
by the fund's investment manager under its investment
advisory agreement; b) supplies the fund with office
facilities (which may be in SSBC's own offices),
statistical and research data, data processing services,
clerical, accounting and bookkeeping services,
including, but not limited to, the calculation of (i)
the net asset value of shares of the fund, (ii)
applicable contingent deferred sales charges and similar
fees and charges and (iii) distribution fees, internal
auditing and legal services, internal executive and
administrative services, and stationary and office
supplies; and (c) prepares reports to shareholders of
the fund, tax returns and reports to and filings with
the SEC and state blue sky authorities.
As compensation for administrative services rendered to
the fund, the manager receives a fee computed daily and
payable monthly at the following annual rates of average
daily net assets: 0.20% up to $500 million; and 0.18% in
excess of $500 million. For the fiscal year ended
November 30, 1996, the fund paid $89,806 (net of fee
waivers amounting to $24,086) in administration fees.
For the fiscal year ended November 30, 1997, the fund
paid the manager $99,811 (net of fee waivers amounting
to $17,707) in administration fees. For the fiscal year
ended November 30, 1998, the fund paid the manager
$126,474 in administration fees.
The fund bears expenses incurred in its operations
including: taxes, interest, brokerage fees and
commissions, if any; fees of trustees of the fund who
are not officers, directors, shareholders or employees
of Salomon Smith Barney or the manager; Securities and
Exchange Commission (the "SEC") fees and state Blue Sky
notice 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.
Auditors
KPMG LLP, independent auditors, 345 Park Avenue, New
York, New York 10154, have been selected to serve as
auditors of the fund and to render opinions on the
fund's financial statements for the fiscal year ended
November 30, 1999.
Distributor. CFBDS, Inc., located at 20 Milk Street,
Boston, Massachusetts 02109-5408 serves as the fund's
distributor pursuant to a written agreement dated
October 8, 1998 (the "Distribution Agreement") which was
approved by the fund's Board of Trustees, including a
majority of the Independent Trustees on July 15, 1998.
Prior to the merger of Travelers Group, Inc. and
Citicorp Inc. on October 8, 1998, Salomon Smith Barney
served as the fund's distributor. For the 1996 and 1997
fiscal years, Salomon Smith Barney, received $45,000 and
$68,000, respectively, in sales charges from the sale of
Class A shares, and did not reallow any portion thereof
to dealers. For the period December 1, 1997 through
October 7, 1998 the aggregate dollar amount of sales
charges on Class A shares was $55,400 all of which was
paid to Salomon Smith Barney. For the period October 8,
1998 through November 30, 1998 the aggregate dollar
amount of sales charges on Class A shares was $48,000,
$43,200 of which was paid to Salomon Smith Barney.
For the period June 12, 1998 through October 7, 1998 the
aggregate dollar amount of sales charges on Class L
shares was $1,000, all of which was paid to Salomon
Smith Barney. For the period October 8, 1998 through
November 30, 1998 the aggregate dollar amount of sales
charges on Class L shares was $2,000, $1,800 of which
was paid to Salomon Smith Barney.
For the fiscal years ended November 30, 1996, 1997 and
1998, Salomon Smith Barney or its predecessor received
from shareholders $56,000, $48,000 and $39,000,
respectively, in deferred sales charges on the
redemption of Class B shares. For the fiscal years
ended November 30, 1996, 1997 and 1998, Salomon Smith
Barney or its predecessor received from $1,000, $0 and
$1,000, respectively, in deferred sales charges on
redemption of Class L shares.
When payment is made by the investor before the
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 Salomon Smith Barney
may benefit from the temporary use of the funds. The
fund's Board of Trustees has been advised of the
benefits to Salomon Smith Barney resulting from these
settlement procedures and will take such benefits into
consideration when reviewing the Investment Management
Agreement for continuance.
Distribution Arrangements. To compensate Salomon Smith
Barney for the service it provides and for the expense
it bears, 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
Salomon 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 L shares.
In addition, the fund pays Salomon Smith Barney a
distribution fee with respect to Class B and Class L
shares primarily intended to compensate Salomon Smith
Barney for its initial expense of paying Financial
Consultants a commission upon sales of those shares.
The Class B and Class L distribution fee is calculated
at the annual rate of 0.50% and 0.55%, respectively, of
the value of the fund's average net assets attributable
to the shares of each Class.
For the fiscal year ended November 30, 1998, Salomon
Smith Barney incurred distribution expenses totaling
$178,073 consisting of approximately $11,820 for
advertising, $1,899 for printing and mailing of
prospectuses, $90,557 for support services, $72,507 to
Salomon Smith Barney Financial Consultants, and $1,290
in accruals for interest on the excess of Salomon Smith
Barney expenses incurred in distributing the fund's
shares over the sum of the distribution fees and
deferred sales charge received by Salomon Smith Barney
from the fund.
The following service and distribution fees were
incurred pursuant to a Distribution Plan during the
periods indicated:
Distribution Plan Fees
Fiscal Year
Ended
11/30/98
Fiscal Year
Ended 11/30/97
Fiscal Year
Ended
11/30/96
Class A
$ 50,498
$ 45,984
$ 42,635
Class B
$ 186,823
$ 180,545
$ 184,536
Class L*
$ 7,934
$ 2,291
$ 929
* Class L shares were called Class C shares until
June 12, 1998.
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote
of the Board of Trustees, including a majority of the
Independent Trustees. The Plan may not be amended to
increase the amount of the service and distribution fees
without shareholder approval, and all material
amendments of the Plan also must be approved by the
Trustees and Independent Trustees in the manner
described above. The Plan may be terminated with
respect to a Class of the fund at any time, without
penalty, by vote of a majority of the Independent
Trustees or by a vote of a majority of the outstanding
voting securities of the Class (as defined in the 1940
Act). Pursuant to the Plan, Salomon 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
The fund's net asset value per share is determined as of
close of regular trading on the NYSE, on each day that
the NYSE is open, by dividing value of the fund's net
assets attributable to each Class by the total number of
shares of that Class outstanding.
When, in judgement of the pricing service, quoted bid
prices for investments are readily available and are
representative of the bid side of the market, these
investments are valued at the mean between the quoted
bid and asked prices. Investments for which, in the
judgement of the pricing service, there is no readily
obtainable market quotation (which may contribute a
majority of the portfolio securities) are carried at
fair value of securities of similar type, yield
maturity. Pricing services generally determine value by
reference to transactions in municipal obligations,
quotations from municipal bond dealers, market
transaction in comparable securities and various
relationships between securities. Short-term
investments that mature in 60 days or less are valued at
amortized cost whenever the board of trustees determines
that amortized cost is fair value. Amortized cost
valuation involves valuing an instrument at its cost
initially 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. Securities and
other assets that are not priced by a pricing service
and for which market quotations are not available will
be valued in good faith at fair value by or under the
direction of the fund's Board of Trustees.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class of
the fund may be exchanged for shares of the same Class
of certain 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
L shares are subject to minimum investment requirements
and all shares are subject to the other requirements of
the fund into which exchanges are made.
Class B Exchanges. If a Class B shareholder wishes to
exchange all or a portion of his or her shares in any of
the funds imposing a higher deferred sales charge than
that imposed by the fund, the exchanged Class B shares
will be subject to the higher applicable deferred sales
charge. 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 L Exchanges. Upon an exchange, the new Class L
shares will be deemed to have been purchased on the same
date as the Class L shares of the fund that have been
exchanged.
Class A and Class 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 manager may determine that a pattern
of frequent exchanges is excessive and contrary to the
best interests of the fund's other shareholders. In this
event, 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 funds of the Smith Barney
Mutual Funds ordinarily available, which position the
shareholder would be expected to maintain for a
significant period of time. All relevant factors will be
considered in determining what constitutes an abusive
pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See ''Redemption of Shares'Telephone
Redemptions and Exchange Program.'' Exchanges will be
processed at the net asset value next determined.
Redemption procedures discussed 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 registration of
the shares of the fund exchanged, no signature guarantee
is required. An exchange involves a taxable redemption
of shares, subject to the tax treatment described in
"Dividends, Distributions and Taxes" below, followed by
a purchase of shares of a different fund. 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.
Additional Information Regarding Telephone Redemption
and Exchange Program
Neither the fund nor its agents will be liable for
instructions communicated by telephone that are
reasonably believed to be genuine. The fund or its
agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions
(for example, a shareholder's name and account number
will be required and phone calls may be recorded). The
fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange
program or to impose a charge for this service at any
time following at least seven (7) days' prior notice to
shareholders.
PERFORMANCE INFORMATION
From time to time, the fund may quote 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 data from the following industry
and financial publications: Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA
Today and The Wall Street Journal.
Yield and Equivalent Taxable Yield
A Class' 30-day yield figure described below is
calculated according to a formula prescribed by the SEC.
The formula can be expressed as follows:
YIELD =2 [(a-b +1)6-1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share
on the last day of the period.
For the purpose of determining the interest earned
(variable "a'' in the formula) on debt obligations that
were purchased by the fund at a discount or premium, the
formula generally calls for amortization of the discount
or premium. The amortization schedule will be adjusted
monthly to reflect changes in the market values of the
debt obligations.
The Fund's equivalent taxable 30-day yield for a Class
of shares is computed by dividing that portion of the
Class' 30-day yield which is tax-exempt by one minus a
stated income tax rate and adding the product to that
portion, if any, of the Class' yield that is not tax-
exempt.
The yields on municipal securities are dependent upon a
variety of factors, including general economic and
monetary conditions, conditions of the municipal
securities market, size of a particular offering,
maturity of the obligation offered and rating of the
issue. Investors should recognize that in periods of
declining interest rates the fund's yield for each Class
of shares will tend to be somewhat higher than
prevailing market rates, and in periods of rising
interest rates the fund's yield for each Class of shares
will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to the
fund from the continuous sale of its shares will likely
be invested in portfolio instruments producing lower
yields than the balance of the fund's portfolio, thereby
reducing the current yield of the fund. In periods of
rising interest rates, the opposite can be expected to
occur.
The fund's yield for Class A, Class B and Class L shares
for the 30-day period ended November 30, 1998 was 4.04%,
3.70% and 3.64%, respectively. The equivalent taxable
yield for Class A, Class B and Class L shares for that
same period was 8.41%, 7.64% and 7.52%, respectively,
assuming the payment of Federal income taxes at a rate
of 39.6% and Massachusetts taxes at a rate of 12%.
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):
3.35% for the one-year period ended
November 30, 1998.
5.27% for the five-year period ended
November 30, 1998.
7.84% per annum during the period from the
fund's commencement of operations on
December 21, 1987 through November 30,
1998.
A Class' average annual total return assumes that the
maximum applicable sales charge or deferred sales charge
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 7.66%, 6.13% and 8.25%,
respectively, for those same periods.
The fund's average annual total return for Class B
shares assuming the maximum applicable deferred 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):
2.55% for the one-year period ended
November 30, 1998.
5.43% for the five-year period ended
November 30, 1998.
6.64% per annum during the period from the
fund's commencement of operations on
November 6, 1992 through November 30, 1998.
Had the maximum applicable deferred sales charge had not
been deducted at the time of redemption, Class B's
average annual total return would have been 7.05%, 5.59%
and 6.64%, respectively, for the same periods.
The fund's average annual total return for Class L
shares assuming the maximum applicable deferred 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):
5.06% for the one-year period ended
November 30, 1998.
9.41% per annum during the period from the
fund's commencement of operations on
November 10, 1994 through November 30,
1998.
Had the maximum applicable deferred sales charge had not
been deducted at the time of redemption, Class L's
average annual total return for the one-year period
ended November 30, 1998 would have been 7.11%.
Aggregate Total Return
"Aggregate total return" represents the cumulative
change in the value of an investment in the Class for
the specified period and is 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):
3.35% for the one-year period ended
November 30, 1998.
29.3% for the five-year period ended
November 30, 1998.
128.53% for the period from the fund's
commencement of operations on December 21,
1987 through November 30, 1998.
A Class' aggregate total return assumes that the maximum
applicable sales charge or maximum applicable deferred
sales charge 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 7.66%, 34.67% and
138.15%, 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):
2.55% for the one-year period ended
November 30, 1998.
30.25% for the five-year period ended
November 30, 1998.
47.7% for the period from commencement of
operations on November 6, 1992 through
November 30, 1998.
If the maximum applicable deferred sales charge had not
been deducted at the time of redemption, Class B's
aggregate total return for the same periods would have
been 7.05%, 31.25% and 47.7%, respectively.
The fund's aggregate total return for Class L shares was
as follows for the period indicated (reflecting the
waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
6.11% for the one-year period ended
November 30, 1998.
45.46% for the period from commencement of
operations on November 10, 1994 through
November 30, 1998.
If the maximum applicable deferred sales charge had not
been deducted at the time of redemption, Class L's
aggregate total return for the one-year period ended
November 30, 1998 would have been 7.11%.
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. The fund's policy is to
declare and pay exempt-interest dividends monthly.
Dividends from net realized capital gains, if any, will
be distributed annually. The fund may also pay
additional dividends shortly before December 31 from
certain amounts of undistributed ordinary income and
capital gains, in order to avoid a Federal excise tax
liability. If a shareholder does not otherwise
instruct, exempt-interest dividends and capital gain
distributions will be reinvested automatically in
additional shares of the same Class at net asset value,
with no additional sales charge or deferred sales
charge.
The per share amounts of the exempt-interest dividends
on Class B and Class L shares may be lower than on Class
A and Class Y shares, mainly as a result of the
distribution fees applicable to Class B and Class L
shares. Similarly, the per share amounts of exempt-
interest dividends on Class A shares may be lower than
on Class Y shares, as a result of the service fee
attributable to Class A shares. Capital gain
distributions, if any, will be the same across all
Classes of fund shares (A, B, L and Y).
Taxes. The following is a summary of the material United
States federal income tax considerations regarding the
purchase, ownership and disposition of shares of the
fund. Each prospective shareholder is urged to consult
his own tax adviser with respect to the specific
federal, state and local consequences of investing in
the fund. The summary is based on the laws in effect on
the date of this SAI, which are subject to change.
The fund and its investments
As described 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 intends to continue to qualify to be treated as
a regulated investment company each taxable year under
the Code. To so qualify, the fund must, among other
things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the
sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward
contracts) derived with respect to its business of
investing in such stock, securities or currencies; and
(b) diversify its holdings so that, at the end of each
quarter of the fund's taxable year, (i) at least 50% of
the market value of the fund's assets is represented by
cash, securities of other regulated investment
companies, United States government securities and other
securities, with such other securities limited, in
respect of any one issuer, to an amount not greater than
5% of the fund's assets and not greater than 10% of the
outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested
in the securities (other than United States government
securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers
that the fund controls and are determined to be engaged
in the same or similar trades or businesses or related
trades or businesses.
As a regulated investment company, the fund will not be
subject to United States federal income tax on its net
investment income (i.e., income other than its net
realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any,
that it distributes to its shareholders, provided that
an amount equal to at least 90% of its investment
company taxable income (i.e., 90% of its taxable income
minus the excess, if any, of its net realized long-term
capital gains over its net realized short-term capital
losses (including any capital loss carryovers), plus or
minus certain other adjustments as specified in the
Code) and 90% of its net tax-exempt income for the
taxable year is distributed in compliance with the
Code's timing and other requirements but will be subject
to tax at regular corporate rates on any taxable income
or gains that it does not distribute.
The Code imposes a 4% nondeductible excise tax on the
fund to the extent it does not distribute by the end of
any calendar year at least 98% of its net investment
income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-
year period ending, as a general rule, on October 31 of
that year. For this purpose, however, any income or
gain retained by the fund that is subject to corporate
income tax will be considered to have been distributed
by year-end. In addition, the minimum amounts that must
be distributed in any year to avoid the excise tax will
be increased or decreased to reflect any
underdistribution or overdistribution, as the case may
be, from the previous year. The fund anticipates that
it will pay such dividends and will make such
distributions as are necessary in order to avoid the
application of this tax.
If, in any taxable year, the fund fails to qualify as a
regulated investment company under the Code or fails to
meet the distribution requirement, it would be taxed in
the same manner as an ordinary corporation and
distributions to its shareholders would not be
deductible by the fund in computing its taxable income.
In addition, in the event of a failure to qualify, the
fund's distributions, to the extent derived from the
fund's current or accumulated earnings and profits would
constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to
shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have
been treated in the shareholders' hands as tax-exempt
interest. If the fund fails to qualify as a regulated
investment company in any year, it must pay out its
earnings and profits accumulated in that year in order
to qualify again as a regulated investment company. In
addition, if the fund failed to qualify as a regulated
investment company for a period greater than one taxable
year, the fund may be required to recognize any net
built-in gains (the excess of the aggregate gains,
including items of income, over aggregate losses that
would have been realized if it had been liquidated) in
order to qualify as a regulated investment company in a
subsequent year.
The fund's transactions in municipal bond index and
interest rate futures contracts and options on these
futures contracts (collectively "section 1256
contracts") will be subject to special provisions of the
Code (including provisions relating to "hedging
transactions" and "straddles") that, among other things,
may affect the character of gains and losses realized by
the fund (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income
to the fund and defer fund losses. These rules could
therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a)
will require the fund to mark-to-market certain types of
the positions in its portfolio (i.e., treat them as if
they were closed out) and (b) may cause the fund to
recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary
to satisfy the distribution requirements for avoiding
income and excise taxes. The fund will monitor its
transactions, will make the appropriate tax elections
and will make the appropriate entries in its books and
records when it engages in these transactions in order
to mitigate the effect of these rules and prevent
disqualification of the fund as a regulated investment
company.
All section 1256 contracts held by the fund at the end
of its taxable year are required to be marked to their
market value, and any unrealized gain or loss on those
positions will be included in the fund's income as if
each position had been sold for its fair market value at
the end of the taxable year. The resulting gain or loss
will be combined with any gain or loss realized by the
fund from positions in section 1256 contracts closed
during the taxable year. Provided such positions were
held as capital assets and were not part of a "hedging
transaction" nor part of a "straddle," 60% of the
resulting net gain or loss will be treated as long-term
capital gain or loss, and 40% of such net gain or loss
will be treated as short-term capital gain or loss,
regardless of the period of time the positions were
actually held by the fund.
Taxation of 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, 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. In addition,
the receipt of the fund's dividends and distributions
may affect a foreign corporate shareholder's Federal
"branch profits" tax liability and 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 branch profits tax or the Federal "excess net
passive income" tax.
The fund does not expect to realize a significant amount
of capital gains. Net realized short-term capital gains
are taxable to a United States shareholder as ordinary
income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any,
that the fund designates as capital gains dividends are
taxable as long-term capital gains, whether paid in cash
or in shares and regardless of how long a shareholder
has held shares of the fund.
Upon the sale or exchange of his shares, a shareholder
will realize a taxable gain or loss equal to the
difference between the amount realized and his basis in
his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets
in the shareholder's hands, and will be long-term
capital gain or loss if the shares are held for more
than one year and short-term capital gain or loss if the
shares are held for one year or less. Any loss realized
on a sale or exchange will be disallowed to the extent
the shares disposed of are replaced, including
replacement through the reinvesting of dividends and
capital gains distributions in the fund, within a 61-day
period beginning 30 days before and ending 30 days after
the disposition of the shares. In such a case, the basis
of the shares acquired will be increased to reflect the
disallowed loss. Any loss realized by a shareholder on
the sale of a fund share held by the shareholder for six
months or less (to the extent not disallowed pursuant to
the six-month rule described above relating to exempt-
interest dividends) will be treated for United States
federal income tax purposes as a long-term capital loss
to the extent of any distributions or deemed
distributions of long-term capital gains received by the
shareholder with respect to such share.
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 (e.g., an 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, the disregarded portion of the
original sales charge 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
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.
Backup Withholding. The fund may be required to
withhold, for United States federal income tax purposes,
31% of (a) taxable dividends and distributions and (b)
redemption proceeds payable to shareholders who fail to
provide the fund with their correct taxpayer
identification number or to make required
certifications, or who have been notified by the IRS
that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup
withholding is not an additional tax and any amount
withheld may be credited against a shareholder's United
States federal income tax liabilities.
Notices. Shareholders will be notified annually by the
fund as to the United States federal income tax and
Massachusetts personal income tax status of the
dividends and distributions made by the fund to its
shareholders. 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. 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.
Massachusetts Taxation
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 material tax
consequences affecting the fund and its shareholders.
Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences
to them of an investment in the fund.
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 Federal Street, Boston,
Massachusetts 02110, serves as the fund's transfer
agent. Under the transfer agency agreement, First Data
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, First Data
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 Massachusetts 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 July 30, 1993 and
October 14, 1994, the fund changed its name to Smith
Barney Shearson Massachusetts Municipals Fund and Smith
Barney Massachusetts Municipals Fund, respectively.
Under Massachusetts's 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, 1998 is incorporated herein by reference in
its entirety. The annual report was filed on February
22, 1999, Accession Number 0000091155-99-000074.
OTHER INFORMATION
In an industry where the average portfolio manager has
seven years of experience (source: ICI, 1998), the
portfolio managers of Smith Barney Mutual Funds average
21 years in the industry and 15 years with the firm.
Smith Barney Mutual Funds offers more than 60 mutual
funds. We understand that many investors prefer an
active role in allocating the mix of funds in their
portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management
that can be tailored to suit each investor's unique
financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested
within their asset class and investment style,
enabling investors to make asset allocation
decisions in conjunction with their Salomon Smith
Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range
of equity and fixed income strategies that seek
to capture opportunities across asset classes and
investment styles using disciplined investment
approaches.
The Concert Allocation Series
As a fund of funds, investors can select a
Concert Portfolio that may help their investment
needs. As needs change, investors can easily
choose another long-term, diversified investment
from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed
for investors who are looking beyond more
traditional market categories: from natural
resources to a roster of state-specific municipal
funds.
APPENDIX A
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, 1999
Smith Barney Massachusetts Municipals Fund
388 Greenwich Street
New York, NY 10013
SALOMON
SMITH BARNEY
A Member
of Citigroup [Symbol]
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