Registration No. 33-11417
811-4994
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 19 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 20 [X]
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
(Exact name of Registrant as specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
(212) 816-6474
Registrant's Telephone Number, including area code
Christina T. Sydor, 388 Greenwich Street, New York, New York 10013
(Name and Address of Agent for Service)
Continuous
(Approximate Date of Proposed Public Offering)
It is proposed that this filing becomes effective (check appropriate
box):
[ ] Immediately upon filing pursuant to paragraph b [ ] on (date)
pursuant to paragraph b
[ ] 60 days after filing pursuant to paragraph (a)(1) [X] on
March 30, 1999 pursuant to
paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on
(date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Part A-Prospectus
Part B-Statement of Additional Information
Part C-Other Information
Signature
Exhibits
Part A
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[Logo]
Smith Barney Mutual
Funds
Investing for your
future.
Every day.
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Prospectus Smith Barney
Mutual Funds
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March 30, 1999 Massachusetts Municipals Fund
Class A, B, L and Y Shares
The Securities and Exchange Commission has not approved the fund's shares as an
investment or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
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Contents
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Fund goal and strategies...........................4
Risks, performance and expenses....................5
Smith Barney Mutual
Funds offers a More on the fund's investments.....................8
distinctive family of
fund choices tailored to Management.........................................9
help meet the varying
needs of large and small Choosing a class of shares to buy.................10
investors. Currently,
Smith Barney Mutual Comparing the fund's classes......................11
Funds offers more than
60 individual funds with Sales charges.....................................12
assets of more than $xx
billion. More about deferred sales charges.................15
Buying shares.....................................16
Exchanging shares.................................17
Redeeming shares..................................18
Other things to know about
share transactions..............................20
Dividends, distributions and
taxes...........................................22
Share price.......................................23
Financial highlights..............................23
You should know:
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
Massachusetts Municipals Fund 1
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Fund goal and strategies
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Investment objective The fund seeks to provide Massachusetts investors with as
high a level of dividend income exempt from federal and Massachusetts personal
income taxes as is consistent with prudent investment management and the
preservation of capital.
Key investments
The fund invests primarily in intermediate-term and long-term investment grade
Massachusetts municipal securities. These include securities issued by the
Commonwealth of Massachusetts and certain other municipal issuers, political
subdivisions, agencies and public authorities that pay interest which is exempt
from Massachusetts personal income taxes. Intermediate-term and long-term
municipal securities have remaining maturities at the time of purchase from
three to more than twenty years. The fund can invest up to 25% of its assets in
below investment grade bonds. Investment grade bonds are those rated by a
national ratings organization in any of the four highest long-term rating
categories, or if unrated, of comparable quality.
Selection process
The manager selects individual securities that it believes are undervalued or
will benefit from changes in market conditions. The manager spreads the fund's
investments among various sectors, focusing more heavily on sectors it believes
are relatively undervalued. In selecting individual securities, the manager:
. Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit
opportunities in the municipal bond market
. May trade between general obligation and revenue bonds, and among various
revenue bond sectors, such as hospital, industrial development and housing,
based on their apparent relative values
. Considers a security's maturity in light of the outlook for the issuer and
its sector, and for interest rates
. Identifies individual securities with the most potential for added value,
such as those involving unusual situations, new issuers, the potential for
credit upgrades, unique structural characteristics or innovative features
2
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Risks, performance and expenses
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Principal risks of investing in the fund
Investing in Massachusetts municipal securities can bring added benefits, but it
may also involve additional risks. Investors could lose money on their
investment in the fund, or the fund may not perform as well as other
investments, if any of the following occurs:
. Interest rates rise, causing the value of the fund's portfolio to decline
. The issuer of a security owned by the fund defaults on its obligation to
pay principal and/or interest or has its credit rating downgraded. This
risk is higher for below investment grade bonds, which are considered
speculative because they have a higher risk of issuer default, are subject
to greater price volatility and may be illiquid
. Massachusetts municipal securities fall out of favor with investors .
. Unfavorable legislation affects the tax-exempt status of municipal bonds
. The manager's judgment about the attractiveness, value or income potential
of a particular security proves to be incorrect
It is possible that some of the fund's income distributions may be, and
distributions of the fund's gains generally will be, subject to federal and
Massachusetts state taxation. The fund may realize taxable gains on the sale of
its securities or on transactions in derivative contracts. Some of the fund's
income may be subject to the federal alternative minimum tax. In addition,
distributions of the fund's income and gains will be subject to taxation to
investors in states other than Massachusetts.
The fund is classified as "non-diversified," which means it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the fund concentrates its assets in a particular issuer, the fund will be more
susceptible to the negative events affecting that issuer.
Who may want to invest
The fund may be an appropriate investment if you:
. Are a Massachusetts taxpayer in a high federal tax bracket, seeking income
that is exempt from Massachusetts and federal taxation
. Currently have exposure to other asset classes and are seeking to broaden
your investment portfolio
. Are willing to accept the risks of municipal securities, including the
risks of concentrating in a single state
Massachusetts Municipals Fund 3
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Total return
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
[BAR GRAPH GOES HERE]
% Total Return: Class A Shares
Calendar years ended December 31
88 89 90 91 92 93 94 95 96 97 98
12.25% 8.43% 4.16% 11.57% 10.06% 11.74% -9.03% 20.78% 5.00% 7.85%
The bar chart shows the performance of the fund's Class A shares for each of the
past 10 years. Class B, L and Y shares would have different performance because
of their different expenses. The performance information in the chart does not
reflect sales charges, which would reduce your return.
Quarterly returns: Highest: xx% in ___ quarter 199X;
Lowest: xx% in ___ quarter 199X
Comparative performance
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown to that of the Lehman
Brothers Municipal Bond Index (the "Lehman Index"), an unmanaged index of
municipal bonds and the Lipper Massachusetts Municipal Fund Average (the "Lipper
Funds Average"), an average composed of the fund's peer group of mutual funds.
This table assumes imposition of the maximum sales charge applicable to the
class, redemption of shares at the end of the period, and reinvestment of
distributions and dividends.
<TABLE>
<CAPTION>
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Average Annual Total Returns C Calendar Years Ended December 31, 1998
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<S> <C> <C> <C> <C> <C>
Class Inception date 1 year 5 years 10 years Since inception
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A [12/21/87]
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B 11/30/92 n/a n/a
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L 11/10/94 n/a
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Y xx/xx/xx n/a n/a
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Lehman Index n/a
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Lipper Funds n/a
Average
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</TABLE>
4
<PAGE>
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
<TABLE>
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Shareholder fees
(paid directly from your investment) Class A Class B Class L Class Y
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<S> <C> <C> <C> <C>
Maximum sales charge on purchases (as a % of 4.00% None 1.00% None
offering price)
Maximum deferred sales charge on redemptions None* 4.50% 1.00% None
(as a % of the lower of net asset value at
purchase or redemption)
Annual fund operating expenses (paid by the
fund as a % of fund net assets)
Management fee** 0.50% 0.50% 0.50% 0.50%
Distribution and service (12b-1) fee 0.15% 0.65% 0.70% None
Other expenses
---- ---- ---- -----
Total annual fund operating expenses
==== ==== ==== =====
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial charge) but if you redeem those shares within 12 months of
their purchase, you will pay a deferred sales charge of 1.00%.
**Management fee rates shown above have not been reduced to reflect waivers
currently in effect. The actual management fee rate for the current fiscal
period was ___% of each class' average daily net assets, and the total annual
operating expenses for the fund were ___% for Class A, ___% for Class B and ___%
for Class L.
Example
This example helps you compare the costs of investing in the fund with the costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
. You invest $10,000 in the fund for the period shown
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
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Number of years you own your shares 1 year 3 years 5 years 10 years
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Class A $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class Y $ $ $ $
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Massachusetts Municipals Fund 5
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More on the fund's investments
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Massachusetts municipal securities. Massachusetts municipal securities are debt
obligations issued by the Commonwealth of Massachusetts and its political
subdivisions, agencies and public authorities (together with certain other
governmental issuers such as Puerto Rico, the Virgin Islands and Guam). The
interest on these bonds is exempt from federal income tax and Massachusetts
personal income tax. As a result, the interest rate on these bonds normally is
lower than it would be if the bonds were subject to taxation. The Massachusetts
municipal securities in which the fund invests include general obligation bonds,
revenue bonds and municipal leases.
Derivatives and hedging techniques. The fund may, but need not, use derivative
contracts, such as futures and options on securities and securities indices, and
options on futures, to hedge against adverse changes in the market value of its
securities or interest rates.
A derivative contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities or
indices. Even a small investment in derivative contracts can have a big impact
on the interest rate exposure. Therefore, using derivatives can
disproportionately increase losses and reduce opportunities for gains when
securities prices or interest rates are changing. The fund may not fully benefit
from or may lose money on derivatives if changes in their value do not
correspond accurately to changes in the value of the fund's holdings. The other
parties to certain derivative contracts present the same types of default risk
as issuers of fixed income securities. Derivatives can also make the fund less
liquid and harder to value, especially in declining markets.
Defensive investing. The fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short-term
debt securities. If the fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
6
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Management
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Manager. The fund's investment manager is SSBC Fund Management Inc., an
affiliate of Salomon Smith Barney Inc. The manager's address is 388 Greenwich
Street, New York, New York 10013. The manager selects the fund's investments and
oversees its operations. The manager and Salomon Smith Barney are subsidiaries
of Citigroup Inc. Citigroup businesses produce a broad range of financial
services -- asset management, banking and consumer finance, credit and charge
cards, insurance, investments, investment banking and trading -- and use diverse
channels to make them available to consumer and corporate customers around the
world. Among these businesses are Citibank, Commercial Credit, Primerica
Financial Services, Salomon Smith Barney, SSBC Asset Management, Travelers Life
& Annuity, and Travelers Property Casualty.
Lawrence T. McDermott, an investment officer of Mutual Management Corp. and a
managing director of Salomon Smith Barney, has been responsible for the day to
day management of the fund since its inception in 1987.
Management fees. During the fiscal year ended November 30, 1998, the manager
received an advisory fee and an administrative fee equal to ___% and ___%,
respectively, of the fund's average daily net assets.
Distributor. The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker dealers sell fund shares to the public.
Distribution plans. The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
Year 2000 issue. Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
the efforts of the fund (limited to requesting and receiving reports from its
service providers) or its service providers to correct the problem will be
successful.
Massachusetts Municipals Fund 7
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Choosing a class of shares to buy
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You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
. If you establish a program of regular investment, you may wish to consider
Class A shares; as the investment accumulates, you may qualify for reduced sales
charges and the shares are subject to lower ongoing expenses.
. Class B shares are sold without any initial sales charge so the entire price
is immediately invested in the fund, which may partially or wholly offset the
higher annual expenses of this class. Class L shares are sold with a lower
initial sales charge than Class A shares, which may also help to offset the
higher annual expenses of this class. Because the fund's future return cannot be
predicted, however, there can be no assurance that this would be the case for
either class.
. Consider the effect of the deferred sales charge period and any conversion
rights in the context of your investment time frame. For example, while Class L
shares have a shorter deferred sales charge period than Class B shares, they do
not have a conversion feature, and therefore, are subject to an ongoing
distribution fee. Thus, Class B shares may be more attractive than Class L
shares to investors with long-term investment outlooks.
You may buy shares from:
. A Salomon Smith Barney Financial Consultant
. An investment dealer in the selling group or a broker that clears through
Salomon Smith Barney -- a dealer representative
. The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
Investment minimums. Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
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Initial Additional
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Classes A, B, L Class Y All Classes
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment Plans $50 n/a $50
Uniform Gift to Minor Accounts $250 $15 million $50
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8
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Comparing the fund's classes
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Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. Your Salomon Smith Barney Financial
Consultant or dealer representative may receive different compensation depending
upon which class you choose.
<TABLE>
<CAPTION>
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Class A Class B Class L Class Y
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<S> <C> <C> <C> <C>
Key features . Initial sales . No initial . Initial . No initial or
charge sales charge sales charge deferred sales
. You may . Deferred is lower than charge
qualify for sales charge Class A . Must invest at
reduction or declines over . Deferred least $15 million
waiver of time sales charge . Lower annual
initial sales . Converts to for only 1 year expenses than the
charge Class A after 8 . Does not other classes
. Lower annual years convert to
expenses than . Higher annual Class A
Class B and expenses than . Higher
Class L Class A annual
expenses than
Class A
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Initial Up to 4.00%; None 1.00% None
sales charge reduced or
waived for large
purchases and
certain
investors. No
charge for
purchases of
$500,000 or more
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Deferred 1% on purchases Up to 4.50% 1% if you None
sales charge of $500,000 or charged when redeem within
more if you you redeem 1 year of
redeem within 1 shares. The purchase
year of purchase charge is
reduced over
time and there
is no deferred
sales charge
after 6 years
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Annual 0.15% of average 0.65% of 0.70% of None
distribution daily net assets average daily average daily
and service net assets net assets
fees
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Exchange-able Class A shares Class B shares Class L shares Class Y shares of
into* of most Smith of most Smith of most Smith most Smith Barney
Barney mutual Barney mutual Barney mutual mutual funds
funds funds funds
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</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Massachusetts Municipals Fund 9
<PAGE>
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Sales charge: Class A shares
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You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.
-------------------------------------------------------------------------
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
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Less than $25,000 4.00 4.17
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$25,000 but less than $50,000 3.50 3.63
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$50,000 but less than $100,000 3.00 3.09
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$100,000 but less than $250,000 2.50 2.56
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$250,000 but less than $500,000 1.50 1.52
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$500,000 or more -0- -0-
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Investments of $500,000 or more. You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge. There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege - lets you combine the current value of Class A shares
owned
. by you, or
. by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
10
<PAGE>
Letter of intent - lets you purchase Class A shares of the fund and other Smith
Barney mutual funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases on
which you paid a sales charge within 90 days before you sign the letter.
Waivers for certain Class A investors. Class A initial sales charges are waived
for certain types of investors, including:
. Employees of members of the NASD.
. Clients of newly employed Salomon Smith Barney Financial Consultants if
certain conditions are met
. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn more about the requirements for reductions or waivers of
Class A initial sales charges, contact your Salomon Smith Barney Financial
Consultant or dealer representative or consult the SAI.
Massachusetts Municipals Fund 11
<PAGE>
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Sales charge: Class B shares
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You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
6th and
Year after purchase 1st 2nd 3rd 4th 5th over
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Deferred sales charge 4.5% 4% 3% 2% 1% 0%
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</TABLE>
Class B conversion. After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
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Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith Barney
distributions mutual fund
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Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total have converted into
Class B shares you own Class A shares
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Sales charge: Class L shares
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You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund on June 12, 1998, you
will not pay an initial sales charge on Class L shares you buy before June 22,
2001.
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Sales charge: Class Y shares
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You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 6-month period. To qualify, you must
initially invest $5,000,000.
12
<PAGE>
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More about deferred sales charges
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The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
. Shares exchanged for shares of another Smith Barney mutual fund
. Shares representing reinvested distributions and dividends
. Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund and be credited with the
amount of the deferred sales charge, if you notify your Salomon Smith Barney
Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
. On payments made through certain systematic withdrawal plans
. On certain distributions from a retirement plan
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
Massachusetts Municipals Fund 13
<PAGE>
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Buying shares
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<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
Through a You should contact your Salomon Smith Barney Financial Consultant or
Salomon Smith dealer representative to open a brokerage account and make Barney
arrangements to buy shares. Financial Consultant or If you do not provide the
following information, your order will be dealer rejected representative
. Class of shares being bought
. Dollar amount or number of shares being bought
You should pay for your shares through your brokerage account
no later than the third business day after you place your
order. Salomon Smith Barney or your dealer representative may
charge an annual account maintenance fee.
- -----------------------------------------------------------------------------------------
Through the Qualified retirement plans and certain other investors who are
fund's transfer clients of the selling group are eligible to buy shares directly
from agent the fund.
. Write the transfer agent at the following address:
Smith Barney Funds
Massachusetts Municipals Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
. Enclose a check to pay for the shares. For initial
purchases, complete and send an account application.
. For more information, call the transfer agent at 1-800-451-
2010
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Systematic You may authorize Salomon Smith Barney, the dealer representative or
investment plan the transfer agent to transfer funds automatically from a
regular
bank account, cash held in a Salomon Smith Barney brokerage
account or Smith Barney money market fund to buy shares on a
regular basis.
. Amounts transferred should be at least: $25 monthly or $50
quarterly
. If you do not have sufficient funds in your account on a transfer
date, Salomon Smith Barney, your dealer representative or the
transfer agent may charge you a fee
For more information, contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent or
consult the SAI.
- -----------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
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Exchanging shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
Smith Barney You should contact your Salomon Smith Barney Financial Consultant or
offers a dealer representative to exchange into other Smith Barney mutual
distinctive funds. Be sure to read the prospectus of the Smith Barney mutual
family of fund you are exchanging into. An exchange is a taxable transaction.
mutual funds
tailored to . You may exchange shares only for shares of the same class of
help meet the another Smith Barney mutual fund. Not all Smith Barney funds offer
varying needs all classes.
of both large
and small . Not all Smith Barney funds may be offered in your state of
investors. residence. Contact your Smith Barney Financial Consultant, dealer
representative or the transfer agent.
. You must meet the minimum investment amount for each fund
. If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers before the exchange is effective.
. The fund may suspend or terminate your exchange privilege if you
engage in an excessive pattern of exchanges
- -----------------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at the
additional time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be measured from
the date of your original purchase. If the fund you exchange into
has a higher deferred sales charge, you will be subject to that
charge. If you exchange at any time into a fund with a lower charge,
the sales charge will not be reduced.
- -----------------------------------------------------------------------------------------
By telephone If you do not have a brokerage account, you may be eligible to
exchange shares through the transfer agent. You must complete an
authorization form to authorize telephone transfers. If eligible,
you may make telephone exchanges on any day the New York Stock
Exchange is open. Call the transfer agent at 1-800-451-2010 between
9:00 a.m. and 4:00 p.m. (Eastern time). Requests received after the
close of regular trading on the Exchange are priced at the net asset
value next determined.
You can make telephone exchanges only between accounts that
have identical registrations.
- -----------------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage
account, contact your dealer representative or write to the
transfer agent at the address on the opposite page.
- -----------------------------------------------------------------------------------------
</TABLE>
Massachusetts Municipals Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Redeeming shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However, if
you recently purchased your shares by check, your redemption
proceeds will not be sent to you until your original check
clears.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
- -----------------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written
requests to the transfer agent at the following address:
Smith Barney Funds
Massachusetts Municipals Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
. Your account number
. The class of shares and the dollar amount or number of shares to
be redeemed
. Signatures of each owner exactly as the account is registered
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
By telephone If you do not have a brokerage account, you may be eligible to
redeem shares in amounts up to $10,000 per day through the
transfer agent. You must complete an authorization form to
authorize telephone redemptions. If eligible, you may request
redemptions by telephone on any day the New York Stock
Exchange is open. Call the transfer agent at 1-800-451-2010
between 9:00 a.m. and 4:00 p.m. (Eastern time). Requests
received after the close of regular trading on the Exchange
are priced at the net asset value next determined.
Your redemption proceeds can be sent by check to your address
of record or by wire transfer to a bank account designated on
your authorization form. You may be charged a fee for wire
transfers. You must submit a new authorization form to change
the bank account designated to receive wire transfers and you
may be asked to provide certain other documents.
- -----------------------------------------------------------------------------------------
Automatic cash You can arrange for the automatic redemption of a portion of your
withdrawal plans shares on a monthly or quarterly basis. To qualify you must own
shares of the fund with a value of at least $10,000 and each
automatic redemption must be at least $50. If your shares are
subject to a deferred sales charge, the sales charge will be
waived if your automatic payments do not exceed 1% per month
of the value of your shares subject to a deferred sales
charge.
The following conditions apply:
. Your shares must not be represented by certificates
. All dividends and distributions must be reinvested
For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the
SAI.
- -----------------------------------------------------------------------------------------
</TABLE>
Massachusetts Municipals Fund 17
<PAGE>
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Other things to know about share transactions
- --------------------------------------------------------------------------------
When you buy, exchange or redeem shares, your request must be in good order.
This means that you have provided the following information, without which your
request will not be processed.
. Name of the fund
. Account number
. Class of shares being bought, exchanged or redeemed
. Dollar amount or number of shares being bought, exchanged or
redeemed
. Signature of each owner exactly as account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
Signature guarantees. To be in good order, your redemption request must include
a signature guarantee if you:
. Are redeeming (together with other requests submitted in the previous 10 days)
over $10,000 of shares
. Are sending signed share certificates or stock powers to the transfer agent
. Instruct the transfer agent to mail the check to an address different from the
one on your account
. Changed your account registration
. Want the check paid to someone other than the account owner(s)
. Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loans, but not from a notary public.
18
<PAGE>
The fund has the right to:
. Suspend the offering of shares
. Waive or change minimum and additional investment amounts
. Reject any purchase or exchange order
. Change, revoke or suspend the exchange privilege
. Suspend telephone transactions
. Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securities
and Exchange Commission
Small account balances. If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Excessive exchange transactions. The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
Share certificates. The fund does not issue share certificates unless a written
request is made to the transfer agent. If you hold share certificates it will
take longer to exchange or redeem shares.
Massachusetts Municipals Fund 19
<PAGE>
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Dividends, distributions and taxes
- ------------------------------------------------------------------------------
Dividends. The fund pays dividends each month from its net investment income.
The fund generally makes capital gain distributions and pays dividends, if any,
once a year, typically in December. The fund may pay additional distributions
and dividends at other times if necessary for the fund to avoid a federal tax.
Capital gain distributions and dividends are reinvested in additional fund
shares of the same class you hold. The fund expects distributions to be
primarily from income. You do not pay a sales charge on reinvested distributions
or dividends. Alternatively, you can instruct your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer agent to have your
distributions and/or dividends paid in cash. You can change your choice at any
time to be effective as of the next distribution or dividend, except that any
change given to the transfer agent less than five days before the payment date
will not be effective until the next distribution or dividend is paid.
Taxes. In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Transaction Federal tax status Massachusetts tax status
- -----------------------------------------------------------------------------------------
Redemption or exchange Usually capital gain or loss; Usually capital gain or
loss of shares long-term only if shares owned
more than one year
- -----------------------------------------------------------------------------------------
Long-term capital gain Taxable gain Taxable gain
distributions
- -----------------------------------------------------------------------------------------
Short-term capital gain Ordinary income Ordinary income
distributions
- -----------------------------------------------------------------------------------------
Dividends Exempt if from interest on Exempt if from interest on
tax-exempt securities, Mass. municipal securities,
otherwise ordinary income otherwise ordinary income
- -----------------------------------------------------------------------------------------
</TABLE>
Any taxable dividends and capital gains are taxable whether received in cash or
reinvested in fund shares. Long-term capital gain distributions are taxable to
you as long-term capital gain regardless of how long you have owned your shares.
You may want to avoid buying shares when the fund is about to declare a capital
gain distribution or a dividend, because it will be taxable to you even though
it may actually be a return of a portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
20
<PAGE>
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Share price
- --------------------------------------------------------------------------------
You may buy, exchange or redeem shares at their net asset value, adjusted for
any applicable sales charge, next determined after receipt of your request in
good order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time).
The fund generally values its fund securities based on market prices or
quotations. Fair value is determined in accordance with procedures approved by
the fund's board. A fund that uses fair value to price securities may value
those securities higher or lower than another fund using market quotations to
price the same securities.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
- --------------------------------------------------------------------------------
Financial highlights
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by KPMG LLP, independent
accountants, whose report, along with the fund's financial statements, are
included in the annual report (available upon request).
Massachusetts Municipals Fund 21
<PAGE>
For a Class A share of beneficial interest outstanding throughout each year
ended November 30:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.99 $12.96 $11.35 $13.26
- ---------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(1) 0.66 0.68 0.69 0.70
Net realized and unrealized
gains (loss) 0.32 0.02 1.61 (1.85)
- ---------------------------------------------------------------------------------------
Total income (loss) from operations 0.98 0.70 2.30 (1.15)
- ---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.67) (0.67) (0.69) (0.70)
Net realized gains (0.12) -- -- (0.06)
In excess of net investment income -- -- -- --
- ---------------------------------------------------------------------------------------
Total distributions (0.79) (0.67) (0.69) (0.76)
- ---------------------------------------------------------------------------------------
Net asset value, end of year $13.18 $12.99 $12.96 $11.35
- ---------------------------------------------------------------------------------------
Total return (2) 7.85% 5.65% 20.73% (9.07)%
- ---------------------------------------------------------------------------------------
Net assets, end of year (millions) $33 $30 $29 $28
- ---------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(1) 0.80% 0.80% 0.83% 0.81%
Net investment income 5.07 5.32 5.42 5.55
- ---------------------------------------------------------------------------------------
Portfolio turnover rate 58% 23% 10% 37%
- ---------------------------------------------------------------------------------------
</TABLE>
(1) The adviser waived all or part of its fees for the four years ended
November 30, 1997. If such fees had not been waived, the per share decrease
in net investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
In Net Investment Income Without Fee Waivers
- -----------------------------------------------------------------------------------
1997 1996 1995 1994 1977 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- -----
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $ 0.01 $0.01 $0.03 $0.04 0.88% 0.91% 1.07% 1.09%
</TABLE>
(2) Total return does not reflect any applicable sales load or deferred sales
charge.
22
<PAGE>
For a Class B share of beneficial interest outstanding throughout each year
ended November 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning $ 12.99 $12.96 $11.35 $13.26
of year
- --------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income(1) 0.60 0.61 0.63 0.63
Net realized and 0.31 0.03 1.61 (1.84)
unrealized gains (loss)
- --------------------------------------------------------------------------------------
Total income (loss) from 0.91 0.64 2.24 (1.21)
operations
- --------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.61) (0.61) (0.63) (0.64)
Net realized gains (0.12) -- -- (0.06)
- -------------------------------------------------------------------------------------
Total distributions (0.73) (0.16) (0.63) (0.70)
- --------------------------------------------------------------------------------------
Net asset value, end of year $13.17 $12.99 $12.96 $11.35
- --------------------------------------------------------------------------------------
Total return (2) 7.25% 5.14% 20.15% (9.50)%
- --------------------------------------------------------------------------------------
Net assets, end of year $28 $29 $29 $23
(millions)
- --------------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses(1) 1.31% 1.31% 1.35% 1.32%
Net investment income 4.57 4.81 4.94 5.04
- --------------------------------------------------------------------------------------
Portfolio turnover rate 58% 23% 10% 37%
- --------------------------------------------------------------------------------------
</TABLE>
(1) The adviser has waived all or part of its fees for the four years ended
November 30, 1997. If such fees had not been waived, the per share decrease
in net investment income and the expense ratios would have been as follows:
Per Share Decreases Expense Ratios
In Net Investment Income Without Fee Waivers
------------------------------ -----------------------------------
1997 1996 1995 1994 1997 1996 1995 1994
---- ---- ---- ----- ---- ---- ---- ----
- --------------------------------------------------------------------------------
Class B $ 0.01 $0.01 $0.04 $0.03 1.39% 1.42% 1.59% 1.60%
- --------------------------------------------------------------------------------
(2) Total return does not reflect any applicable sales load or deferred sales
charge.
Massachusetts Municipals Fund 23
<PAGE>
For a Class L share of beneficial interest outstanding throughout each year
ended November 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Net asset value, beginning of year $12.98 $12.95 $ 11.35 $ 11.34
- --------------------------------------------------------------------------------------
Income from operations:
Net investment income(2) 0.59 0.60 0.63 0.05
Net realized and unrealized gain 0.31 0.03 1.60 --
- --------------------------------------------------------------------------------------
Total income from operations 0.90 0.63 2.23 0.05
- --------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.60) (0.60) (0.63) (0.04)
- --------------------------------------------------------------------------------------
Net realized gains (0.12) -- -- --
- --------------------------------------------------------------------------------------
Total distributions (0.72) (0.60) (0.63) (0.04)
- --------------------------------------------------------------------------------------
Net asset value, end of year $13.16 $12.98 $ 12.95 $ 11.35
- --------------------------------------------------------------------------------------
Total return (3) 7.21% 5.09% 20.04% 0.40%(4)
- --------------------------------------------------------------------------------------
Net assets, end of year (millions) $428 $179 $146 $75
- --------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(2) 1.34% 1.34% 1.35% 1.36%(5)
- --------------------------------------------------------------------------------------
Net investment income 4.51 4.77 4.65 5.00(5)
- --------------------------------------------------------------------------------------
Portfolio turnover rate 58% 23% 10% 37%
- --------------------------------------------------------------------------------------
</TABLE>
(1) For the period from November 10, 1994 (inception date) to November 30, 1994.
(2) The investment adviser waived all or part of its fees for the three years
ended November 30, 1997 and the period ended November 30, 1994. If such fees
had not been waived, the per share decrease in net investment income and the
ratios of expenses would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
In Net Investment Income Without Fee Waivers
------------------------------- -----------------------------
1997 1996 1995 1994 1997 1996 1995 1994
---- ---- ---- ----- ---- ---- ---- -----
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class L $0.01 $0.01 $0.04 $0.00(6) 1.42% 1.44% 1.58% 1.63%(5)
</TABLE>
(3) Total return does not reflect any applicable sales load or deferred sales
charge.
(4) Not annualized. (5) Annualized.
(6) Amount represents less than $0.01 per share.
24
<PAGE>
Salomon Smith Barney/SM/
a member of citigroup [Symbol]
Massachusetts Municipals Fund
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site. Our web site is located at www.smithbarney.com
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can get the same information free from the Commission's
Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
K Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-06290)
Part B
Smith Barney
Massachusetts Municipals Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional
Information
March 30, 1999
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
Investment Objective and Management Policies 2
Management of the Fund 19
Purchase of Shares 24
Redemption of Shares 30
Distributor. . 33
Valuation of Shares 34
Exchange Privilege 35
Performance Information 36
Dividends, Distributions and Taxes 39
Additional Information 43
Appendix A 45
Appendix B..................................................................50
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 that the fund is not limited by the Act in the
proportion of its assets that 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 that 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 in excess
of 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 that are supported
by the right of the issuer to borrow from the U.S. Treasury and
instruments that are 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 debt obligations 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 that 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 that 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 bard 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 are those that 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 under-written 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 if 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, as the holder of long-term Exempt Obligations 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 may not be as liquid as that for the futures contracts,
however, the ability to enter into such contracts could enable the fund to
react more quickly to anticipated changes in market conditions or interest
rates.
Unlike the purchase or sale of a Municipal Bond, no consideration is paid
or received by the fund upon the purchase or sale of a futures contract.
Initially, the fund will be required to deposit in the name of the
futures commission merchant effecting the transaction an amount of cash or
cash equivalents equal to approximately 10% of the contract amount (this
amount is subject to change by the board of trade on which the contract is
traded and members of the board of trade may charge a higher amount).
This amount is known as initial margin and is in the nature of a
performance bond or good faith deposit on the contract that is returned to
the fund upon termination of the futures contract, assuming that all
contractual obligations have been satisfied. Subsequent payments, known
as variation margin, to and from the futures commission merchant will be
made on a daily basis as the price of the index or securities underlying
the futures contract fluctuates, making the long and short positions in
the futures contract more or less valuable, a process known as marking-to-
market. At any time prior to the expiration of the contract, the fund may
elect to close the position by taking an opposite position, which will
operate to terminate the fund's existing position in the futures contract.
There are several risks in connection with the use of municipal bond index
and interest rate futures contracts as hedging devices. Successful use of
these futures contracts by the fund is subject to the 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. The fund's ability to purchase
and sell options on futures contracts and to trade in these contracts may
be limited to some extent by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), applicable to a regulated investment
company. See "Taxes" below.
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. Due to
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 a fund agrees to purchase when-issued or delayed-delivery securities,
its custodian will set aside cash or liquid securities equal to the amount
of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in
such a case a 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 a 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 a 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 to be 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,
stand-by commitment, therefore, 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
funds.
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 that are listed 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.
Special Considerations Relating to Massachusetts Municipal Securities
The Commonwealth of Massachusetts and certain of its cities and towns have
at certain times in the recent past undergone serious financial
difficulties which have adversely affected their credit standing. The
prolonged effects of such financial difficulties could adversely affect
the market value of the Massachusetts Municipal Securities held by the
fund. The information summarized below describes some of the more
significant factors that could affect the fund or the ability of the
obligors to pay debt service on certain of these securities. The sources
of such information are the official statements of issuers located in the
Commonwealth of Massachusetts, as well as other publicly available
documents, and statements of public officials. The Fund has not
independently verified any of the information contained in such statements
and documents, but the fund is not aware of facts which would render such
information inaccurate.
Fiscal Matters
The Commonwealth's operating fund structure satisfies the requirements of
state finance law and is in accordance with generally accepted accounting
principles ("GAAP"), as defined by the Government Accounting Standards
Board. The General Fund and those special revenue funds which are
appropriated in the annual state budget receive most of the non-bond and
non-Federal grant revenues of the Commonwealth. These funds are referred
to herein as the "budgeted operating funds" of the Commonwealth. They do
not include the capital projects funds of the Commonwealth, into which the
proceeds of Commonwealth bonds are deposited. The three principal
budgeted operating funds are the General Fund, the Highway Fund and the
Local Aid Fund. Expenditures from these three funds generally account for
approximately 96% of total expenditures of the budgeted operating funds.
The Commonwealth's budgeted operating funds for fiscal 1993, 1994, 1995
and 1996 showed an excess of revenues and other sources over expenditures
and other uses of $13.1 million, $26.8 million, $137 million and $446
million and positive fund balances of $562.5 million, $589.3 million, $726
million and $1.172 billion, respectively. Over the same period, budgeted
expenditures were approximately $14.696 billion for fiscal year 1993,
$15.523 billion for fiscal 1994, $16.251 billion for fiscal 1995 and
$16.881 billion for fiscal 1996. The Commonwealth is in the process of
closing its records for fiscal 1997. Based upon the preliminary financial
report of the Commonwealth, budgeted revenues and other sources collected
in fiscal 1997 were approximately $17.386 billion, and budgeted
expenditures and other uses of funds in fiscal 1997 were approximately
$17.702 billion. The Commonwealth's fiscal 1998 budget is based on
numerous spending and revenue estimates, the achievement of which cannot
be assumed.
Limitations on Tax Revenues
In Massachusetts, efforts to limit and reduce levels of taxation have been
underway for several years. Limits were established on state tax revenues
by legislation enacted on October 25, 1986 and by an initiative petition
approved by the voters on November 4, 1986. The two measures are
inconsistent in several respects.
Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each
fiscal year equal to the average positive rate of growth in total wages
and salaries in the Commonwealth, as reported by the Federal government,
during the three calendar years immediately preceding the end of such
fiscal year. Chapter 62F also requires that allowable state tax revenues
be reduced by the aggregate amount received by local governmental units
from any newly authorized or increased local option taxes or excises. Any
excess in state tax revenue collections for a given fiscal year over the
prescribed limit, as determined by the State Auditor, is to be applied as
a credit against the then-current personal income tax liability of all
taxpayers in the Commonwealth in proportion to the personal income tax
liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. Unlike Chapter 29B, as described below, the initiative
petition did not exclude principal and interest payments on Commonwealth
debt obligations from the scope of its tax limit. However, the preamble
contained in Chapter 62F provides that "although not specifically required
by anything contained in this chapter, it is assumed that from allowable
state tax revenues as defined herein the Commonwealth will give priority
attention to the funding of state financial assistance to local
governmental units, obligations under the state governmental pension
systems, and payment of principal and interest on debt and other
obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However,
rather than utilizing a three-year average wage and salary growth rate as
used by Chapter 62F, Chapter 29B utilizes an allowable state revenue
growth factor equal to one-third of the positive percentage gain in
Massachusetts wages and salaries, as reported by the Federal government,
during the three calendar years immediately preceding the end of a given
fiscal year. Additionally, unlike Chapter 62F, Chapter 29B allows for an
increase in maximum state tax revenues to fund an increase in local aid
and excludes from its definition of state tax revenues (i) income derived
from local option taxes and excises, and (ii) revenues needed to fund debt
service costs. Tax revenues in fiscal 1992 through fiscal 1996 were lower
than the limit set by either Chapter 62F or Chapter 29B, and the Executive
Office for Administration and Finance currently estimates that state tax
revenues in fiscal 1997 will not reach the limit imposed by either of
these statues.
Local Aid
Proposition 2 1/2. In November 1980, voters in the Commonwealth approved
a statewide tax limitation initiative petition, commonly known as
Proposition 2 1/2, to constrain levels of property taxation and to limit
the charges and fees imposed on cities and towns by certain governmental
entities, including county governments. Proposition 2 1/2 is not a
provision of the state constitution and accordingly is subject to
amendment or repeal by the Legislature. Proposition 2 1/2, as amended to
date, limits the property taxes that may be levied by any city or town in
any fiscal year to the lesser of (i) 2.5% of the full and fair cash
valuation of the real estate and personal property therein and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from
certain new construction and parcel subdivisions. Proposition 2 1/2 also
limits any increase in the charges and fees assessed by certain
governmental entities, including county governments, on cities and towns
to the sum of (i) 2.5% of the total charges and fees imposed in the
preceding fiscal year and (ii) any increase in charges for services
customarily provided locally or services obtained by the city or town at
its option. The law contains certain override provisions and, in
addition, permits debt service on specific bonds and notices and
expenditures for identified capital projects to be excluded from the
limits by a majority vote at a general or special election. At the time
Proposition 2 1/2 was enacted, many cities and towns had property tax
levels in excess of the limit and were therefore required to roll back
property taxes with a concurrent lost of revenues. Between fiscal 1981
and fiscal 1996, the aggregate property tax levy grew from $3.347 billion
to $5.924 billion, representing an increase of approximately 77%. By
contrast, according to Federal Bureau of Labor Statistics, the consumer
price index for all urban consumers in Boston grew during the same period
by approximately 92%.
Many communities have responded to the limitation imposed by Proposition
2 1/2 through statutorily permitted overrides and exclusions. Override
activity steadily increased throughout the 1980's before peaking in fiscal
1991 and decreasing thereafter. In fiscal 1992, 65 communities approved
one of the three types of referenda questions (override of levy limit,
exclusion of debt service, or exclusion of capital expenditures) adding
$31.0 million to their levy limits. In fiscal 1993, 59 communities added
$16.3 million through override votes and in fiscal 1994, only 48
communities had successful override referenda which added $8.4 million to
their levy limits. In fiscal 1995, 32 communities added $8.8 million. In
fiscal 1996, 30 communities added $5.8 million to their levy limits.
Although Proposition 2 1/2 will continue to constrain local property tax
revenues, significant capacity exists for overrides in nearly all cities
and towns.
In addition to overrides, Proposition 2 1/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the
payment of certain capital projects (capital outlay expenditure
exclusions) and for the payment of specified debt service costs (debt
exclusions). Capital exclusions were passed by 19 communities in fiscal
1996 and totaled $1.5 million. In fiscal 1996, the impact of successful
debt exclusion votes going back as far as fiscal 1983, was to raise the
levy limits of 229 communities by $125.8 million.
Commonwealth Financial Support for Local Governments. During the 1980s,
the Commonwealth increased payments to its cities, towns and regional
school districts ("Local Aid") to mitigate the impact of Proposition 2 1/2
on local programs and services. In fiscal 1997, approximately 19.9% of
the Commonwealth's budget is estimated to be allocated to direct Local
Aid. Local Aid payments to cities, towns and regional school districts
take the form of both direct and indirect assistance. Direct Local Aid
consists of general revenue sharing funds and specific program funds sent
directly to local governments and regional school districts as reported on
the so-called "cherry sheet" prepared by the Department of Revenue,
excluding certain pension funds and nonappropriated funds.
As a result of comprehensive education reform legislation enacted in June
1993, a large portion of general revenue sharing funds are earmarked for
public education and are distributed through a formula designed to provide
more aid to the Commonwealth's poorer communities. The legislation
established a fiscal 1993 state spending base of approximately $1.288
billion for local education purposes and required annual increases in
state expenditures for such purposes above that base, subject to
appropriation, estimated to be approximately $175 million in fiscal 1994,
approximately $396 million in fiscal 1995, approximately $629 million in
fiscal 1996 and approximately $881 million in fiscal 1997, with additional
annual increases anticipated in later years. The fiscal 1994, 1995, 1996
and 197 budgets have fully funded the requirements imposed by this
legislation.
Another component of general revenue sharing, the Lottery and Additional
Assistance programs, provides unrestricted funds for municipal use. There
are also several specific programs funded through direct Local Aid, such
as highway construction, school building construction and police education
incentives.
In addition to direct Local Aid, the Commonwealth has provided substantial
indirect aid to local governments, including, for example, payments for
the Massachusetts Bay Transportation Authority ("MBTA") assistance and
debt service, pensions for teachers, pension cost-of-living allowances for
municipal retirees, housing subsidies and the cost of courts and district
attorneys that formerly had been paid by the counties.
Direct Local Aid decreased from $2.359 billion in fiscal 1992 to $2.547
billion in fiscal 1993 and to $2.727 billion in fiscal 1994. Fiscal 1995
expenditures for direct Local Aid were $2.976 billion, which is an
increase of approximately 9.1% above the fiscal 1994 level. Fiscal 1996
expenditures for direct Local Aid were $3.246 billion, an increase of
approximately 9.1% above the fiscal 1995 level. It is estimated that
fiscal 1997 expenditures for direct Local Aid will be $3.538 billion,
which is an increase of approximately 9.0% above the fiscal 1996 level.
Initiative Law. A statute adopted by voter initiative petition to the
November 1990 statewide election regulates the distribution of Local Aid
to cities and towns. This statute requires that, subject to annual
appropriation, no less than 40% of collections from personal income taxes,
sales and use taxes, corporate excise taxes and lottery fund proceeds be
distributed to cities and towns. Under the law, the Local Aid
distribution to each city or town would equal no less than 100% of the
total Local Aid received for fiscal 1989. Distributions in excess of
fiscal 1989 levels would be based on new formulas that would replace the
current Local Aid distribution formulas. By its terms, the new formula
would have called for a substantial increase in direct Local Aid in fiscal
1992 and subsequent years. However, Local Aid payments expressly remain
subject to annual appropriation, and fiscal 1992, 1993, 1994, 1995 and
1996 appropriations for Local Aid did not meet, and fiscal 1997
appropriations for Local Aid do not meet, the levels set forth in the
initiative law.
Commonwealth Expenditures
Fiscal 1993 budgeted expenditures were $14.696 billion, an increase of
9.6% from fiscal 1992. Fiscal 1994 budgeted expenditures were $15.523
billion, an increase of 5.6% from fiscal 1993. Fiscal 1995 budgeted
expenditures were $16.251 billion, an increase of 4.7% from fiscal 1994.
Fiscal 1996 budgeted expenditures were $16.881 billion, an increase of
3.9% from fiscal 1995. It is estimated that fiscal 1997 budgeted
expenditures will be $17.704 billion, an increase of 4.9% over fiscal 1996
levels.
Commonwealth expenditures since 1992 largely reflect significant growth in
several programs and services provided by the Commonwealth, principally
direct Local Aid, Medicaid, group health insurance, debt service,
pensions, higher education and assistance to the MBTA and regional transit
authorities.
The Commonwealth is responsible for the payment of pension benefits for
state employees and for school teachers throughout the state, and for the
cost-of-living increases payable to local government retirees. In 1988,
the Commonwealth adopted a funding schedule under which it is required to
fund future pension liabilities currently and to amortize the accumulated
unfunded liabilities over 40 years. Since the adoption of this schedule,
the amount of unfunded liability has been reduced significantly. Total
pension expenditures increased at an average annual rate of 7.6% per year,
rising from $751.5 million in fiscal 1992 to $1.005 billion in fiscal
1996. Total pension expenses include the costs associated with an early
retirement program for elementary and secondary school teachers mandated
by the 1993 education reform legislation. In fiscal 1997, the anticipated
pension expenditure is $1.067 billion, an increase of 6.2% new fiscal 1996
costs. In fiscal 1996, a number of reform measures affecting pensions
were enacted into law. Among the most notable were a measure
consolidating the assets of the state employees' and teachers' retirement
systems into a single investment fund and another that will reform the
disability pension system.
Other Factors
Many factors affect the financial condition of the Commonwealth, including
many social, environmental, and economic conditions, which are beyond the
control of the Commonwealth. As with most urban states, the continuation
of many of the Commonwealth's programs, particularly its human service
programs, is in significant part dependent upon continuing Federal
reimbursements which have been declining.
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.
MANAGEMENT OF THE FUND
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.
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, Chairman of the Board and Investment Officer (Age 65).
Managing Director of Salomon Smith Barney, Inc., Chairman of the Board of
Smith Barney Strategy Advisers Inc. and President of SSBC and Travelers
Investment Adviser, Inc. ("TIA"); Chairman or Co-Chariman of the Board of
59 investment companies associated with 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, Senior Vice President and Treasurer (Age 41). Managing
Director of Salomon Smith Barney, Chief Financial Officer of the Smith
Barney Mutual funds; Director and Senior Vice President of SSBC and TIA.
Lawrence T. McDermott, Vice President and Investment Officer (Age 49).
Investment Officer of SSBC; Managing Director of Salomon Smith Barney.
*Christina T. Sydor, Secretary (Age 47), Managing Director of Salomon
Smith Barney. General Counsel and Secretary of SSBC and TIA.
* Designates an "interested person" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act") whose business address
is 388 Greenwich Street, New York, New York 10013. Such person is not
separately compensated for services as a fund officer or Trustee.
As of January 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 January 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. 6.6179
Attn: Reverend Raymond C. Lee
675 Massachusetts Ave.
Cambridge, MA 02139-3309
Class L
Phillip J. Cade 16.0557
Margaret P. Cade
JTWROS
24 Ginn Rd.
Winchester, MA 01890-2607
Lilla M. Pond TTEE 14.3706
Lilla M. Pond Trust
U/A/D 5/13/93
80 Lincoln Street
Norwood, MA 02062-1352
Helen D9Alelio and 10.8941
Ralph D9Alelio JTWROS
9 Stillings Rd.
Saugus, MA 01906-1928
Myron Pulier 9.2237
Anita Pulier JTWROS
c/o Salzman & Salzman
32 Court Street
Brooklyn, NY 11201-4404
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 $8,000 per annum plus $500 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 $4,000 per annum plus $250 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
Compensat
ion
from
Californi
a Fund #
Aggregate
Compensat
ion from
New York
Fund #
Total
Pension or
Retirement
Benefits
Accrued
as part of
Fund
Expenses
Compensatio
n
from Funds
and Fund
Complex
Paid to
Trustees
Number of
Funds for
Which
Trustees
Serves
Within
Fund
Complex
Herbert Barg **
$0
18
Alfred
Bianchetti * **
0
13
Martin Brody **
0
21
Dwight B. Crane
**
0
24
Burt N. Dorsett
**
0
13
Elliot S. Jaffe
**
0
13
Stephen E.
Kaufman **
0
15
Joseph J.
McCann **
0
13
Heath B.
McLendon *
- -
59
Cornelius C.
Rose, Jr. **
0
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, during which time they are paid
50% of the annual retainer fee and meeting fees otherwise
applicable to fund trustees, together with reasonable out-of-pocket
expenses for each meeting attended. 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 $_______.
Investment Adviser and Administrator - SSBC
SSBC (formerly known as Mutual Management Corp.) serves as investment
adviser to each 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 each fund's portfolio in accordance with the fund's
stated investment objective and policies, makes investment decisions for
the fund, places order to purchase an 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.
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, $170,838, $202,259 and $___________, respectively,
in investment advisory fees. For the fiscal years ended November 30,
1996, 1997 and 1998, the manager voluntarily waived investment advisory
fees of $36,129, $26,561 and $___________, 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 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 $113,892 (net of fee waivers amounting to $24,086) in
administration fees. For the fiscal year ended November 30, 1997, the
fund paid the manager $117,518 (net of fee waivers amounting to $17,707)
in administration fees. For the fiscal year ended November 30, 1998, the
fund paid the manager $_______ (net of fee waivers amounting to $______)
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.
Year 2000 - The investment management services provided to the fund by the
manager and the services provided to shareholders by Salomon Smith Barney
depend on the smooth functioning of their computer systems. Many computer
software systems in use today cannot recognize the year 2000, but revert
to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the fund's
operations, including the handling of securities trades, pricing and
account services. The manager and Salomon Smith Barney have advised the
fund that they have been reviewing all of their computer systems and
actively working on necessary changes to their systems to prepare for the
year 2000 and expect that their systems will be compliant before that
date. In addition, the manager has been advised by the fund's custodian,
transfer agent and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however,
be no assurance that the manager, Salomon Smith Barney or any other
service provider will be successful, or that interaction with other non-
complying computer systems will not impair fund services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired
by the inadequate preparation of their computer systems for the year 2000.
This may adversely affect the market values of securities of specific
issuers or of securities generally if the inadequacy of preparation is
perceived as widespread or as affecting trading markets.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the fund. The
Independent Trustees of the fund have selected Stroock & Stroock & Lavan
LLP as their legal counsel.
KPMG LLP, independent auditors, 345 Park Avenue, New York, New York 10154,
serve as auditors of the fund and have rendered an opinion on the fund's
financial statements for the fiscal year ended November 30, 1999.
Portfolio Transactions
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales
usually are placed with those dealers from which it appears that the best
price or execution will be obtained; those dealers may be acting as either
agents or principals. The purchase price paid by the fund to underwriters
of newly issued securities usually includes a concession paid by the
issuer to the underwriter, and purchases of after-market securities from
dealers normally are executed at a price between the bid and asked prices.
(The fund has paid no brokerage commissions since its commencement of
operations.)
Allocation of transactions, including their frequency, to various dealers
is determined by the 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
their receipt 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 Securities
Exchange Commission ("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 ___%, 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 "Deferred
Sales Charge Alternatives" and "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 1933 Act.
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, or $250 for an IRA or a Self-Employed Retirement Plan, 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 participants in retirement plans qualified under
Section 403(b)(7) or Section 401(c) of the Code, the minimum initial
investment required for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes in the fund is $25. 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.
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) purchases by a separate account used to
fund certain unregistered variable annuity contracts; (g) investments of
distributions from a UIT sponsored by Salomon Smith Barney; and
(h) 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 0.25%) 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 that the value of such shares represents: (a) capital appreciation
of fund assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more
than five years after their purchase; or (d) with respect to Class 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 that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the
amount of the 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'')
(provided, however, that 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 that were established prior to November 7,
1994); (c) redemptions of shares within 12 months following the death or
disability of the shareholder; (d) redemptions of shares made in
connection with qualified distributions from retirement plans or IRAs upon
the attainment of age 591/2; (e) involuntary redemptions; and
(f) 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 on 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. Portfolio securities
that are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
except that when an occurrence subsequent to the time a value was so
established is likely to have changed the value, then the fair value of
those securities will be determined by consideration of other factors by
or under the direction of the Board of Trustees or its delegates.
Over-the-counter securities and securities listed or traded on certain
foreign exchanges whose operations are similar to the United States over-
the-counter market for which no sale was reported on that date 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. A contingent deferred sales charge ("deferred sales charge"),
however, is imposed on certain redemptions of Class B and Class L shares,
and on Class A shares when purchased in amounts exceeding $500,000. The
method of computing the public offering price is shown in the fund's
financial statements, incorporated by reference in their entirety into
this SAI.
REDEMPTION OF SHARES
The 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 4:00 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 4:00 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 Smith
Barney Financial Consultant. Effective November 7, 1994, Withdrawal Plans
should be set up with a Smith Barney Financial Consultant. A shareholder
who purchases shares directly through the Transfer Agent may continue to
do so and applications for participation in the Withdrawal Plan must be
received by the Transfer Agent no later than the eighth day of the month
to be eligible for participation beginning with that month's withdrawals.
For additional information, shareholders should contact a Smith Barney
Financial Consultant.
Distributor. CFBDS, Inc. 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 Directors 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, 1997 and 1998
fiscal years, Salomon Smith Barney, received $45,000, $68,000 and
__________, respectively, in sales charges from the sale of Class A
shares, and did not reallow any portion thereof to dealers. For the
fiscal years ended November 30, 1996, 1997 and 1998, Salomon Smith Barney
or its predecessor received from shareholders $57,000, $48,000 and
$_________, respectively, in deferred sales charge on the redemption of
Class B and 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 and
Distribution Agreements for continuance.
For the fiscal year ended November 30, 1998, Salomon Smith Barney incurred
distribution expenses totaling approximately $____ consisting of
approximately $___ for advertising, $____ for printing and mailing of
prospectuses, $____ for support services, $____ to Salomon Smith
Barney Financial Consultants, and $____ 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.
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 0.25% 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 0.75% of the value of the fund's average net assets
attributable to the shares of the respective Class.
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
$
$
$
Class B
$
$
$
Class L*
$
$
$
* 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 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 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 "ADDITIONAL TAX INFORMATION" above, 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.
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):
____% for the one-year period from December 1, 1997 through
November 30, 1998.
____% for the five-year period from December 1, 1993 through
November 30, 1998.
____% 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 ____%, ____% and ____%, 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):
____% for the one-year period from December 1, 1997 through
November 30, 1998.
____% for the five-year period from December 1, 1993 through
November 30, 1998.
____% 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 ____%, ____% and ____%, 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):
____% for the one-year period from December 1, 1997 through
November 30, 1998.
____% 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 from December 1, 1997 through November 30, 1998 would have
been ____%.
Aggregate Total Return
"Aggregate total return" represents the cumulative change in the value of
an investment in the Class for the specified period and are computed by
the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV= Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of a 1-, 5-, or 10-year
period at the end of a 1-, 5-, or 10-year period (or
fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The Fund's aggregate total return for Class A shares was as follows for
the periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
____% for the one-year period from December 1, 1997 through
November 30, 1998.
____% for the five-year period from December 1, 1993 through
November 30, 1998.
____% 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 ____%,____% and ____%, 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):
____% for the one-year period from December 1, 1997 through
November 30, 1998.
____% for the five-year period from December 1, 1993 through
November 30, 1998.
____% 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 ____%,____% and ____%, 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):
____% for the one-year period from December 1, 1997 through
November 30, 1998.
____% for the period from commencement of operations on
November 10, 1994 through November 30, 1998.
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 distribute its net
investment income (that is, its income other than its net realized capital
gains) and net realized capital gains, if any, once a year, normally at
the end of the year in which earned or at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or deferred
sales charge. In order to avoid the application of a federal 4%
nondeductible excise tax on certain undistributed amounts of ordinary
income and capital gains, the fund may make an additional distribution
shortly before or shortly after December 31 in each year of any
undistributed ordinary income or capital gains and expects to pay any
additional dividends and distributions necessary to avoid the application
of this tax. For federal income tax purposes, dividends declared by the
fund in October, November or December as of a record date in such a month
and which are actually paid in January of the following year will be
treated as if they were paid on December 31. These dividends will be
taxable to shareholders as if actually received on December 31 rather than
in the year in which shareholders actually receive the dividends.
The per share dividends on Class B and Class L shares of the fund may be
lower than the per share dividends on Class A and Class Y shares
principally as a result of the distribution fee applicable with respect to
Class B and Class L shares. The per share dividends on Class A shares of
the fund may be lower than the per share dividends on Class Y shares
principally as a result of the service fee applicable to Class A shares.
Distributions of capital gains, if any, will be in the same amount for
Class A, Class B, Class L and Class Y shares.
The following is a summary of selected Federal income tax considerations
that may affect the fund and its shareholders. In addition to the
considerations described below, there may be other federal, state, local
or foreign tax applications to consider. The summary is not intended as
a substitute for individual tax advice and investors are urged to consult
their own tax advisors as to the tax consequences of an investment in the
fund.
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 Statement of Additional
Information, 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 Internal Revenue Code of
1986, as amended (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 the
sum 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 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. Furthermore, the fund will
be subject to a United States corporate income tax with respect to such
distributed amounts in any year that it fails to qualify as a regulated
investment company or fails to meet this distribution requirement.
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 tot 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.
Shareholders receiving dividends or distributions in the form of
additional shares should have a cost basis in the shares received equal to
the amount of money that the shareholders receiving cash dividends or
distributions will receive.
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 Exchange Place, Boston, Massachusetts 02109, 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 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.
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.
APPENDIX B
The Smith Barney Mutual Fund Family encompasses more than 60 mutual
funds, representing approximately $87 billion of shareholder assets
under management as of September 30, 1998. This places us among the
largest mutual fund companies in the United States. Our portfolio
managers average approximately 25 years of experience in the financial
field - of which, on average, 18 have been with Smith Barney.
By building a core portfolio of mutual funds with complementary
investment styles, individuals can work toward specific goals of capital
appreciation, regular income and preservation of investment principal.
Your Salomon Smith Barney Financial Consultant can recommend and provide
a prospectus for one or more mutual funds designed to help you meet your
individual goals for education funding, retirement and changing
lifestyle needs.
Smith Barney Mutual Funds provide a broad selection of funds to suit
every investment goal, from capital appreciation to preservation of
investment principal. Our Family is divided into these main categories:
? Growth: For individuals seeking long-term capital appreciation
through investments in common stocks. Some of our growth funds
also give equal emphasis to income.
? Taxable Fixed Income: For individuals seeking current income.
? Tax-Exempt Fixed Income: For individuals seeking a tax-exempt
investment that allows them to keep more of what they earn for
current spending or future investment.
? Global/International: For individuals seeking to diversify their
portfolio to include long-term capital appreciation or income from
investments in markets around the world.
? Concert Allocation Series:
We understand that investors can be ________ in how they wish to reach
their financial goals. That's why we offer four different Series of
funds. Some investors, guided by their Financial Consultant, prefer to
take an active role in allocating their investment portfolio. For these
investors we offer the Style Pure Series. Others prefer to rely on the
asset allocation decisions of experienced portfolio managers, and may
fund solutions to their investment needs in our Classic Series. For
investors who want to explore opportunities using a narrower focus, we
offer the Specialty Series. The Concert Allocation Series allows
investors to invest in a diversified "fund of funds."
Style Pure Series Smith Barney mutual funds designated as "Style Pure"
are the basic building blocks of asset allocation. Other than
maintaining minimal cash, or under extraordinary market conditions, each
of these funds is 100% invested, 1005 of the time within its designated
asset classes and designated investment style. The Style Pure Series
enables you and your Smith Barney Financial Consultant to control your
asset allocation decisions using funds managed by experienced portfolio
managers.
Global/International Funds
Taxable Fixed Income Funds
Emerging Markets Portfolio
Adjustable Rate Government
Income Fund
European Portfolio
Government Securities Fund
Pacific Portfolio
High Income Fund
Investment Grade Bond Fund
Growth Funds
Managed Governments Fund
Large Cap Blend Fund
Short-Term High Grade Bond Fund
Large Capitalization Growth
Fund
U.S. Government Securities Fund
Large Cap Value Fund
Mid Cap Blend Fund
Tax-Exempt Fixed Income Funds
Small Cap Blend Fund
Limited Term Portfolio
Municipal High Income Fund
Classic Series The "Classic Series" lets you participate in mutual
funds whose investment decisions are determined by experienced portfolio
managers, based on each fund's investment objectives and guidelines.
Funds in the Smith Barney Classic Series invest across asset classes and
sectors, utilizing a range of strategies in order to achieve their
objectives.
Global/International Funds
Taxable Fixed Income Funds
Global Government Bond Fund
Diversified Strategic Income
Fund
Hansberger Global Small Cap
Value Fund
Total Return Bond Fund
Hansberger Global Value Fund
International Balanced
Portfolio
Tax-Exempt Fixed Income Funds
International Equity Portfolio
Managed Municipals Fund
Growth Funds
Aggressive Growth Fund
Appreciation Fund
Balanced Fund
Concert Peachtree Growth Fund
Contrarian Fund
Fundamental Value Fund
Premium Total Return Fund
Special Equities Fund
Specialty Series Mutual funds included in Smith Barney's "Specialty
Series" explore opportunities in a narrower sector of the market or by
using a narrower investment focus.
Growth Funds
State-Specific, Intermediate-
Term Tax-Exempt Fixed Income
Funds
Concert Social Awareness Fund
Intermediate Maturity
California Municipals Fund
Convertible Fund
Intermediate Maturity New York
Municipals Fund
Natural Resources Fund
S&P 500 Index Fund
State-Specific, Tax-Exempt
Fixed Income Funds
Arizona New Jersey
California New York
Florida Oregon
Georgia Pennsylvania
Massachusetts
Concert Allocation Series These "funds of funds" are designed to
provide you with targeted objectives, but at diversification levels that
are significantly greater than an investment in a single fund can
provide. Currently, available options include Global, High Growth,
Growth, Balanced, Conservative and Income Portfolios. These Portfolios'
objectives are achieved through stock and bond fund allocations that
range from 100% stocks to 10% stocks/90% bonds, allowing you to match
"funds of funds" in the Concert Allocation Series with your changing
financial goals and risk tolerance.
The Global Portfolio The Balanced
Portfolio
The High Growth Portfolio The Conservative
Portfolio
The Growth Portfolio The Income
Portfolio
Help Along the Way
A professionally trained Salomon Smith Barney Financial Consultant is
ready, willing and able to serve as a reliable financial guide
throughout your financial journey. Talk with your Financial Consultant
before you invest in order to help prioritize your goals. Once you've
set your sights on clear objectives, rely on the expertise of this
dedicated professional to help you determine which investment mix may be
suited to your unique circumstances.
Your Financial Consultant knows from experience that allocating assets
is a key part of determining the long-term success of investment
strategies. As your circumstances and life style change, your Financial
Consultant will suggest adjustments to your strategy in order to keep
you on the right road and on track for achieving your financial goals.
International Investing
Whether you're a conservative or aggressive investor, just starting to
save or nearing retirement, chances are you could benefit from investing
a portion of your overall portfolio in international stocks and bonds.
Smith Barney offers a variety of international mutual funds designed to
help you gain access to:
Expanded horizons
Today, approximately 55% of the world's stock and bond opportunities are
found beyond U.S. boundaries. And non-U.S. markets represent some of
the fastest-growing economies in the world.
Potential for higher return
Taken as a whole, foreign markets have outperformed their domestic
counterparts on a long-term basis. Foreign markets do not outperform
the U.S. every quarter of every year, but they have delivered superior
returns over time.
Enhanced diversification
One of the most significant benefits of investing abroad is the
potential for reducing risk. Intentionally diversified portfolios tend
to experience less overall price volatility than portfolios invested in
single markets. Since world markets do not necessarily move in tandem
with those of the U.S., many international markets may be on the rise
when U.S. markets are down. The net result may be lower overall
portfolio volatility and potentially higher investment returns over
time. In addition, global/international mutual funds offer convenient
access to attractive opportunities not always available to U.S.
investors.
Growth Investing
A growth mutual fund can offer you the benefits of professional
management, lower volatility as a result of diversification, and
affordability in terms of both initial and subsequent investments. If
you are a long-term investor, you may be best served by having a
significant portion of your assets invested in growth funds, although
past performance is not a guarantee of future results and principal
value will fluctuate with changes in the market. For younger investors,
growth funds may be one of the best ways to grow your assets and help
you reach your financial goals. Yet investing for growth is also
important for older investors, who should not underestimate the
importance of offsetting the effects of inflation and continuing to
build financial resources for future needs.
Different types of investments have different rewards and risks
associated with them. For example, funds that invest in bonds as well
as stocks may be less volatile than funds investing solely in stocks.
You may reduce overall investment risk by owning funds that span
different market capitalizations and investment styles.
Tax-Exempt Investing: Helping You to Keep More of What You Earn
Tax-exempt fixed income funds, also known as "municipal bond mutual
funds," seek to provide tax-exempt income by investing in portfolios of
selected municipal bonds. Cities, states and municipalities issue
municipal bonds to finance ongoing operations and public projects.
These tax-exempt funds have remained tax-free and offer the potential to
provide shareholders with income and capital growth at levels that may
equal or exceed total returns from taxable investments on an after-tax
basis.
Maturity and credit quality can be important factors in determining the
potential risks and rewards of a municipal bond investment. Longer-term
bond funds generally offer higher yields but your principal will be more
affected by interest rate changes, and therefore, are more risky.
Municipal bonds that are of lower credit quality tend to be riskier
because they are subject to credit risk; however, they generally offer
higher yields. Tax-exempt funds may be appropriate for investors in
high tax brackets. If you are risk-averse, or have shorter-term goals,
an intermediate or shorter-term investment may be more appropriate.
Investors with longer time horizons or a greater tolerance for risk may
benefit from the higher yields offered by longer-term municipal funds.
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]
Part C. Other Information
Item 23. Exhibits
Unless otherwise noted, all references are to the
Registrant's Registration Statement on Form N-1A (the
"Registration Statement") as filed with the SEC on
January 26, 1987 (File Nos. 33-11417 and 811-4994).
(a) (1) First Amended and Restated Master Trust Agreement, dated
November 5, 1992, is incorporated by reference to Post-
Effective Amendment No. 12 filed on November 26, 1994
("Post-Effective Amendment No. 12").
(a) (2) Amendment No. 1 to the Registrant's Amended and Restated
Master Trust Agreement is incorporated by reference to
Post-Effective Amendment No. 12.
(a) (3) Amendment No. 2 to the Registrant's Amended and Restated
Master Trust Agreement is incorporated by reference to
Post-Effective Amendment No. 15 filed on January 26, 1995
("Post-Effective Amendment No. 15").
(a) (4) Articles of Amendment dated June 1, 1998 to the Articles
of Incorporation are filed herein.
(b) Registrant's by-laws are incorporated by reference to the
Registration Statement.
(c) Registrant's form of stock certificate is incorporated by
reference to Post-Effective Amendment No. 9 filed on
October 23, 1992 ("Post-Effective Amendment No. 9").
(d) (1) Investment Advisory Agreement dated July 30, 1993
between the Registrant and Greenwich Street Advisors
is incorporated by reference to Post-Effective Amendment
No. 12.
(d) (2) Form of Transfer and Assumption of Investment Advisory
Agreement between the Registrant, Mutual Management Corp.
and Smith Barney Mutual Funds Management Inc. is
incorporated by reference to Post-Effective Amendment No.
16.
(e) (1) Distribution Agreement dated July 30, 1993, between
the Registrant and Smith Barney Shearson Inc. is
incorporated by reference to Post-Effective Amendment No. 12.
(e) (2) Form of Distribution Agreement between Registrant
and CFBDS, Inc. is filed herein.
(f) Not applicable.
(g) Form of Custodian Agreement between the Registrant and
PNC Bank, National Association is incorporated by
reference to Post-Effective Amendment No. 16.
(h) (1) Administration Agreement between the Registrant and
Smith, Barney Advisers, Inc., dated April 20, 1994 is
incorporated by reference to Post-Effective Amendment No.
15.
(h) (2) Transfer Agency Agreement between the Registrant and The
Shareholder Services Group, Inc., dated August 2, 1993,
is incorporated by reference to Post-Effective Amendment
No. 13 filed on January 28, 1994.
(i) Opinion of Counsel regarding legality of shares being
registered is incorporated by reference to the
Registration Statement filed on January 26, 1987..
(j) Consent of Independent Accountants is filed herein.
(k) Not applicable.
(l) Purchase Agreement between the Registrant and Shearson
Lehman Brothers is incorporated by reference to the
Registration Statement dated January 26, 1987.
(m) (1) Amended Service and Distribution Plan dated as of
November 7, 1994 pursuant to Rule
12b-1 between the Registrant and Smith Barney Inc. is
incorporated by reference to Post-Effective Amendment No.
15.
(m) (2) Form of Amended Service and Distribution Plan pursuant to
Rule 12b-1 between the Registrant and Salomon Smith
Barney Inc. is filed herein.
(n) Financial Data Schedule to be filed by amendment.
(o) (1) Form of Rule 18f-3(d) Multiple Class Plan of the
Registrant is incorporated by reference to Post-
Effective Amendment No. 16.
(o) (2) Form of Rule 18f-3(d) Multiple Class Plan of the
Registrant is filed herein.
Item 24. Persons Controlled by or Under Common Control with
Registrant
None.
Item 25. Indemnification.
The response to this item is incorporated by reference to the
Registration Statement.
Item 26. Business and Other Connections of Investment
Adviser
Investment Adviser - - Mutual Management Corp.
Mutual Management Corp.("MMC") was incorporated in December 1968
under the laws of the State of Delaware. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. (formerly known as
Smith Barney Holdings Inc.), which in turn is a wholly owned
subsidiary of Citigroup Inc. ("Citigroup"). MMC is registered as an
investment adviser under the Investment Advisers Act of 1940 (the
"Advisers Act") and has, through its predecessors, been in the
investment counseling business since 1934.
The list required by this Item 26 of the officer and directors of MMC
together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such
officer and directors during the past two fiscal years, is
incorporated by reference to Schedules A and D of Form ADV filed by
MMC pursuant to the Advisers Act (SEC File No. 801-8314).
Item 27. Principal Underwriters
(a)
CFBDS, Inc., ("CFBDS") the Registrant's Distributor, is also
the distributor for the following Smith Barney funds: Concert
Investment Series, Consulting Group Capital Markets Funds,
Greenwich Street Series Fund, Smith Barney Adjustable Rate
Government Income Fund, Smith Barney Aggressive Growth Fund Inc.,
Smith Barney Appreciation Fund Inc., Smith Barney Arizona
Municipals Fund Inc., Smith Barney California Municipals Fund
Inc., Smith Barney Concert Allocation Series Inc., Smith Barney
Equity Funds, Smith Barney Fundamental Value Fund Inc., Smith
Barney Funds, Inc., Smith Barney Income Funds, Smith Barney
Institutional Cash Management Fund, Inc., Smith Barney Investment
Funds Inc., Smith Barney Investment Trust, Smith Barney Managed
Governments Fund Inc., Smith Barney Managed Municipals Fund Inc.,
Smith Barney Massachusetts Municipals Fund, Smith Barney Money
Funds, Inc., Smith Barney Muni Funds, Smith Barney Municipal Money
Market Fund, Inc., Smith Barney New Jersey Municipals Fund Inc.,
Smith Barney Oregon Municipals Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney
Telecommunications Trust, Smith Barney Variable Account Funds,
Smith Barney World Funds, Inc., Travelers Series Fund Inc., and
various series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA for
Variable Annuities, The Travelers Fund BD for Variable Annuities, The
Travelers Fund BD II for Variable Annuities, The Travelers Fund BD
III for Variable Annuities, The Travelers Fund BD IV for Variable
Annuities, The Travelers Fund ABD for Variable Annuities, The
Travelers Fund ABD II for Variable Annuities, The Travelers Separate
Account PF for Variable Annuities, The Travelers Separate Account PF
II for Variable Annuities, The Travelers Separate Account QP for
Variable Annuities, The Travelers Separate Account TM for Variable
Annuities, The Travelers Separate Account TM II for Variable
Annuities, The Travelers Separate Account Five for Variable
Annuities, The Travelers Separate Account Six for Variable Annuities,
The Travelers Separate Account Seven for Variable Annuities, The
Travelers Separate Account Eight for Variable Annuities, The
Travelers Fund UL for Variable Annuities, The Travelers Fund UL II
for Variable Annuities, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance Separate
Account Two, The Travelers Variable Life Insurance Separate Account
Three, The Travelers Variable Life Insurance Separate Account Four,
The Travelers Separate Account MGA, The Travelers Separate Account
MGA II, The Travelers Growth and Income Stock Account for Variable
Annuities, The Travelers Quality Bond Account for Variable Annuities,
The Travelers Money Market Account for Variable Annuities, The
Travelers Timed Growth and Income Stock Account for Variable
Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable
Annuities, The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the
distributor for CitiFunds Multi-State Tax Free Trust, CitiFunds
Premium Trust, CitiFunds Institutional Trust, CitiFunds Tax Free
Reserves, CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust III,
CitiFunds International Trust, CitiFunds Fixed Income Trust,
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP
Portfolio. CFBDS is also the placement agent for Large Cap Value
Portfolio, Small Cap Value Portfolio, International Portfolio,
Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term
Portfolio, Growth & Income Portfolio, U.S. Fixed Income Portfolio,
Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio,
Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon
Brothers Investors Fund Inc., Salomon Brothers Capital Fund Inc.,
Salomon Brothers Series Funds Inc., Salomon Brothers Institutional
Series Funds Inc., Salomon Brothers Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds,
Inc.
(b) The information required by this Item 27 with respect to each
director and officer of CFBDS is incorporated by reference to
Schedule A of Form BD filed by CFBDS pursuant to the Securities and
Exchange Act of 1934 (File No. 8-32417).
(c) Not applicable.
Item 28. Location of Accountants and Records
(1) Smith Barney Massachusetts Municipals Fund
388 Greenwich Street
New York, New York 10013
(2) Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(5) CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None.
Exhibit Index
Exhibit No. Exhibit
(a) (4) Articles of Amendment filed June 1, 1998
(e) (2) Form of Distribution Agreement
(j) Consent of Independent Accountants
(m) (2) Form of Rule 12b-1 Plan
(n) Financial Data Schedule +
(o) 18f-3 Plan
+ To be filed by further amendment
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant, SMITH BARNEY
MASSACHUSETTS MUNICIPALS FUND, has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly
authorized in the City of New York, and State of New York as of the
4th day of March, 1999.
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
/s/Heath B. McLendon
Heath B. McLendon, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following
persons in the capacities and on the date indicated.
/s/Heath B. McLendon
Heath B. McLendon Chairman of the Board March
4, 1999
(Chief Executive Officer)
/s/Lewis E. Daidone *
Lewis E. Daidone Treasurer March 4,
1999
(Chief Financial and
Accounting Officer)
/s/Herbert Barg *
Herbert Barg Trustee
March 4, 1999
/s/Alfred Bianchetti *
Alfred J. Bianchetti Trustee
March 4, 1999
/s/Martin Brody *
Martin Brody Trustee
March 4, 1999
/s/Dwight B. Crane *
Dwight B. Crane Trustee
March 4, 1999
/s/Burt N. Dorsett *
Burt N. Dorsett Trustee
March 4, 1999
/s/Elliot S. Jaffe *
Elliot S. Jaffe Trustee
March 4, 1999
/s/Stephen E. Kaufman *
Stephen E. Kaufman Trustee
March 4, 1999
/s/Joseph J. McCann *
Joseph J. McCann Trustee March
4, 1999
/s/Cornelius C. Rose, Jr. *
Cornelius C. Rose, Jr. Trustee
March 4, 1999
Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to the power of attorney.
/s/Heath B. McLendon
Heath B. McLendon
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
AMENDMENT NO. 4
TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
AMENDMENT NO. 4 to the First Amended and Restated Master Trust
Agreement dated as of November 5, 1992 (the "Agreement") of Smith
Barney Massachusetts Municipals Fund (the "Trust"), made as of the 12th
day of June, 1998.
WITNESSETH:
WHEREAS, Article VII, Section 7.3 of the Agreement provides that
the Agreement may be amended at any time, so long as such amendment
does not materially adversely affect the rights of any shareholder and
so long as such amendment is not in contravention of applicable law,
including the Investment Company Act of 1940, as amended, by an
instrument in writing signed by an officer of the Trust pursuant to a
vote of a majority of the Trustees; and
WHEREAS, the Trustees have the authority under Section 4.1 of the
Agreement to issue classes of shares (as defined in the Agreement) of
any Sub-Trust (as defined in the Agreement) or divide the shares of any
Sub-Trust into classes, each class having such different dividend,
liquidation, voting and other rights as the Trustees may determine, and
to establish and designate the specific classes of shares of each Sub-
Trust; and
WHEREAS, on April 15, 1998, a majority of the Trustees voted to
redesignate the "Class C" shares of each Sub-Trust as "Class L" shares;
and
WHEREAS, the undersigned has been duly authorized by the Trustees
to execute and file this Amendment No. 1 to the Agreement; and
NOW, THEREFORE, the Agreement is hereby amended as follows:
1. The first paragraph of Article IV, Section 4.2 of the
Agreement is hereby amended to read in pertinent part as follows:
"Section 4.2 Establishment and Designation of Sub-Trusts.
Without limiting the authority of the Trustees set forth in Section 4.1
to establish and designate any further Sub-Trusts and classes, the
Trustees hereby establish and designate the following Sub-Trusts and
classes thereof: "Smith Barney Massachusetts Municipals Fund", which
shall consist of five classes designated as Class A, Class B, Class L,
Class Y and Class Z shares. The shares of such Sub-Trusts and classes
thereof and any shares of any further Sub-Trusts or classes that may
from time to time be established and designated by the Trustees shall
(unless the Trustees otherwise determine with respect to some further
Sub-Trust or class at the time of establishing and designating the
same) have the following relative rights and preferences:"
The undersigned hereby certifies that the Amendment set forth
above has been duly adopted in accordance with the provisions of the
Agreement.
IN WITHNESS WHEREOF, the undersigned has hereto set his hands as
of the day and year first above written.
SMITH BARNEY MASSACHUSETTS
MUNICIPALS FUND
By:
_______________________________
Name: Michael Kocur
Title: Assistant Secretary
LEGAL\FUND\MAMU\MAMUAMND
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
FORM OF
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the "Fund")
has agreed that you shall be, for the period of this Agreement, the non-
exclusive principal underwriter and distributor of shares of the Fund
and each Series of the Fund set forth on Exhibit A hereto, as such
Exhibit may be revised from time to time (each, including any shares of
the Fund not designated by series, a "Series"). For purposes of this
Agreement, the term "Shares" shall mean shares of the each Series, or
one or more Series, as the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of Shares
covered by, and in accordance with, the registration statement,
prospectus and statement of additional information then in effect under
the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended (the "1940 Act"), and will
transmit or cause to be transmitted promptly any orders received by you
or those with whom you have sales or servicing agreements for purchase
or redemption of Shares to the Transfer and Dividend Disbursing Agent
for the Fund of which the Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit orders
for the sale of Shares. It is contemplated that you will enter into
sales or servicing agreements with registered securities brokers and
banks and into servicing agreements with financial institutions and
other industry professionals, such as investment advisers, accountants
and estate planning firms. In entering into such agreements, you will
act only on your own behalf as principal underwriter and distributor.
You will not be responsible for making any distribution plan or service
fee payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as the non-exclusive principal
underwriter and distributor of Shares in compliance with all applicable
laws, rules, and regulations, including, without limitation, all rules
and regulations made or adopted from time to time by the Securities and
Exchange Commission (the "SEC") pursuant to the 1933 Act or the 1940
Act or by any securities association registered under the Securities
Exchange Act of 1934, as amended.
1.4 Whenever in their judgment such action is warranted
for any reason, including, without limitation, market, economic or
political conditions, the Fund's officers may decline to accept any
orders for, or make any sales of, any Shares until such time as those
officers deem it advisable to accept such orders and to make such sales
and the Fund shall advise you promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and all
expenses in connection with maintaining facilities for the issue and
transfer of Shares and for supplying information, prices and other data
to be furnished by the Fund hereunder, and all expenses in connection
with the preparation and printing of the Fund's prospectuses and
statements of additional information for regulatory purposes and for
distribution to shareholders; provided however, that nothing contained
herein shall be deemed to require the Fund to pay any costs of
advertising or marketing the sale of Shares.
2.2 The Fund agrees to execute any and all documents and
to furnish any and all information and otherwise to take any other
actions that may be reasonably necessary in the discretion of the Fund's
officers in connection with the qualification of Shares for sale in such
states and other U.S. jurisdictions as the Fund may approve and
designate to you from time to time, and the Fund agrees to pay all
expenses that may be incurred in connection with such qualification.
You shall pay all expenses connected with your own qualification as a
securities broker or dealer under state or Federal laws and, except as
otherwise specifically provided in this Agreement, all other expenses
incurred by you in connection with the sale of Shares as contemplated in
this Agreement.
2.3 The Fund shall furnish you from time to time, for use
in connection with the sale of Shares, such information reports with
respect to the Fund or any relevant Series and the Shares as you may
reasonably request, all of which shall be signed by one or more of the
Fund's duly authorized officers; and the Fund warrants that the
statements contained in any such reports, when so signed by the Fund's
officers, shall be true and correct. The Fund also shall furnish you
upon request with (a) the reports of the annual audits of the financial
statements of the Fund for each Series made by independent certified
public accountants retained by the Fund for such purpose; (b) semi-
annual unaudited financial statements pertaining to each Series; (c)
quarterly earnings statements prepared by the Fund for any Series; (d) a
monthly itemized list of the securities in each Series' portfolio; (e)
monthly balance sheets as soon as practicable after the end of each
month; (f) the current net asset value and offering price per share
for each Series on each day such net asset value is computed and (g)
from time to time such additional information regarding the financial
condition of each Series of the Fund as you may reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the Fund
with the SEC under the 1933 Act and the 1940 Act with respect to the
Shares have been prepared in conformity with the requirements of said
Acts and the rules and regulations of the SEC thereunder. As used in
this Agreement, the terms "registration statement", "prospectus" and
"statement of additional information" shall mean any registration
statement, prospectus and statement of additional information filed by
the Fund with the SEC and any amendments and supplements thereto filed
by the Fund with the SEC. The Fund represents and warrants to you that
any such registration statement, prospectus and statement of additional
information, when such registration statement becomes effective and as
such prospectus and statement of additional information are amended and
supplemented, includes at the time of such effectiveness, amendment or
supplement all statements required to be contained therein in
conformance with the 1933 Act, the 1940 Act and the rules and
regulations of the SEC; that all statements of material fact contained
in any registration statement, prospectus or statement of additional
information will be true and correct when such registration statement
becomes effective; and that neither any registration statement nor any
prospectus or statement of additional information when such registration
statement becomes effective will include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading to a
purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or amendments to
any registration statement and such supplement or supplements to any
prospectus or statement of additional information as, in the light of
future developments, may, in the opinion of the Fund, be necessary or
advisable. If the Fund shall not propose such amendment or amendments
and/or supplement or supplements within fifteen days after receipt by
the Fund of a written request from you to do so, you may, at your
option, terminate this Agreement or decline to make offers of the Fund's
Shares until such amendments are made. The Fund shall not file any
amendment to any registration statement or supplement to any prospectus
or statement of additional information without giving you reasonable
notice thereof in advance; provided, however, that nothing contained in
this Agreement shall in any way limit the Fund's right to file at any
time such amendments to any registration statement and/or supplements to
any prospectus or statement of additional information, of whatever
character, as the Fund may deem advisable, such right being in all
respects absolute and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from time to
time, in connection with the sale of Shares. The Fund agrees to
indemnify, defend and hold you, your several officers and directors, and
any person who controls you within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any such counsel fees
incurred in connection therewith) which you, your officers and
directors, or any such controlling person, may incur under the 1933 Act
or under common law or otherwise, arising out of or based upon any
untrue statement, or alleged untrue statement, of a material fact
contained in any registration statement, any prospectus or any statement
of additional information or arising out of or based upon any omission,
or alleged omission, to state a material fact required to be stated in
any registration statement, any prospectus or any statement of
additional information or necessary to make the statements in any of
them not misleading; provided, however, that the Fund's agreement to
indemnify you, your officers or directors, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or
expenses arising out of any statements or representations made by you or
your representatives or agents other than such statements and
representations as are contained in any prospectus or statement of
additional information and in such financial and other statements as are
furnished to you pursuant to paragraph 2.3 of this Agreement; and
further provided that the Fund's agreement to indemnify you and the
Fund's representations and warranties herein before set forth in
paragraph 3 of this Agreement shall not be deemed to cover any liability
to the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of
your obligations and duties under this Agreement. The Fund's agreement
to indemnify you, your officers and directors, and any such controlling
person, as aforesaid, is expressly conditioned upon the Fund's being
notified of any action brought against you, your officers or directors,
or any such controlling person, such notification to be given by letter
or by telegram addressed to the Fund at its principal office in New
York, New York and sent to the Fund by the person against whom such
action is brought, within ten days after the summons or other first
legal process shall have been served. The failure so to notify the Fund
of any such action shall not relieve the Fund from any liability that
the Fund may have to the person against whom such action is brought by
reason of any such untrue, or alleged untrue, statement or omission, or
alleged omission, otherwise than on account of the Fund's indemnity
agreement contained in this paragraph 4.1. The Fund will be entitled to
assume the defense of any suit brought to enforce any such claim, demand
or liability, but, in such case, such defense shall be conducted by
counsel of good standing chosen by the Fund. In the event the Fund
elects to assume the defense of any such suit and retains counsel of
good standing, the defendant or defendants in such suit shall bear the
fees and expenses of any additional counsel retained by any of them; but
if the Fund does not elect to assume the defense of any such suit, the
Fund will reimburse you, your officers and directors, or the controlling
person or persons named as defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by you or them.
The Fund's indemnification agreement contained in this paragraph 4.1 and
the Fund's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of you, your officers and directors, or any
controlling person, and shall survive the delivery of any of the Fund's
Shares. This agreement of indemnity will inure exclusively to your
benefit, to the benefit of your several officers and directors, and
their respective estates, and to the benefit of the controlling persons
and their successors. The Fund agrees to notify you promptly of the
commencement of any litigation or proceedings against the Fund or any of
its officers or Board members in connection with the issuance and sale
of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund, its
several officers and Board members, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith)
that the Fund, its officers or Board members or any such controlling
person may incur under the 1933 Act, or under common law or otherwise,
but only to the extent that such liability or expense incurred by the
Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be based
upon any untrue, or alleged untrue, statement of a material fact
contained in information furnished in writing by you to the Fund and
used in the answers to any of the items of the registration statement or
in the corresponding statements made in the prospectus or statement of
additional information, or shall arise out of or be based upon any
omission, or alleged omission, to state a material fact in connection
with such information furnished in writing by you to the Fund and
required to be stated in such answers or necessary to make such
information not misleading. Your agreement to indemnify the Fund, its
officers or Board members, and any such controlling person, as
aforesaid, is expressly conditioned upon your being notified of any
action brought against the Fund, its officers or Board members, or any
such controlling person, such notification to be given by letter or
telegram addressed to you at your principal office in Boston,
Massachusetts and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process
shall have been served. You shall have the right to control the defense
of such action, with counsel of your own choosing, satisfactory to the
Fund, if such action is based solely upon such alleged misstatement or
omission on your part or with the Fund's consent, and in any event the
Fund, its officers or Board members or such controlling person shall
each have the right to participate in the defense or preparation of the
defense of any such action with counsel of its own choosing reasonably
acceptable to you but shall not have the right to settle any such action
without your consent, which will not be unreasonably withheld. The
failure to so notify you of any such action shall not relieve you from
any liability that you may have to the Fund, its officers or Board
members, or to such controlling person by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission, otherwise
than on account of your indemnity agreement contained in this paragraph
4.2. You agree to notify the Fund promptly of the commencement of any
litigation or proceedings against you or any of your officers or
directors in connection with the issuance and sale of any of the Fund's
Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under any of
the provisions of this Agreement and no orders for the purchase or sale
of such Shares under this Agreement shall be accepted by the Fund if and
so long as the effectiveness of the registration statement then in
effect or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current
prospectus as required by Section 5(b) (2) of the 1933 Act is not on
file with the SEC; provided, however, that nothing contained in this
paragraph 5 shall in any way restrict or have any application to or
bearing upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's prospectus,
statement of additional information or charter documents, as amended
from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for sale by
you shall be offered for sale at a price per share (the "offering
price") equal to (a) their net asset value (determined in the manner
set forth in the Fund's charter documents and the then-current
prospectus and statement of additional information) plus (b) a sales
charge, if applicable, which shall be the percentage of the offering
price of such Shares as set forth in the Fund's then-current prospectus
relating to such Series. In addition to or in lieu of any sales charge
applicable at the time of sale, Shares of any class of any Series of the
Fund offered for sale by you may be subject to a contingent deferred
sales charge as set forth in the Fund's then-current prospectus and
statement of additional information. You shall be entitled to receive
any sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a broker or
dealer through whom you sell Shares shall be governed by a separate
agreement between you and such broker or dealer and the Fund's then-
current prospectus and statement of additional information. Any
payments to any provider of services to you shall be governed by a
separate agreement between you and such service provider.
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC for
amendments to the registration statement,
prospectus or statement of additional
information then in effect or for additional
information;
(b) in the event of the issuance by
the SEC of any stop order suspending the
effectiveness of the registration statement,
prospectus or statement of additional
information then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that
makes untrue any statement of a material fact
made in the registration statement,
prospectus or statement of additional
information then in effect or that requires
the making of a change in such registration
statement, prospectus or statement of
additional information in order to make the
statements therein not misleading; and
(d) of all actions of the SEC with
respect to any amendment to the registration
statement, or any supplement to the
prospectus or statement of additional
information which may from time to time be
filed with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof, shall
have an initial term of one year from the date hereof, and shall
continue for successive annual periods thereafter so long as such
continuance is specifically approved at least annually by (a) the Fund's
Board or (b) by a vote of a majority (as defined in the 1940 Act) of the
Fund's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board members of the
Fund who are not interested persons (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable
with or without cause, without penalty, on 60 days' notice by the Fund's
Board or by vote of holders of a majority of the relevant Series
outstanding voting securities, or on 90 days' notice by you. This
Agreement will also terminate automatically, as to the relevant Series,
in the event of its assignment (as defined in the 1940 Act and the rules
and regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising under
this Agreement (collectively, a "Dispute") shall be settled by
arbitration administered under the rules of the American Arbitration
Association ("AAA") in New York, New York. Any arbitration and award
of the arbitrators, or a majority of them, shall be final and the
judgment upon the award rendered may be entered in any state or federal
court having jurisdiction. No punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and distributor of
Shares, you shall not perform any services for any entity other than
investment companies advised or administered by Citigroup Inc. or its
subsidiaries. The Fund recognizes that the persons employed by you to
assist in the performance of your duties under this Agreement may not
devote their full time to such service and nothing contained in this
Agreement shall be deemed to limit or restrict the persons employed by
you or any of your affiliates right to engage in and devote time and
attention to other businesses or to render services of whatever kind or
nature, provided, however, that in conducting such business or rendering
such services your employees and affiliates would take reasonable steps
to assure that the other parties involved are put on notice as to the
legal entity with which they are dealing. This Agreement and the terms
and conditions set forth herein shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect
to its conflict of interest principles.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning to
us the enclosed copy, whereupon this Agreement will become binding on
you.
Very truly yours,
SMITH BARNEY MASSACHUSETTS
MUNICIPALS FUND
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
Page: 3
8
FORM OF
AMENDED AND RESTATED
SHAREHOLDER SERVICES AND DISTRIBUTION PLAN PRIVATE
This Amended and Restated Shareholder Services and Distribution
Plan (the "Plan") is adopted in accordance with Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by Smith Barney Massachusetts Municipals Fund, a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Trust") on behalf of its sub-trust (the
"Fund"), subject to the following terms and conditions:
Section 1. Annual Fee.
(a) Service Fee for Class A shares. The Trust will pay to
Salomon Smith Barney Inc., a corporation organized under the
laws of the State of Delaware ("Salomon Smith Barney"), a
service fee under the Plan at an annual rate of [ %] of
the average daily net assets of the Fund attributable to the
Class A shares sold and not redeemed (the "Class A Service
Fee").
(b) Service Fee for Class B shares. The Trust will pay to
Salomon Smith Barney a service fee under the Plan at the
annual rate of [ %] of the average daily net assets of
the Fund attributable to the Class B shares sold and not
redeemed (the "Class B Service Fee").
(c) Distribution Fee for Class B shares. In addition to the
Class B Service Fee, the Trust will pay Salomon Smith Barney
a distribution fee under the Plan at the annual rate of [
%] of the average daily net assets of the Fund attributable
to the Class B shares sold and not redeemed (the "Class B
Distribution Fee").
(d) Service Fee for Class L shares. The Trust will pay to
Salomon Smith Barney a service fee under the plan at the
annual rate of [ %] of the average daily net assets of
the Fund attributable to the Class L shares sold and not
redeemed (the "Class L Service Fee").
(e) Distribution Fee for Class L shares. In addition to the
Class L Service Fee, the Trust will pay Salomon Smith Barney
a distribution fee under the Plan at the annual rate of [
%] of the average daily net assets of the Fund attributable
to the Class L shares sold and not redeemed (the "Class L
Distribution Fee").
(f) Payment of Fees. The Service Fees and Distribution Fees will
be calculated daily and paid monthly by the Trust with
respect to the foregoing classes of the Fund's shares (each
a "Class" and together, the "Classes") at the annual rates
indicated above.
Section 2. Expenses Covered by the Plan.
With respect to expenses incurred by each Class, its respective
Service Fee and/or Distribution Fee may be used by Salomon Smith
Barney for: (a) costs of printing and distributing the Trust's
prospectuses, statements of additional information and reports to
prospective investors in the Trust; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Trust;
(c) an allocation of overhead and other branch office distribution-
related expenses of Salomon Smith Barney; (d) payments made to, and
expenses of, Salomon Smith Barney's financial consultants and other
persons who provide support services to Trust shareholders in
connection with the distribution of the Trust's shares, including but
not limited to, office space and equipment, telephone facilities,
answering routine inquires regarding the Trust and its operation,
processing shareholder transactions, forwarding and collecting proxy
material, changing dividend payment elections and providing any other
shareholder services not otherwise provided by the Trust's transfer
agent; and (e) accruals for interest on the amount of the foregoing
expenses that exceed the Distribution Fee for that Class and, in the
case of Class B and Class L shares, any contingent deferred sales
charges received by Salomon Smith Barney; provided, however, that (i)
the Distribution Fee for a particular Class may be used by Salomon
Smith Barney only to cover expenses primarily intended to result in
the sale of shares of that Class, including, without limitation,
payments to the financial consultants of Salomon Smith Barney and
other persons as compensation for the sale of the shares, and (ii)
the Service Fees are intended to be used by Salomon Smith Barney
primarily to pay its financial consultants for servicing shareholder
accounts, including a continuing fee to each such financial
consultant, which fee shall begin to accrue immediately after the
sale of such shares.
Section 3. Approval by Shareholders.
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of
the Plan, with respect to a Class until the Plan has been approved by
a vote of at least a majority
of the outstanding voting securities of the Class. The Plan will be
deemed to have been approved
with respect to a Class so long as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a
majority of the outstanding voting securities of any other Class, or
(b) the Plan has not been
approved by a majority of the outstanding voting securities of the
Trust.
Section 4. Approval by Trustees.
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the Board of Trustees and (b)
those Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to it (the "Qualified Trustees"),
cast in person at a meeting called for the purpose of voting on the
Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect with respect to each Class until
[ , 1999] and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Trust
and by a majority of the Qualified Trustees.
Section 6. Termination.
The Plan may be terminated at any time with respect to a Class (i)
by the Trust without the payment of any penalty, by the vote of a
majority of the outstanding voting securities of such Class or (ii)
by a majority vote of the Qualified Trustees. The Plan may remain in
effect with respect to a particular Class even if the Plan has been
terminated in accordance with this Section 6 with respect to any
other Class.
Section 7. Amendments.
The Plan may not be amended with respect to any Class so as to
increase materially the amounts of the fees described in Section 1
above, unless the amendment is approved by a vote of holders of at
least a majority of the outstanding voting securities of that Class.
No material amendment to the Plan may be made unless approved by the
Trust's Board of Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees.
While the Plan is in effect, the selection and nomination of the
Trust's Trustees who are not interested persons of the Trust will be
committed to the discretion of the Trustees then in office who are
not interested persons of the Trust.
Section 9. Written Reports
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the
Fund pursuant to the Plan or any related agreement will prepare and
furnish to the Trust's Board of Trustees and the Board will review,
at least quarterly, written reports complying with the requirements
of the Rule, which set out the amounts expended under the Plan and
the purposes for which those expenditures were made.
Section 10. Preservation of Materials.
The Trust will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 9 above, for a
period of not less than six years (the first two years in an easily
accessible place) from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority
of the outstanding voting securities" will be deemed to have the same
meaning that those terms have under the rules and regulations under
the 1940 Act, subject to any exemption that may be granted to the
Trust under the 1940 Act, by the Securities and Exchange Commission.
Section 12. Limitation of Liability.
The obligations of the Trust under this Agreement shall not be
binding upon any of the Trustees, shareholders, nominees, officers,
employees or agents, whether past, present or future, of the Trust,
individually, but are binding only upon the assets and property of
the Trust, as provided in the Master Trust Agreement. The execution
of this Plan has been authorized by the Trustees and signed by an
authorized officer of the Trust, acting as such, and neither such
authorization by such Trustees nor such execution by such officer
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only
the trust property of the Trust as provided in its Master Trust
Agreement.
IN WITNESS WHEREOF, the Fund has executed the Plan as of October
8, 1998.
SMITH BARNEY MASSACHUSETTS
MUNICIPALS FUND
By:
____________________________________
Heath B. McLendon
Chairman of the Board
g:\legal\general\forms\agreemts\dist12b1\12b1Plan
Rule 18f-3 (d) Multiple Class Plan for Smith Barney Mutual Funds
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of the
Investment Company Act of 1940, as amended (the "1940 Act"). The
purpose of the Plan is to restate the existing arrangements previously
approved by the Boards of Directors and Trustees of certain of the open-
end investment companies set forth on Schedule A (the "Funds" and each a
"Fund") under the Funds' existing order of exemption (Investment Company
Act Release Nos. 20042 (January 28, 1994) (notice) and 20090 (February
23, 1994)). Shares of the Funds are distributed pursuant to a system
(the "Multiple Class System") in which each class of shares (a "Class")
of a Fund represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent outlined below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for purchase by
investors with the following sales load structure. In addition,
pursuant to Rule 12b-1 under the 1940 Act (the "Rule"), the Funds have
each adopted a plan (the "Services and Distribution Plan") under which
shares of the Classes are subject to the
services and distribution fees described below.
1. Class A Shares
Class A shares are offered with a front-end sales load and under the
Services and Distribution Plan are subject to a service fee of up to
0.25% of average daily net assets. In addition, the Funds are permitted
to assess a contingent deferred sales charge ("CDSC") on certain
redemptions of Class A shares sold pursuant to a complete waiver of
front-end sales loads applicable to large purchases, if the shares are
redeemed within one year of the date of purchase. This waiver applies
to sales of Class A shares where the amount of purchase is equal to or
exceeds $500,000 although this amount may be changed in the future.
2. Class B Shares
Class B shares are offered without a front-end sales load, but are
subject to a five-year declining CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate of up
to 0.25% of average daily net assets and a distribution fee at an annual
rate of up to 0.75% of average daily net assets.
3. Class D Shares
Class D shares are offered without a front-end sales load, CDSC, service
fee or distribution fee.
4. Class L Shares
Class L shares are offered with a front-end load, are subject to a one-
year CDSC and under the Services and Distribution Plan are subject to a
service fee at an annual rate of up to 0.25% of average daily net assets
and a distribution fee at an annual rate of up to 0.75% of average daily
net assets. Unlike Class B shares, Class L shares do not have the
conversion feature as discussed below and accordingly, these shares are
subject to a
distribution fee for an indefinite period of time. The Funds reserve
the right to impose these fees at such higher rates as may be
determined.
5. Class I Shares
Class I shares are offered without a front-end sales load, but are
subject under the Services and Distribution Plan to a service fee at an
annual rate of up to 0.25% of average daily net assets.
6. Class O Shares
Class O shares are offered without a front-end load, but are subject to
a one-year CDSC and under the Services and Distribution Plan are subject
to a service fee at an annual rate of up to 0.25% of average daily net
assets and a distribution fee at an annual rate of up to 0.50% of
average daily net assets. Unlike Class B
shares, Class O shares do not have the conversion feature as discussed
below and accordingly, these shares are subject to a distribution fee
for an indefinite period of time. The Funds reserve the right to impose
these fees at such higher rates as may be determined.
Effective June 28, 1999, Class O shares will be offered with a front-end
load and will continue to be subject to a one year CDSC, a service fee
at an annual rate of up to 0.25% of average daily net assets and a
distribution fee at an annual rate of up to 0.50% of average daily net
assets.
7. Class Y Shares
Class Y shares are offered without imposition of either a sales charge
or a service or distribution fee for investments where the amount of
purchase is equal to or exceeds a specific amount as specified in each
Fund's prospectus.
8. Class Z Shares
Class Z shares are offered without imposition of either a sales charge
or a service or distribution fee for purchase (i) by employee benefit
and retirement plans of Salomon Smith Barney Inc. ("Salomon Smith
Barney") and its affiliates, (ii) by certain unit investment trusts
sponsored by Salomon Smith Barney and its affiliates, and (iii) although
not currently authorized by the governing boards of the Funds, when and
if authorized, (x) by employees of Salomon Smith Barney and its
affiliates and (y) by directors, general partners or trustees of any
investment company listed on Schedule A and, for each of (x) and (y),
their
spouses and minor children.
9. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the authority to
create additional classes, or change existing Classes, from time to
time, in accordance with Rule 18f-3 of the 1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a Fund are
allocated among the various Classes of shares based on the net assets of
the Fund attributable to each Class, except that each Class's net asset
value and expenses reflect the expenses associated with that Class under
the Fund's Services and
Distribution Plan, including any costs associated with obtaining
shareholder approval of the Services and Distribution Plan (or an
amendment thereto) and any expenses specific to that Class. Such
expenses are limited to the following:
(i) transfer agency fees as identified by the transfer agent as
being attributable to a specific Class;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and
proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class of shares;
(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;
(v) the expense of administrative personnel and services as
required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating solely to one
Class of shares; and
(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of shares.
Pursuant to the Multiple Class System, expenses of a Fund allocated to a
particular Class of shares of that Fund are borne on a pro rata basis by
each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert to Class A
shares after a certain holding period, expected to be, in most cases,
approximately eight years but may be shorter. Upon the expiration of
the holding period, Class B shares (except those purchases through the
reinvestment of dividends and other
distributions paid in respect of Class B shares) will automatically
convert to Class A shares of the Fund at the relative net asset value of
each of the Classes, and will, as a result, thereafter be subject to the
lower fee under the Services and Distribution Plan. For purposes of
calculating the holding period required for conversion, newly created
Class B shares issued after the date of implementation of the Multiple
Class
System are deemed to have been issued on (i) the date on which the
issuance of the Class B shares occurred or (ii) for Class B shares
obtained through an exchange, or a series of exchanges, the date on
which the issuance of the original Class B shares occurred.
Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B shares.
However, for purposes of conversion to Class A, all Class B shares in a
shareholder's Fund account that were purchased through the reinvestment
of dividends and other distributions paid in respect of Class B shares
(and that have not converted to Class A shares as provided in the
following sentence) are considered to be held in a separate sub-account.
Each time any Class B shares
in the shareholder's Fund account (other than those in the sub-account
referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B shares
then in the sub-account also converts to Class A. The portion is
determined by the ratio that the shareholder's Class B shares converting
to Class A bears to the shareholder's total Class B shares not acquired
through dividends and distributions.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of a ruling of the Internal Revenue Service that
payment of different dividends on Class A and Class B shares does not
result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing availability
of an opinion of counsel to the effect that the conversion of shares
does not constitute a taxable event under the Code. The conversion of
Class B shares to Class A shares may be suspended if this opinion is no
longer available, In the event that conversion of Class B shares does
not occur, Class B shares would continue to be subject to the
distribution fee and any incrementally higher transfer agency costs
attending the Class B shares for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net asset value for
shares of the same Class in certain other of the Smith Barney Mutual
Funds as set forth in the prospectus for such Fund. Funds only permit
exchanges into shares of money market funds having a plan under the Rule
if, as permitted by paragraph (b) (5) of Rule 11a-3 under the 1940 Act,
either (i) the time period during which the shares of the money market
funds are held is included in the calculations of the CDSC or (ii) the
time period is not included but the amount of the CDSC is reduced by the
amount of any payments made under a plan adopted pursuant to the
Rule by the money market funds with respects to those shares.
Currently, the Funds include the time period during which shares of the
money market fund are held in the CDSC period. The exchange privileges
applicable to all Classes of shares must comply with Rule 11a-3 under
the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of October 31, 1998)
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Smith Barney Concert Allocation Series Inc.
Conservative Portfolio
Balanced Portfolio
Global Portfolio
Growth Portfolio
Income Portfolio
High Growth Portfolio
Smith Barney Equity Funds -
Concert Social Awareness Fund
Smith Barney Large Cap Blend Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Large Cap Value Fund
Short-Term High Grade Bond Fund
U.S. Government Securities Fund
Smith Barney Income Funds -
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Smith Barney Investment Trust -
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney S&P 500 Index Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Investment Funds Inc. -
Concert Peachtree Growth Fund
Smith Barney Contrarian Fund
Smith Barney Government Securities Fund
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund
Smith Barney Institutional Cash Management Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Money Market Portfolio
Florida Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New York Portfolio
New York Money Market
Pennsylvania Portfolio
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
Emerging Markets Portfolio
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
The Massachusetts Municipals Fund:
We consent to, to the use of our report dated January 15, 1998 with
respect to the Massachusetts Municipals Fund, incorporated herein by
reference to the references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Auditors" in the Statement of
Additional Information.
KPMG LLP
New York, New York
January 21, 1999
