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. 20 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 21 [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 [ X] on (March
30, 1999) pursuant to paragraph
b
[ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on
(date) 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
<PAGE>
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
Smith Barney Mutual Funds
Investing for your future.
Everyday.
Massachusetts
Municipals Fund
Class A, B, L and Y Shares
March 30, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statements to the contrary is a crime.
<PAGE>
Massachusetts Municipals Fund
Contents
<TABLE>
<S> <C>
Fund goal and strategies.................................................... 2
Risks, performance and expenses............................................. 3
More on the fund's investments.............................................. 6
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
</TABLE>
<TABLE>
<S> <C>
Comparing the fund's classes................................................ 9
Sales charge................................................................ 10
More about deferred sales charges........................................... 12
Buying shares............................................................... 13
Exchanging shares........................................................... 14
Redeeming shares............................................................ 16
Other things to know about share transactions............................... 18
Dividends, distributions and taxes.......................................... 20
Share price................................................................. 21
Financial highlights........................................................ 22
</TABLE>
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.
Smith Barney Mutual Funds 1
<PAGE>
Fund goal and strategies
Investment objective
The fund seeks to provide Massachusetts investors with as high a level of divi-
dend 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 Com-
monwealth of Massachusetts and certain other municipal issuers, political sub-
divisions, 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 cate-
gories, or if unrated, of comparable quality.
Selection process
The manager selects individual securities 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 attrac-
tiveness 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 rev-
enue bond sectors, such as hospital, industrial development and housing,
based on their apparent relative values
.Considers the yields available for securities with different maturities and a
security's maturity in light of the outlook for the issuer, 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 Massachusetts Municipals Fund
<PAGE>
Risks, performance and expenses
Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
.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 the security's credit rating is downgraded. This
risk is higher for below investment grade bonds, which are considered specu-
lative 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 distri-
butions of the fund's gains generally will be, subject to federal and Massachu-
setts 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, dis-
tributions 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 fewer issuers, the fund will be more sus-
ceptible to negative events affecting those issuers.
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 Massachu-
setts 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
Smith Barney Mutual Funds 3
<PAGE>
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 neces-
sarily indicate how the fund will perform in the future.
Total Return for Class A Shares
[BAR GRAPH APPEARS HERE]
Calendar years ended December 31
88 89 90 91 92 93 94 95 96 97
----- ----- ---- ----- ----- ----- ---- ----- ----- ----
12.25 8.43 4.11 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: 7.79% in 3rd quarter 1995; Lowest: (7.14)% in 3rd quarter 1994
Comparative performance
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
Lehman Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unman-
aged index of municipal bonds and the Lipper Massachusetts Municipal Fund Aver-
age (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.
Average Annual Total Returns
Calendar Years Ended December 31, 1998
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since inception Inception date
<S> <C> <C> <C> <C> <C>
A 1.69% 26.62% 100.8% 128.6% 12/21/87
B 0.96% 16.4% n/a 47.79% 11/30/92
L 3.41% n/a n/a 44.04% 11/10/94
Lehman Index 6.48% 35.24% 120.25% 142.64 *
Lipper Funds Average 5.42% 29.68% 107.55% 130.48 *
</TABLE>
* Index comparison begins on December 31, 1987.
4 Massachusetts Municipals Fund
<PAGE>
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge on purchases
(as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge on redemptions
(as a % of the lower of net asset value at
purchase or redemption) None* 4.50% 1.00% None
Annual fund operating expenses
<CAPTION>
(paid by the fund as a % of net assets) Class A Class B Class L Class Y**
<S> <C> <C> <C> <C>
Management fee 0.50% 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.11% 0.13% 0.11% 0.11%
----- ----- ----- -----
Total annual fund operating expenses 0.76% 1.28% 1.31% 0.61%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales charge) but if you redeem those shares within 12
months of their purchase, you will pay a deferred sales charge of 1.00%.
**For Class Y shares, "Other Expenses" have been estimated based on expenses
incurred by Class A shares because prior to November 30, 1998, no Class Y
shares were sold.
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
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $475 $633 $805 $1,305
Class B (redemption at end of period) $580 $706 $802 $1,402
Class B (no redemption) $130 $406 $702 $1,402
Class L (redemption at end of period) $332 $511 $811 $1,663
Class L (no redemption) $232 $511 $811 $1,663
Class Y (with or without redemption) $ 62 $195 $340 $ 762
</TABLE>
Smith Barney Mutual Funds 5
<PAGE>
More on the fund's investments
Massachusetts municipal securities Massachusetts municipal securities include
debt obligations issued by certain non-Massachusetts governmental issuers such
as Puerto Rico, the Virgin Islands and Guam. The interest on Massachusetts
municipal securities is exempt from federal income tax and Massachusetts per-
sonal 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 dispro-
portionately 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 accu-
rately 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 strate-
gies 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 Massachusetts Municipals Fund
<PAGE>
Management
Manager The fund's investment adviser and administrator 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.
Peter Coffey, an investment officer of SSBC and a managing director of Salomon
Smith Barney, has assumed responsibility for the day-to-day management of the
fund's portfolio on February 2, 1999. Mr. Coffey has over 30 years of
securities business experience.
Management fees For its services, during the fund's last fiscal year the man-
ager received an advisory fee equal to 0.30% of the fund's average daily net
assets and an administration fee equal to 0.20% of the fund's average daily net
assets up to $500 million and 0.18% of the fund's average daily net assets in
excess of $500 million.
Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute the fund's shares. A selling group consisting of Salomon Smith Barney and
other broker-dealers sells 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 serv-
ice 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 cost of addressing the Year 2000 issue, if sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by 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, which are limited to requesting and receiving reports
from its service providers, or the efforts of its service providers to correct
the problem will be successful.
Smith Barney Mutual Funds 7
<PAGE>
Choosing a class of shares to buy
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 plan to invest regularly or in large amounts, buying Class A shares may
help you reduce sales charges and ongoing expenses.
.For Class B shares, all of your purchase amount and, for Class L shares, more
of your purchase amount (compared to Class A shares) will be immediately
invested. This may help offset the higher expenses of Class B and Class L
shares, but only if the fund performs well.
.Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and Class
L shares do not, Class B shares may be more attractive to long-term invest-
ors.
You may buy shares from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through Sal-
omon 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.
<TABLE>
<CAPTION>
Initial Additional
Classes A, B, L Class Y All Classes
<S> <C> <C> <C>
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
</TABLE>
8 Massachusetts Municipals Fund
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Key features .Initial .No initial .Initial .No initial
sales sales sales or
charge charge charge is deferred
.You may .Deferred lower than sales
qualify sales Class A charge
for reduc- charge .Deferred .Must
tion or declines sales invest at
waiver of over time charge for least $15
initial .Converts only 1 million
sales to Class A year .Lower
charge after 8 .Does not annual
.Lower years convert to expenses
annual .Higher Class A than the
expenses annual .Higher other
than Class expenses annual classes
B and than Class expenses
Class L A than Class
A
- ------------------------------------------------------------------------
Initial sales charge Up to None 1.00% None
4.00%;
reduced or
waived for
large pur-
chases and
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
- ------------------------------------------------------------------------
Deferred sales charge 1% on pur- Up to 4.50% 1% if you None
chases of charged redeem
$500,000 or when you within 1
more if you redeem year of
redeem shares. The purchase
within 1 charge is
year of reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
- ------------------------------------------------------------------------
Annual distribution and 0.15% of 0.65% of 0.70% of None
service fees average average average
daily net daily net daily net
assets assets assets
- ------------------------------------------------------------------------
Exchange privilege* Class A Class B Class L Class Y
shares shares shares shares
of most of most of most of most
Smith Smith Smith Smith
Barney Barney Barney Barney
funds funds funds funds
- ------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds 9
<PAGE>
Sales charge
Class A shares
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.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
Less than $25,000 4.00 4.17
$25,000 but less than $50,000 3.50 3.63
$50,000 but less than $100,000 3.00 3.09
$100,000 but less than $250,000 2.50 2.56
$250,000 but less than $500,000 1.50 1.52
$500,000 or more -0- -0-
</TABLE>
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. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
.Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney 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.
10 Massachusetts Municipals Fund
<PAGE>
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 cer-
tain 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 Con-
sultant or dealer representative or consult the Statement of Additional Infor-
mation ("SAI").
Class B shares
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 pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th and over
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</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:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith
distributions Barney fund
<S> <C> <C>
Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
</TABLE>
Smith Barney Mutual Funds 11
<PAGE>
Class L shares
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.
Class Y shares
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.
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase 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 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 at the current net asset
value 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
12 Massachusetts Municipals Fund
<PAGE>
.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.
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
Consultant or If you do not provide the following information, your order
dealer will be 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
fund's Certain other investors who are clients of the selling group
transfer are eligible to buy shares directly from the fund.
agent
.Write the transfer agent at the following address:
Smith Barney 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 pur-
chases, complete and send an account application.
.For more information, call the transfer agent at 1-800-451-
2010.
Smith Barney Mutual Funds 13
<PAGE>
Through a You may authorize Salomon Smith Barney, your dealer represen-
systematic tative or the transfer agent to transfer funds automatically
investment from a regular bank account, cash held in a Salomon Smith
plan 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 represen-
tative 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.
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the
varying needs .You may exchange shares only for shares of the same class of
of both large another Smith Barney fund. Not all Smith Barney funds offer
and small all classes
investors
.Not all Smith Barney funds may be offered in your state of
residence. Contact your Salomon 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 (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges
14 Massachusetts Municipals Fund
<PAGE>
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured 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 com-
plete 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 5:00 p.m. (Eastern
time). Requests received after the close of regular trading
on the Exchange are priced at the net asset value next deter-
mined.
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.
Smith Barney Mutual Funds 15
<PAGE>
Redeeming shares
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 redemp-
tion proceeds will not be sent to you until your original
check clears, which may take up to 15 days.
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 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 regis-
tered
16 Massachusetts Municipals Fund
<PAGE>
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 5:00 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 You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans 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.
Smith Barney Mutual Funds 17
<PAGE>
Other things to know about share transactions
When you buy, exchange or redeem shares, your request must be in good order.
This means 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 the account is registered
The transfer agent will try to confirm that any telephone exchange or redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal 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 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 regis-
tration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
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
18 Massachusetts Municipals Fund
<PAGE>
.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 Securi-
ties and Exchange Commission
.Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
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 share-
holders. 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.
Smith Barney Mutual Funds 19
<PAGE>
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 primar-
ily 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 distribu-
tions 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 distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status Massachusetts tax status
<S> <C> <C>
Redemption or exchange Usually capital Usually capital gain
of shares gain or loss; long-term only or loss
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 Exempt if from
interest on tax-exempt interest on Massachusetts
securities, otherwise municipal securities,
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 taxable 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
20 Massachusetts Municipals Fund
<PAGE>
shares during the previous year. If you do not provide the fund with your cor-
rect 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.
Share price
You may buy, exchange or redeem shares at their net asset value, plus 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 liabili-
ties. 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. The Exchange is closed on certain holidays listed in the SAI. This calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. 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. A security's
valuation may differ depending on the method used for determining value.
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 repre-
sentative 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.
Smith Barney Mutual Funds 21
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance 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, is
included in the annual report (available upon request). The information for the
fiscal year ended November 30, 1994 has been audited by other auditors. No
information is present for Class Y shares because no shares were outstanding
during these fiscal years.
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 $13.18 $12.99 $12.96 $11.35 $13.26
- -------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(/1/) 0.65 0.66 0.68 0.69 0.70
Net realized and unrealized
gain (loss) 0.34 0.32 0.02 1.61 (1.85)
- -------------------------------------------------------------------------------
Total income (loss) from
operations 0.99 0.98 0.70 2.30 (1.15)
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.64) (0.67) (0.67) (0.69) (0.70)
In excess of net investment
income (0.01) -- -- -- --
Net realized gains (0.20) (0.12) -- -- (0.06)
- -------------------------------------------------------------------------------
Total distributions (0.85) (0.79) (0.67) (0.69) (0.76)
- -------------------------------------------------------------------------------
Net asset value, end of year $13.32 $13.18 $12.99 $12.96 $11.35
- -------------------------------------------------------------------------------
Total return(/2/) 7.66% 7.85% 5.65% 20.73% (9.07)%
- -------------------------------------------------------------------------------
Net assets, end of year (000)'s $37,451 $32,736 $30,109 $29,159 $27,634
- -------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/1/) 0.76% 0.80% 0.80% 0.83% 0.81%
Net investment income 4.84 5.07 5.32 5.42 5.55
- -------------------------------------------------------------------------------
Portfolio turnover rate 51% 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
In Net Investment Expense Ratios
Income Without Fee Waivers
1997 1996 1995 1994 1997 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 Massachusetts Municipals Fund
<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 of
year $13.17 $12.99 $12.96 $11.35 $13.26
- -------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income(/1/) 0.58 0.60 0.61 0.63 0.63
Net realized and unrealized
gain (loss) 0.33 0.31 0.03 1.61 (1.84)
- -------------------------------------------------------------------------------
Total income (loss) from
operations 0.91 0.91 0.64 2.24 (1.21)
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.57) (0.61) (0.61) (0.63) (0.64)
In excess of net investment
income (0.01) -- -- -- --
Net realized gains (0.20) (0.12) -- -- (0.06)
- -------------------------------------------------------------------------------
Total distributions (0.78) (0.73) (0.16) (0.63) (0.70)
- -------------------------------------------------------------------------------
Net asset value, end of year $13.30 $13.17 $12.99 $12.96 $11.35
- -------------------------------------------------------------------------------
Total return(/2/) 7.05% 7.25% 5.14% 20.15% (9.50)%
- -------------------------------------------------------------------------------
Net assets, end of year (000)'s $30,285 $27,589 $28,874 $28,726 $23,279
- -------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/1/) 1.28% 1.31% 1.31% 1.35% 1.32%
Net investment income 4.32 4.57 4.81 4.94 5.04
- -------------------------------------------------------------------------------
Portfolio turnover rate 51% 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:
<TABLE>
<CAPTION>
Per Share Decreases
In Net Investment Expense Ratios
Income Without Fee Waivers
1997 1996 1995 1994 1997 1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $0.01 $0.01 $0.04 $0.03 1.39% 1.42% 1.59% 1.60%
- --------------------------------------------------------
</TABLE>
(/2/) Total return does not reflect any applicable sales load or deferred sales
charge.
Smith Barney Mutual Funds 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 $13.16 $12.98 $12.95 $11.35 $11.34
- -------------------------------------------------------------------------------
Income from operations:
Net investment income(/2/) 0.58 0.59 0.60 0.63 0.05
Net realized and unrealized
gain 0.34 0.31 0.03 1.60 --
- -------------------------------------------------------------------------------
Total income from operations 0.92 0.90 0.63 2.23 0.05
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.57) (0.60) (0.60) (0.63) (0.04)
In excess of net investment
income (0.01) -- -- -- --
Net realized gains (0.20) (0.12) -- -- --
- -------------------------------------------------------------------------------
Total distributions (0.78) (0.72) (0.60) (0.63) (0.04)
- -------------------------------------------------------------------------------
Net asset value, end of year $13.30 $13.16 $12.98 $12.95 $11.35
- -------------------------------------------------------------------------------
Total return(/3/) 7.11% 7.21% 5.09% 20.04% 0.40%(/4/)
- -------------------------------------------------------------------------------
Net assets, end of year (000)'s $1,895 $428 $179 $146 $75
- -------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 1.31% 1.34% 1.34% 1.35% 1.36%(/5/)
Net investment income 4.25 4.51 4.77 4.65 5.00(/5/)
- -------------------------------------------------------------------------------
Portfolio turnover rate 51% 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
In Net Investment Expense Ratios
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 Massachusetts Municipals Fund
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Massachusetts
Municipals Fund
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket 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 refer-
ence 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 Ref-
erence Room in Washington, D.C. You can get copies of these materials for a fee
by writing to the Public Reference Section of the Commission, Washington, D.C.
20549-6009. Information about the public reference room may be obtained by
calling 1-800-SEC-0330. You can get the same information free from the Commis-
sion'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 law-
fully sell its shares.
SMSalomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file
no. 811-06290)
[FD0226 3/99]
Part B
March 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is meant to be read in
conjunction with the Prospectus of the Smith Barney Massachusetts
Municipals Fund (the "fund") dated March 30, 1999, as amended or
supplemented from time to time (the "prospectus"), and is incorporated
by reference in it entirety into the prospectus. Additional information
about the fund's investments is available in the fund's annual and semi-
annual reports to shareholders which are incorporated herein by reference.
The prospectus and copies of the reports may be obtained free of charge
by contacting a Salomon Smith Barney Financial Consultant, or by writing
or calling Salomon Smith Barney at the address or telephone number above.
TABLE OF CONTENTS
Trustees and Executive Officers of the Fund 2
Investment Objective and Management Policies 5
Risk Factors...............................17
Special Considerations Relating to Massachusetts Municipal
Securities.....................18
Investment Restrictions....................33
Portfolio Transactions....................35
Portfolio Turnover.........................36
Purchase of Shares.........................36
Determination of Net Asset Value...........42
Redemption of Shares 43
Investment Management and Other Services 46
Valuation of Shares 49
Exchange Privilege 50
Performance Information 51
Dividends, Distributions and Taxes 55
Additional Information 60
Financial Statements...............61
Appendix A 62
TRUSTEES AND EXECUTIVE OFFICERS OF THE FUND
The names of the trustees of the trust and executive officers of the fund,
together with information as to their principal business occupations, are
set forth below. The executive officers of the fund are employees of
organizations that provide services to the fund. Each trustee who is an
"interested person" of the trust, as defined in the 1940 Act, is indicated
by an asterisk. The address of the "non-interested" trustees and
executive officers of the fund is 388 Greenwich Street, New York, New York
10013.
Herbert Barg (Age 75). Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred J. Bianchetti (Age 76). Retired; formerly Senior Consultant to
Dean Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New
Jersey 07466.
Martin Brody (Age 77). Consultant, HMK Associates; Retired Vice Chairman
of the Board of Restaurant Associates Corp. His address is c/o HMK
Associates, 30 Columbia Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane (Age 61). Professor, Harvard Business School. His
address is c/o Harvard Business School, Soldiers Field Road, Boston,
Massachusetts 02163.
Burt N. Dorsett (Age 68). Managing Partner of Dorsett McCabe Management.
Inc., an investment counseling firm; Director of Research Corporation
Technologies, Inc., a nonprofit patent clearing and licensing firm. His
address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe (Age 72). Chairman of the Board and President of The
Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York
10901.
Stephen E. Kaufman (Age 67). Attorney. His address is 277 Park Avenue,
New York, New York 10172.
Joseph J. McCann (Age 68). Financial Consultant; Retired Financial
Executive, Ryan Homes, Inc. His address is 200 Oak Park Place,
Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon (Age 65). Chairman of the Board and Investment
Officer; Managing Director of Salomon Smith Barney Inc.; President of SSBC
and Travelers Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman of
the Board of 59 investment companies managed by affiliates of Salomon
Smith Barney. His address is 388 Greenwich Street, New York, New York
10013.
Cornelius C. Rose, Jr. (Age 65). President, Cornelius C. Rose Associates,
Inc., financial consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. His address is Meadowbrook
Village, Building 4, Apt 6, West Lebanon, New Hampshire 03784.
Lewis E. Daidone (Age 41). Senior Vice President and Treasurer; Managing
Director of Salomon Smith Barney; Chief Financial Officer of the Smith
Barney Mutual funds; Director and Senior Vice President of SSBC and TIA.
Peter Coffey (Age 54). Vice President and Investment Officer; Investment
Officer of SSBC; Managing Director of Salomon Smith Barney.
Paul Brook (Age 45). Controller; Director of Salomon Smith Barney; from
1997-1998 Managing Director of AMT Capital Services Inc.; prior to 1997
Partner with Ernst & Young LLP.
Christina T. Sydor (Age 48). Secretary; Managing Director of Salomon Smith
Barney; General Counsel and Secretary of SSBC and TIA.
As of March 22, 1999, the trustees and officers of the funds, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
fund.
To the best knowledge of the trustees, as of March 22, 1999, the following
shareholders or "groups" (as such term is defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended) owned beneficially or of
record more than 5% of the shares of the following classes:
Class A Percentage
East West Enterprises Inc. 6.3381
Attn: Reverend Raymond C. Lee
675 Massachusetts Ave.
Cambridge, MA 02139-3309
Class L
Phillip J. Cade 12.9910
Margaret P. Cade
JTWROS
24 Ginn Rd.
Winchester, MA 01890-2607
Lilla M. Pond TTEE 11.7892
Lilla M. Pond Trust
U/A/D 5/13/93
80 Lincoln Street
Norwood, MA 02062-1352
Helen D'Alelio and 8.4664
Ralph D'Alelio JTWROS
9 Stillings Rd.
Saugus, MA 01906-1928
Myron Pulier 7.5155
Anita Pulier JTWROS
c/o Salzman & Salzman
32 Court Street
Brooklyn, NY 11201-4404
Neil S. Taylor and 7.3613
Susan E. Taylor JTWROS
5 Belle Haven Drive
Andover, MA 01810-4253
No officer, trustee or employee of Salomon Smith Barney or any of its
affiliates receives any compensation from the trust for serving as an
officer of the funds or trustee of the trust. The trust pays each trustee
who is not an officer, trustee or employee of Salomon Smith Barney or any
of its affiliates a fee of $1,000 per annum plus $100 per in-person
meeting and $100 per telephonic meeting. Each trustee emeritus who is not
an officer, director or employee of Salomon Smith Barney or its affiliates
receives a fee of $500 per annum plus $50 per in-person meeting and $50
per telephonic meeting. All trustees are reimbursed for travel and out-
of-pocket expenses incurred to attend such meetings.
For the fiscal year ended November 30, 1998, the trustees of the trust
were paid the following compensation:
Name of Person
Aggregate
Compensati
on
from Fund
Total
Pension or
Retirement
Benefits
Accrued
as part of
Fund
Expenses
Compensati
on
From Fund
And Fund
Complex
Paid to
Trustees
Number of
Funds for
Which
Trustees
Serves
Within
Fund Complex
Herbert Barg **
$1,600
$0
$101,600
18
Alfred
Bianchetti * **
1,600
0
49,600
13
Martin Brody **
1,600
0
119,814
21
Dwight B. Crane
**
1,600
0
133,850
24
Burt N. Dorsett
**
1,500
0
49,600
13
Elliot S. Jaffe
**
1,600
0
48,500
13
Stephen E.
Kaufman **
1,600
0
91,964
15
Joseph J. McCann
**
1,600
0
49,600
13
Heath B.
McLendon *
0
- -
0
59
Cornelius C.
Rose, Jr. **
1,600
0
49,600
13
* Designates an "interested" trustee.
** Designates member of Audit Committee.
Upon attainment of age 80, fund trustees are required to change to
emeritus status. Trustees emeritus are entitled to serve in emeritus
status for a maximum of 10 years. A trustee emeritus may attend
meetings but has no voting rights. During the fund's last fiscal
year, aggregate compensation paid by the fund to trustees achieving
emeritus status totaled $700.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the fund's investment objective and the policies
it employs to achieve that objective. The following discussion supplements
the description of the fund's investment policies in the prospectus. For
purposes of this SAI, obligations of non-Massachusetts municipal issuers
that pay interest which is excluded from gross income for Federal income
tax purposes ("Non-Massachusetts Municipal Securities") and obligations of
The Commonwealth of Massachusetts and its political subdivisions, agencies
and public authorities (together with certain other municipal issuers such
as Puerto Rico, the Virgin Islands and Guam) that pay interest which is
excluded from gross income for Federal income tax purposes and exempt from
Massachusetts personal income taxes ("Massachusetts Municipal
Securities"), are collectively referred to as "Exempt Obligations." Under
normal market conditions, the fund will invest at least 80% of its net
assets in Massachusetts Municipal Securities. The Fund may invest up to
20% of its net assets in non-Massachusetts Municipal Securities. SSBC Fund
Management Inc. ("SSBC" or the "manager") serves as investment adviser and
administrator to the fund.
Non-Diversified Classification. The fund is classified as a non-
diversified fund under the Investment Company Act of 1940, as amended (the
"1940 Act") which means the fund is not limited by the Act in the
proportion of its assets it may invest in the obligations of a single
issuer. The fund intends to conduct its operations, however, so as to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"), which will relieve the
fund of any liability for the Federal income tax and Massachusetts
franchise tax, as applicable, to the extent its earnings are distributed
to shareholders. To qualify as a regulated investment company, the fund
will, among other things, limit its investments so that, at the close of
each quarter of the taxable year (a) not more than 25% of the market value
of the fund's total assets will be invested in the securities of a single
issuer and (b) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the fund will not own
more than 10% of the outstanding voting securities of a single issuer.
As a result of the fund's non-diversified status, an investment in the
fund may present greater risks to investors than an investment in a
diversified fund. The investment return on a non-diversified fund
typically is dependent upon the performance of a smaller number of
securities relative to the number of securities held in a diversified
fund. The fund's assumption of large positions in the obligations of a
small number of issuers will affect the value of its portfolio to a
greater extent than that of a diversified fund in the event of changes in
the financial condition, or in the market's assessment, of the issuers.
The identification of the issuer of Exempt Obligations generally depends
upon the terms and conditions of the security. When the assets and
revenues of an agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the issuing
entity and the security is backed only by the assets and revenues of such
entity, such entity would be deemed to be the sole issuer. Similarly, in
the case of a private activity bond, if that bond is backed only by the
assets and revenues of the nongovernmental user, then such nongovernmental
user is deemed to be the sole issuer. If in either case, however, the
creating government or some other entity guarantees a security, such a
guarantee would be considered a separate security and would be treated as
an issue of such government or other entity.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc. ("Moody's'')
and Standard & Poor's Ratings Group ("S&P") represent the opinions of
those agencies as to the quality of the Exempt Obligations and short-term
investments which they rate. It should be emphasized, however, that such
ratings are relative and subjective, are not absolute standards of quality
and do not evaluate the market risk of securities. These ratings will be
used by the fund as initial criteria for the selection of portfolio
securities, but the fund also will rely upon the independent advice of the
manager to evaluate potential investments. Among the factors that will be
considered are the long-term ability of the issuer to pay principal and
interest and general economic trends. To the extent the fund invests in
lower-rated and comparable unrated securities, the fund's achievement of
its investment objective may be more dependent on the manager's credit
analysis of such securities than would be the case for a portfolio
consisting entirely of higher-rated securities. The Appendix contains
information concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the fund, an issue of Exempt Obligations may
cease to be rated or its rating may be reduced below the rating given at
the time the securities were acquired by the fund. Neither event will
require the sale of such Exempt Obligations by the fund, but the manager
will consider such event in its determination of whether the fund should
continue to hold the Exempt Obligations. To the extent the ratings change
as a result of changes in such organizations or their rating systems or
due to a corporate restructuring of Moody's or S&P, the fund will attempt
to use comparable ratings as standards for its investments in accordance
with its investment objective and policies.
The Fund may invest up to 25% of its total assets in securities rated
below investment grade (i.e., lower than Baa, MIG 3 or Prime-1 by Moody's
or BBB, SP-2 or A-1 by S&P), or in unrated securities of comparable
quality. These securities, commonly referred to as "junk bonds," (a) will
likely have some quality and protective characteristics that, in the
judgment of the rating organization, are outweighed by large uncertainties
or major risk exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation.
Securities rated as low as C by Moody's or D by S&P are extremely
speculative and may be in actual default of interest and/or principal
payments.
While the market values of low-rated and comparable unrated securities
tend to react less to fluctuations in interest rate levels than the market
values of higher-rated securities, the market values of certain low-rated
and comparable unrated municipal securities also tend to be more sensitive
than higher-rated securities to short-term corporate and industry
developments and changes in economic conditions (including recession) in
specific regions or localities or among specific types of issuers. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. During an economic downturn or a
prolonged period of rising interest rates, the ability of issuers of low-
rated and comparable unrated securities to service their payment
obligations, meet projected goals or obtain additional financing may be
impaired. The risk of loss due to default by such issuers is
significantly greater because low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to
the extent it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings.
While the market for municipal securities is considered generally to be
adequate, the existence of limited markets for particular low-rated and
comparable unrated securities may diminish the fund's ability to (a)
obtain accurate market quotations for purposes of valuing such securities
and calculating its net asset value and (b) sell the securities at fair
value either to meet redemption requests or to respond to changes in the
economy or in the financial markets. The market for certain low-rated and
comparable unrated securities has not fully weathered a major economic
recession. Any such economic downturn would adversely affect the value of
such securities and the ability of the issuers of these securities to
repay principal and pay interest thereon.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders,
such as the fund. If an issuer exercises these rights during periods of
declining interest rates, the fund may have to replace the security with
a lower yielding security, thus resulting in a decreased return to the
fund.
Because many issuers of Massachusetts Municipal Securities may choose not
to have their obligations rated, it is possible that a large portion of
the fund's portfolio may consist of unrated obligations. Unrated
obligations are not necessarily of lower quality than rated obligations,
but to the extent the fund invests in unrated obligations, the fund will
be more reliant on the Adviser's judgment, analysis and experience than
would be the case if the fund invested only in rated obligations.
Maturity of Obligations Held By The Fund. The fund's average weighted
maturity will vary from time to time based on the judgment of the manager.
The fund intends to focus on intermediate and long-term obligations,
generally with maturities at the time of purchase from three to more than
twenty years.
Exempt Obligations. Exempt Obligations are classified as general
obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue bonds are payable from
the revenue derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise or other specific
revenue source, but not from the general taxing power. Notes are short-
term obligations of issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other
revenues. Exempt Obligations bear fixed, floating and variable rates of
interest, and variations exist in the security of Exempt Obligations, both
within a particular classification and between classifications.
The yields on, and values of, Exempt Obligations depend on a variety of
factors, including general economic and monetary conditions, conditions in
the Exempt Obligation markets, size of a particular offering, maturity of
the obligation and rating of the issue. Consequently, Exempt Obligations
with the same maturity, coupon and rating may have different yields or
values.
Issuers of Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy
Reform Act of 1978, affecting the rights and remedies of creditors. In
addition, the obligations of those issuers may become subject to laws
enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal and/or interest, or imposing
other constraints upon enforcement of the obligations or upon the ability
of municipalities to levy taxes. The possibility also exists that, as a
result of litigation or other conditions, the power or ability of any
issuer to pay, when due, the principal of, and interest on, its
obligations may be materially affected.
Private Activity Bonds. The fund may invest without limit in Exempt
Obligations that are "private activity bonds," as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), which are in most cases
revenue bonds. Private activity bonds generally do not carry the pledge
of the credit of the issuing municipality, but are guaranteed by or
payable from funds provided by the corporate entity on whose behalf they
are issued. Interest income on certain types of private activity bonds
issued after August 7, 1986 to finance non-governmental activities is a
specific tax preference item for purposes of the federal individual and
corporate alternative minimum taxes. Individual and corporate
shareholders may be subject to a federal alternative minimum tax to the
extent the fund's dividends are derived from interest on these bonds.
Dividends derived from interest income on Exempt Obligations are a
"current earnings" adjustment item for purposes of the federal corporate
alternative minimum tax. See "Taxes." Private activity bonds held by the
fund will be included in the term Exempt Obligations for purposes of
determining compliance with the fund's policy of investing at least 80% of
its total assets in Exempt Obligations.
Related Instruments. The fund may invest without limit in Exempt
Obligations that are repayable out of revenues generated from economically
related projects or facilities or debt obligations whose issuers are
located in the same state. Sizable investments in these obligations could
involve an increased risk to the fund should any of the related projects
or facilities experience financial difficulties.
U.S. Government Securities. The fund may invest in debt obligations of
varying maturities issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. Government Securities"). Direct
obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
Government Securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Federal National
Mortgage Association ("FNMA"), Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board and Student Loan Marketing
Association. The fund may also invest in instruments supported by the
right of the issuer to borrow from the U.S. Treasury and instruments
supported by the credit of the instrumentality. Because the U.S.
government is not obligated by law to provide support to an
instrumentality it sponsors, a fund will invest in obligations issued by
such an instrumentality only if the manager determines that the credit
risk with respect to the instrumentality does not make its securities
unsuitable for investment by the fund.
Municipal Obligations. The fund invests principally in debt obligations,
issued by, or on behalf of, states, territories and possessions of the
United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities or multistate agencies or
authorities, the interest from which is, in the opinion of bond counsel to
the issuer, excluded from gross income for Federal income tax purposes
("Municipal Obligations"). Municipal Obligations generally are understood
to include debt obligations issued to obtain funds for various public
purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations, payment of general operating
expenses and extensions of loans to public institutions and facilities.
Private activity bonds issued by or on behalf of public authorities to
finance privately operated facilities are considered to be Municipal
Obligations if the interest paid on them qualifies as excluded from gross
income (but not necessarily from alternative minimum taxable income) for
Federal income tax purposes in the opinion of bond counsel to the issuer.
Municipal Obligations may be issued to finance life care facilities,
which are an alternative form of long-term housing for the elderly that
offer residents the independence of a condominium life-style and, if
needed, the comprehensive care of nursing home services. Bonds to finance
these facilities have been issued by various state industrial development
authorities. Because the bonds are secured only by the revenues of each
facility and not by state or local government tax payments, they are
subject to a wide variety of risks, including a drop in occupancy levels,
the difficulty of maintaining adequate financial reserves to secure
estimated actuarial liabilities, the possibility of regulatory cost
restrictions applied to health care delivery and competition from
alternative health care or conventional housing facilities.
Municipal Leases. The fund may invest without limit in "municipal
leases." Municipal leases may take the form of a lease or an installment
purchase contract issued by state or local government authorities to
obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Interest payments on qualifying municipal leases are exempt from Federal
income taxes and state income taxes within the state of issuance.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget
for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated
for such purpose on a yearly basis. In addition to the "non-
appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with more conventional bonds. Although "non-appropriation" lease
obligations are often secured by the underlying property, disposition of
the property in the event of foreclosure might prove difficult. The fund
may invest in municipal leases without non-appropriation clauses only when
the municipality is required to continue the lease under all circumstances
except bankruptcy. There is no limitation on the percentage of the fund's
assets that may be invested in municipal lease obligations. In evaluating
municipal lease obligations, the manager will consider such factors as it
deems appropriate, which my include: (a) whether the lease can be
canceled; (b) the ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of the lease obligor;
(d) the likelihood that the municipality will discontinue appropriating
funding for the leased property in the event such property is no longer
considered essential by the municipality; (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding; (f)
whether the security is backed by a credit enhancement such as insurance;
and (g) any limitations which are imposed on the lease obligor's ability
to utilize substitute property or services other than those covered by the
lease obligation.
Municipal leases the fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of
investment or those issued by issuers whose senior debt is rated
investment grade at the time of investment. The fund may acquire unrated
issues the manager deems to be comparable in quality to rated issues in
which the fund is authorized to invest. A determination that an unrated
lease obligation is comparable in quality to a rated lease obligation will
be subject to oversight and approval by the trust's board of trustees.
Municipal leases held by the fund will be considered illiquid securities
unless the trust's board of trustees determines on an ongoing basis that
the leases are readily marketable. An unrated municipal lease with a non-
appropriation risk that is backed by an irrevocable bank letter of credit
or an insurance policy issued by a bank or insurer deemed by the manager
to be of high quality and minimal credit risk, will not be deemed to be
illiquid solely because the underlying municipal lease is unrated, if the
manager determines that the lease is readily marketable because it is
backed by the letter of credit or insurance policy.
Zero Coupon Securities. The fund may invest in zero coupon Exempt
Obligations. Zero coupon Exempt Obligations are generally divided into
two categories: pure zero obligations, which pay no interest for their
entire life and zero/fixed obligations, which pay no interest for some
initial period and thereafter pay interest currently. In the case of a
pure zero obligation, the failure to pay interest currently may result
from the obligation's having no stated interest rate, in which case the
obligation pays only principal at maturity and is issued at a discount
from its stated principal amount. A pure zero obligation may, in the
alternative, carry a stated interest rate, but provide that no interest is
payable until maturity. The value to the investor of a zero coupon Exempt
Obligation consists of the economic accretion either of the difference
between the purchase price and the nominal principal amount (if no
interest is stated to accrue) or of accrued, unpaid interest during the
Exempt Obligation's life or payment deferral period.
Custodial Receipts. The fund may acquire custodial receipts or
certificates underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments, or both, on
certain Exempt Obligations. The underwriter of these certificates or
receipts typically purchases Exempt Obligations and deposits the
obligations in an irrevocable trust or custodial account with a custodian
bank, which then issues receipts or certificates evidencing ownership of
the periodic unmatured coupon payments and the final principal payment on
the obligations. Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero coupon Exempt
Obligations described above. Although under the terms of a custodial
receipt the fund would typically be authorized to assert its rights
directly against the issuer of the underlying obligations, the fund could
be required to assert through the custodian bank those rights as may exist
against the underlying issuer. Thus, if the underlying issuer fails to
pay principal and/or interest when due, the fund may be subject to delays,
expenses and risks that are greater than those that would have been
involved if the fund had purchased a direct obligation of the issuer. In
addition, if the trust or custodial account in which the underlying
security has been deposited is determined to be an association taxable as
a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes paid.
Exempt Obligation Components. The fund may invest in Exempt Obligations,
the interest rate on which has been divided by the issuer into two
different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction
Component") pays an interest rate that is reset periodically through an
auction process; whereas the second of the components (the "Residual
Component") pays a residual interest rate based on the difference between
the total interest paid by the issuer on the Exempt Obligation and the
auction rate paid on the Auction Component. The fund may purchase both
Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting from a fixed amount the interest rate
paid to the holders of Auction Components, the interest rate paid to
Residual Component holders will decrease as the Auction Component's rate
increases and increase as the Auction Component's rate decreases.
Moreover, the magnitude of the increases and decreases in market value of
Residual Components may be larger than comparable changes in the market
value of an equal principal amount of a fixed rate Exempt Obligation
having similar credit quality, redemption provisions and maturity.
Floating and Variable Rate Instruments. The fund may purchase floating
and variable rate demand notes and bonds, which are Exempt Obligations
normally having a stated maturity in excess of one year, but which permit
their holder to demand payment of principal at any time, or at specified
intervals. The maturity of a floating or variable rate demand note or
bond will be deemed shortened by virtue of a demand feature.
The issuer of floating and variable rate demand obligations normally has
a corresponding right, after a given period, to prepay at its discretion
the outstanding principal amount of the obligations plus accrued interest
upon a specified number of days' notice to the holders of these
obligations. The interest rate on a floating rate demand obligation is
based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time that rate is adjusted. The interest rate
on a variable rate demand obligation is adjusted automatically at
specified intervals. Frequently, floating and variable rate obligations
are secured by letters of credit or other credit support arrangements
provided by banks. Use of letters of credit or other credit support
arrangements will not adversely affect the tax-exempt status of these
obligations. Because they are direct lending arrangements between the
lender and borrower, floating and variable rate obligations generally will
not be traded. In addition, generally no secondary market exists for these
obligations, although their holders may demand payment at face value. For
these reasons, when floating and variable rate obligations held by the
fund are not secured by letters of credit or other credit support
arrangements, the fund's rights to demand payment is dependent on the
ability of the borrower to pay principal and interest on demand. The
manager, on behalf of the fund, will consider on an ongoing basis the
creditworthiness of the issuers of floating and variable rate demand
obligations held by the fund.
Participation Interests. The fund may purchase from financial
institutions tax-exempt participation interests in Exempt Obligations. A
participation interest gives the fund an undivided interest in the Exempt
Obligation in the proportion that the fund's participation interest bears
to the total amount of the Exempt Obligation. These instruments may have
floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee
of a bank that the trust's board of trustees has determined meets certain
quality standards, or the payment obligation otherwise will be
collateralized by U.S. government securities. The fund will have the
right, with respect to certain participation interests, to demand payment,
on a specified number of days' notice, for all or any part of the fund's
interest in the Exempt Obligation, plus accrued interest. The fund
intends to exercise its right with respect to these instruments to demand
payment only upon a default under the terms of the Exempt Obligation or to
maintain or improve the quality of its investment portfolio.
Taxable Investments. Under normal conditions, the fund may hold up to 20%
of its total assets in cash or money market instruments, including taxable
money market instruments (collectively, "Taxable Investments"). In
addition, when the manager believes that market conditions warrant, the
fund may take a temporary defensive posture and invest without limitation
in short-term Exempt Obligations and Taxable Investments. To the extent
the fund holds Taxable Investments and, under certain market conditions,
certain floating and variable rate demand obligations or Auction
Components, the fund may not achieve its investment objective.
Temporary Investments. When the fund is maintaining a defensive position,
it may invest in short-term investments ("Temporary Investments")
consisting of: (a) the following tax-exempt securities - notes of
municipal issuers having, at the time of purchase, a rating within the
three highest grades of Moody's or S&P or, if not rated, having an issue
of outstanding Exempt Obligations rated within the three highest grades by
Moody's or S&P; and (b) the following taxable securities: U.S. government
securities, including repurchase agreements with respect to such
securities; other debt securities rated within the three highest grades by
Moody's and S&P; commercial paper rated in the highest grade by either of
such rating services; and certificates of deposit of domestic banks with
assets of $1 billion or more. The fund may invest in Temporary
Investments for defensive reasons in anticipation of a market decline. At
no time will more than 20% of the fund's total assets be invested in
Temporary Investments unless the fund has adopted a defensive investment
policy. The fund intends, however, to purchase tax-exempt Temporary
Investments pending the investment of the proceeds of the sale of
portfolio securities or of the fund's shares of beneficial interest, or in
order to have highly liquid securities available to meet anticipated
redemptions.
Investment Techniques
The fund may employ, among others, the investment techniques described
below, which may give rise to taxable income or gain:
Municipal Bond Index and Interest Rate Futures Contracts. The purpose of
entering into a municipal bond index or interest rate futures contract by
the fund is to protect the fund from fluctuations in interest rates on
tax-exempt securities without buying or selling the Exempt Obligations.
If the fund owns long-term Exempt Obligations and interest rates are
expected to increase, for example, the fund might enter into futures
contracts to sell a municipal bond index or the debt security underlying
the interest rate future. Such a transaction would have much the same
effect as selling some of the long-term Exempt Obligations in the fund's
portfolio. If interest rates increase as anticipated, the value of
certain long-term Exempt Obligations in the fund's portfolio would
decline, but the value of the fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the
fund from declining as much as it otherwise would have. Of course,
because the value of the Exempt Obligations in the fund's portfolio will
far exceed the value of the futures contracts entered into by the fund, an
increase in the value of the futures contracts could only mitigate -- but
not totally offset -- the decline in the value of the portfolio.
When interest rates are expected to decline, futures contracts to purchase
a municipal bond index or debt security, could be entered into to hedge
against the fund's anticipated purchases of long-term Exempt Obligations
at higher prices. Because the rate of fluctuation in the value of the
futures contracts should be similar to that of long-term Exempt
Obligations, the fund could enter into futures contracts at lower prices.
At the time the fund deems it appropriate to purchase the Exempt
Obligations, the futures contracts could be liquidated and the fund's cash
could then be used to buy long-term Exempt Obligations. The fund could
accomplish similar results by selling Exempt Obligations with long
maturities and investing in Exempt Obligations with short maturities when
interest rates are expected to increase or by buying Exempt Obligations
with long maturities and selling Exempt Obligations with short maturities
when interest rates are expected to decline. When the market for Exempt
Obligations when it is not as liquid as that for the futures contracts,
however, the ability to enter into such contracts could enable the fund to
react more quickly to anticipated changes in market conditions or interest
rates.
Unlike the purchase or sale of a Municipal Bond, no consideration is paid
or received by the fund upon the purchase or sale of a futures contract.
Initially, the fund will be required to deposit in the name of the
futures commission merchant effecting the transaction an amount of cash or
cash equivalents equal to approximately 10% of the contract amount (this
amount is subject to change by the board of trade on which the contract is
traded and members of the board of trade may charge a higher amount).
This amount is known as initial margin and is in the nature of a
performance bond or good faith deposit on the contract that is returned to
the fund upon termination of the futures contract, assuming that all
contractual obligations have been satisfied. Subsequent payments, known as
variation margin, to and from the futures commission merchant will be made
on a daily basis as the price of the index or securities underlying the
futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking-to-
market. At any time prior to the expiration of the contract, the fund may
elect to close the position by taking an opposite position, which will
operate to terminate the fund's existing position in the futures contract.
There are several risks in connection with the use of municipal bond index
and interest rate futures contracts as hedging devices. Successful use of
these futures contracts by the fund is subject to the manager's ability to
predict correctly movements in the direction of interest rates. Such
predictions involve skills and techniques which may be different from
those involved in the management of a long-term municipal bond portfolio.
In addition, there can be no assurance that there will be a correlation
between movements in the price of the municipal bond index or the debt
security underlying the futures contract and movements in the price of the
Exempt Obligations which are the subject of the hedge. The degree of
imperfection of correlation depends upon various circumstances, such as
variations in speculative market demand for futures contracts and Exempt
Obligations and technical influences on futures trading. The degree of
imperfection of correlation may be increased with respect to the fund,
which will hold primarily Massachusetts Municipal Securities rather than
a selection of the bonds constituting any index. The fund's Exempt
Obligations and the bonds in the index also may differ in such respects as
interest rate levels, maturities and creditworthiness of issuers. A
decision of whether, when and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected trends in interest rates.
Although the fund intends to enter into futures contracts only if an
active market exists for the contracts, there can be no assurance that an
active market will exist for the contracts at any particular time. Most
domestic futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading
day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's
settlement price at the end of a trading session. Once the daily limit has
been reached in a particular contract, no trades may be made that day at
a price beyond that limit. The daily limit governs only price movement
during a particular trading day and therefore does not limit potential
losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices may move to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, it might not be
possible to close a futures position and, in the event of adverse price
movements, the fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. As described above, however, no
assurance can be given that the price of Exempt Obligations will, in fact,
correlate with the price movements in the municipal bond index or interest
rate futures contract and thus provide an offset to losses on a futures
contract.
If the fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of Exempt Obligations held in its
portfolio and rates decrease instead, the fund will lose part or all of
the benefit of the increased value of the Exempt Obligations it has hedged
because it will have offsetting losses in its futures positions. In
addition, in such situations, if the fund has insufficient cash, it may
have to sell securities to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices
which reflect the decline in interest rates. The fund may have to sell
securities at a time when it may be disadvantageous to do so.
Options on Municipal Bond Index and Interest Rate Futures Contracts.
Options on futures contracts are similar to options on securities, which
give the purchaser the right, in return for the premium paid, to purchase
securities. A call option gives the purchaser of such option the right to
assume a long position in a specified underlying futures contract, and a
put option gives the purchaser the right to assume a short position in a
specified underlying futures contract, at a stated exercise price at any
time prior to the expiration date of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on a futures contract is limited to
the premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the point of sale, no daily cash payments
are made to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would
be reflected in the net asset value of the fund.
The fund will purchase put and call options on municipal bond index and
interest rate futures contracts which are traded on a United States
exchange or board of trade as a hedge against changes in interest rates,
and will enter into closing transactions with respect to such options to
terminate existing positions. The fund may purchase put options on
interest rate or municipal bond index futures contracts if the manager
anticipates a rise in interest rates. The purchase of put options on
these futures contracts is analogous to the purchase of put options on
debt securities so as to hedge a portfolio of debt securities against the
risk of rising interest rates. Because the value of a municipal bond
index or interest rate futures contract moves inversely in relation to
changes in interest rates, as is the case with Exempt Obligations, a put
option on such a contract becomes more valuable as interest rates rise.
By purchasing put options on these futures contracts at a time when the
manager expects interest rates to rise, the fund would seek to realize a
profit to offset the loss in value of its portfolio securities without the
need to sell such securities.
The fund may purchase call options on municipal bond index or interest
rate futures contracts if the manager anticipates a decline in interest
rates. The purchase of a call option on a municipal bond index or
interest rate futures contract represents a means of obtaining temporary
exposure to market appreciation at limited risk. It is analogous to the
purchase of a call option on an individual debt security, which can be
used as a substitute for a position in the debt security itself.
Depending upon the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. The fund would purchase a call
option on a futures contract to hedge against a market advance when the
fund was holding cash in anticipation of purchasing Exempt Obligations.
The fund could take advantage of the anticipated rise in the value of
long-term securities without actually buying them until the market had
stabilized. At that time, the options could be liquidated and the fund's
cash could be used to buy Exempt Obligations.
The fund would sell put and call options on futures contracts only as part
of closing transactions to terminate its options positions. No assurance
can be given that such closing transactions can be effected.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be
subject to the existence of a liquid market. In addition, the fund's
purchase of put or call options will be based upon predictions as to
anticipated interest rate trends by the manager, which could prove to be
inaccurate. Even if the manager's expectations are correct, there may be
an imperfect correlation between the change in the value of the options
and of the fund's portfolio securities.
When-Issued Securities and Delayed-Delivery Transactions. The fund may
purchase securities on a "when-issued" basis or for delayed delivery
(i.e., payment or delivery occur beyond the normal settlement date at a
stated price and yield). The fund does not intend to engage in these
transactions for speculative purposes, but only in furtherance of its
investment goal. These transactions occur when securities are purchased
or sold by the fund with payment and delivery taking place in the future
to secure what is considered an advantageous yield and price to the fund
at the time of entering into the transaction. The payment obligation and
the interest rate that will be received on when-issued securities are
fixed at the time the buyer enters into the commitment. Because of
fluctuations in the value of securities purchased or sold on a when-issued
or delayed-delivery basis, the prices obtained on such securities may be
higher or lower than the prices available in the market on the dates when
the investments are actually delivered to the buyers.
When the fund agrees to purchase when-issued or delayed-delivery
securities, the fund will set aside cash or liquid securities equal to the
amount of the commitment in a segregated account. Normally, the fund will
set aside portfolio securities to satisfy a purchase commitment, and in
such a case the fund may be required subsequently to place additional
assets in the segregated account in order to ensure that the value of the
account remains equal to the amount of the fund's commitment. The assets
contained in the segregated account will be marked-to-market daily. It
may be expected that the fund's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. When the fund engages in
when-issued or delayed-delivery transactions, it relies on the other party
to consummate the trade. Failure of the seller to do so may result in the
fund's incurring a loss or missing an opportunity to obtain a price
considered advantageous.
Stand-by Commitments. The fund may acquire "stand-by commitments" with
respect to Exempt Obligations held in its portfolio. Under a stand-by
commitment, a broker, dealer or bank is obligated to repurchase at the
fund's option specified securities at a specified price and, in this way,
a stand-by commitment is subject to the ability of the seller to make
payment on demand. The fund will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise the rights
afforded by the commitments for trading purposes. The fund anticipates
that stand-by commitments will be available from brokers, dealers and
banks without the payment of any direct or indirect consideration. The
fund may pay for stand-by commitments if payment is deemed necessary, thus
increasing to a degree the cost of the underlying Exempt Obligations and
similarly decreasing the security's yield to the fund.
Illiquid Securities. The fund may invest up to 15% of its net assets in
illiquid securities, which term includes securities subject to contractual
or other restrictions on resale and other instruments that lack readily
available markets. In addition, up to 5% of the value of each fund's
assets may be invested in securities of entities that have been in
continuous operation for fewer than three years. Notwithstanding the
foregoing, the fund will not invest more than 10% of its assets (excluding
those subject to Rule 144A under the Securities Act of 1933, as amended)
that are restricted. The fund also is authorized to borrow up to 10% of
its total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) in order to meet
anticipated redemptions and to pledge its assets to the same extent in
connection with the borrowings.
Repurchase Agreements. The fund may agree to purchase securities from a
bank or recognized securities dealer and simultaneously commit to resell
the securities to the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon rate or
maturity of the purchased securities ("repurchase agreements"). The fund
would maintain custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer to pay the
repurchase price on the date agreed to would be, in effect, secured by
such securities. If the value of such securities were less than the
repurchase price, plus interest, the other party to the agreement would be
required to provide additional collateral so that at all times the
collateral is at least 102% of the repurchase price plus accrued interest.
Default by or bankruptcy of a seller would expose the fund to possible
loss because of adverse market action, expenses and/or delays in
connection with the disposition of the underlying obligations. The
financial institutions with which a fund may enter into repurchase
agreements will be banks and non-bank dealers of U.S. Government
securities on the Federal Reserve Bank of New York's list of reporting
dealers, if such banks and non-bank dealers are deemed creditworthy by the
fund's manager. The manager will continue to monitor creditworthiness of
the seller under a repurchase agreement, and will require the seller to
maintain during the term of the agreement the value of the securities
subject to the agreement to equal at least 102% of the repurchase price
(including accrued interest). In addition, the manager will require that
the value of this collateral, after transaction costs (including loss of
interest) reasonably expected to be incurred on a default, be equal to
102% or greater than the repurchase price (including accrued premium)
provided in the repurchase agreement or the daily amortization of the
difference between the purchase price and the repurchase price specified
in the repurchase agreement. The manager will mark-to-market daily the
value of the securities. Repurchase agreements are considered to be loans
by a Fund under the 1940 Act.
RISK FACTORS
The following summaries are included for the purpose of providing certain
information regarding the economic climate and financial condition of the
Commonwealth of Massachusetts and Puerto Rico, and are based primarily on
information from official statements made available in connection with the
issuance of certain securities and other documents and sources and does
not purport to be complete. The trust has not undertaken to verify
independently such information and the trust assumes no responsibility for
the accuracy of such information. These summaries do not provide
information regarding most securities in which the fund is permitted to
invest and in particular do not provide specific information on the
issuers or types of municipal securities in which the fund invests or the
private business entities whose obligations support the payments on AMT-
Subject bonds in which the fund will invest. Therefore, the general risk
factors as to the credit of the state or its political subdivisions
discussed herein may not be relevant to the fund. Although revenue
obligations of a state or its political subdivisions may be payable from
a specific project or source, there can be no assurance that future
economic difficulties and the resulting impact on state and local
government finances will not adversely affect the market value of the fund
or the ability of the respective obligors to make timely payments of
principal and interest on such obligations. In addition, a number of
factors may adversely affect the ability of the issuers of municipal
securities to repay their borrowings that are unrelated to the financial
or economic condition of a state, and that, in some cases, are beyond
their control. Furthermore, issuers of municipal securities are generally
not required to provide ongoing information about their finances and
operations to holders of their debt obligations, although a number of
cities, counties and other issuers prepare annual reports.
SPECIAL CONSIDERATIONS RELATING TO MASSACHUSETTS MUNICIPAL SECURITIES
The Commonwealth of Massachusetts and certain of its cities and towns have
at certain times in the recent past undergone serious financial
difficulties which have adversely affected their credit standing. The
prolonged effects of such financial difficulties could adversely affect
the market value of the Massachusetts Municipal Securities held by the
fund. The information summarized below describes some of the more
significant factors that could affect the fund or the ability of the
obligors to pay debt service on certain of these securities. The sources
of such information are the official statements of issuers located in the
Commonwealth of Massachusetts, as well as other publicly available
documents, and statements of public officials. The Fund has not
independently verified any of the information contained in such statements
and documents, but the fund is not aware of facts which would render such
information inaccurate.
Economic Climate
The Commonwealth of Massachusetts is a densely populated urban state with
a well-educated population, comparatively high income levels, low rates of
unemployment and a relatively diversified economy. According to the 1990
census, Massachusetts had a population density of 768 persons per square
mile, as compared to 70.3 for the United States as a whole. It thus had
the third greatest population density following Rhode Island and New
Jersey. Massachusetts experienced a modest increase in population between
1980 and 1990. In 1997, the population of Massachusetts was approximately
6,118,000.
Per capita personal income for Massachusetts residents, unadjusted for
differentials in the cost of living, was $29,792 in 1996, as compared to
the national average of $24,426. While per capita personal income is, on
a relative scale, higher in Massachusetts than in the United States as a
whole, this is offset to some extent by the higher cost of living in
Massachusetts.
The Massachusetts service sector, which constituted 35.6 percent of the
total non-agricultural work force in February 1998, is the largest sector
in the Massachusetts economy. Government employment represents 13.2
percent of total non-agricultural employment in Massachusetts. While total
employment in construction, manufacturing, trade, government, services,
finance, insurance and real estate declined between 1988 and 1992, the
economic recovery that began in 1993 has been accompanied by increased
employment levels. Since 1994, total employment levels in Massachusetts
have increased at yearly rates greater than 2.0 percent. In 1997,
employment levels in every industry increased, including manufacturing
employment, which had declined in every year since 1983. The most rapid
growth in 1997 came in the construction sector and the services sector,
which grew at rates of 6.7 percent and 4.1 percent, respectively. Total
non-agricultural employment in Massachusetts grew at a rate of 2.7 percent
in 1997.
Between 1982 and 1988, the economies of Massachusetts and New England were
among the strongest performers in the nation. Between 1989 and 1992,
however, both Massachusetts and New England have experienced growth rates
significantly below the national average. An economic recession in the
early 1990s caused unemployment rates in Massachusetts to rise
significantly above the national average. In the first three quarters of
1996, the gross state product for Massachusetts grew at a rate of 2.9
percent, approximately the same rate as the national average.
Massachusetts' unemployment rate averaged 8.6 percent in 1992, 6.9 percent
in 1993, 6.0 percent in 1994, 5.4 percent in 1995, 4.3 percent in 1996 and
4.0 percent in 1997.
The unemployment rate in Massachusetts has fallen almost consistently
since the peak of 9.6% in mid 1991, and has remained at or below that of
the nation for the past three years. Monthly unemployment in Massachusetts
in Fiscal Year 1997 averaged a low 4.0% as compared to a national rate of
5.2%. Unemployment is projected at 3.7% through Fiscal Year 1998 and to
remain steady at 3.7% to 3.9% annually through calendar year 2000.
Growth in personal income is expected to decline from the Fiscal Year 1997
rate of about 6.0% to approximately 5.7% in Fiscal 1998. It is expected
to fall further in Fiscal Year 1999 to 4.3% from 4.5%, and to remain at
that rate through the following few years. However, the rate of inflation
(as measured by consumer prices), at least in metropolitan Boston, should
continue to outpace that of the nation by approximately 0.5%. The risks
for Massachusetts include a continued shortage of skilled labor, low net
population growth, which will further constrain job creation, and the
prominence of the financial services industry in the economy coupled with
a relatively high proportion of non-wage income, both of which are
sensitive to the performance of the financial markets.
Financial Condition
Under its constitution, the Commonwealth may borrow money (a) for defense
or in anticipation of receipts from taxes or other sources, any such loan
to be paid out of the revenue of the year in which the loan is made, or
(b) by a two-thirds vote of the members of each house of the Legislature
present and voting thereon.
Certain independent authorities and agencies within the Commonwealth are
statutorily authorized to issue bonds and notes for which the Commonwealth
is either directly, in whole or in part, or indirectly liable. The
Commonwealth's liabilities with respect to these bonds and notes are
classified as either (a) Commonwealth-supported debt, (b) Commonwealth-
guaranteed debt or (c) indirect obligations.
Debt service expenditures of the Commonwealth in Fiscal Year 1992 totaled
$898.3 million, representing a 4.7 percent decrease from Fiscal Year 1991.
Debt service expenditures for Fiscal Year 1993, Fiscal Year 1994, Fiscal
Year 1995, Fiscal Year 1996 and Fiscal Year 1997 were $1.140 billion,
$1.149 billion, $1.231 billion, $1.183 billion and $1.276 billion,
respectively, and are projected to be $1.224 billion for Fiscal Year 1998.
In January 1990, legislation was enacted which imposes a 10 percent limit
on the total appropriations in any fiscal year that may be expended for
payment of interest on general obligation debt (excluding Fiscal Recovery
Bonds) of Massachusetts.
Also, Wall Street demonstrated its confidence in the Commonwealth's fiscal
policies by again raising the bond rating for Massachusetts. The long-
term debt service obligations are projected to decrease by 2 percent, or
$26.24 million, from Fiscal Year 1997. Short-term debt service
obligations are expected to increase to approximately $49 million in
Fiscal Year 1999, as Central Artery/Tunnel Project cash flow requirements
begin to outpace the inflow of federal and other third-party revenues. The
Commonwealth will fund this interim cash shortfall with Grant Anticipation
Notes to be repaid as federal reimbursements are received and Bond
Anticipation Notes on third-party financing.
In Fiscal Year 1998, legislation was approved to construct a new
convention center in Boston and to expand existing facilities in Worcester
and Springfield. The projects will be financed with increases in certain
taxes on hotels and vehicle rentals, and the dedication of state taxes on
new businesses in Boston's Convention Center Finance District. These new
revenue sources will be sufficient to pay the interest on the general
obligation notes that will be sold to finance construction. The notes will
be permanently financed with special obligation revenue bonds when
construction of the new facility is completed, which is scheduled for
2002.
Fiscal 1999
The House of Representatives approved its version of the fiscal 1999
budget on May 7, 1998, and the Senate approved its version on June 3,
1998. After passage of two interim, partial budgets to provide for
expenditures during the first 30 days of the fiscal year, the legislative
conference committee appointed to reconcile the two versions of the fiscal
1999 budget released its report on July 20, 1998, and the budget was
enacted by the Legislature on the same day. Acting Governor Cellucci
approved it on July 30, 1998. The Governor vetoed or reduced
appropriations totaling approximately $100.9 million. On July 31, 1998
the Legislature overrode several of these vetoes, restoring approximately
$63.1 million of appropriations. After accounting for the value of vetoes
and subsequent overrides, the budget provides for total appropriations of
approximately $19.5 billion.
The fiscal 1999 appropriation for pension funding is approximately $965.3
million. This amount is consistent with the amount requested by the
Acting Governor, but is approximately $93.9 million less than the amount
required by the most recently approved pension funding schedule. The
small appropriation is based on the assumption that a revised funding
schedule will require reduced funding because of the 1997 change in law
eliminating Commonwealth responsibility for funding cost-of-living
adjustments incurred by local pension systems. A revised funding schedule
has not yet been submitted to the Legislature.
The fiscal 1999 budget is based on a consensus tax revenue forecast of
$14.4 billion, as agreed by both houses of the Legislature in May. The
tax cuts incorporated into the budget, valued by the Department of Revenue
at $990 million in fiscal 1999, had the effect of reducing the consensus
forecast to $13.41 billion. Tax collections in July 1998 totaled $895.5
million, an increase of $96.4 million, or 12.1%, over July 1997. On August
19, 1998 the Executive Office for Administration and Finance raised the
fiscal 1999 tax estimate by $200 million to $13.61 billion. This estimate
does not reflect the Acting Governor's recommendation of an additional
$287.5 million tax reduction pursuant to legislation he filed on August
10, 1998.
Fiscal 1998
Preliminary results indicate that tax collections for fiscal 1998 totaled
approximately $14.026 billion, an increase of $1.161 billion or 9.0%, over
fiscal 1997, and approximately $326 million higher than the final estimate
for the year made by the Executive Office for Administration and Finance.
On May 5, 1998 the estimate for the year was raised from $13.154 billion
to $13.3 billion, and on June 10, 1998 it was raised to $13.7 billion.
Projected total fiscal 1998 expenditures are $18.887 billion, including
approximately $123 million in anticipated additional fiscal 1998
supplemental appropriations. Among the anticipated appropriations are
$46.1 million for Medicaid and $8 million for environmental remediation of
certain underground storage tanks in the Commonwealth. If such
remediation efforts are not underway by December 23, 1998, the
Commonwealth may be liable for substantial penalties imposed by the
federal Environmental Protection Agency.
The Legislature has enacted several bills providing for disposition of the
fiscal 1998 surplus, but it has not completed action on final fiscal 1998
appropriations. The final fiscal 1998 supplemental appropriation bill or
bills are expected to authorize certain additional post-fiscal 1998
spending to be charged to fiscal 1998. Acting Governor Cellucci has also
filed a bill calling for a one-time tax cut of $287.5 million to be
charged to fiscal 1998.
Medicaid
Although the Commonwealth has undertaken a number of successful Medicaid
savings and cost control initiatives in the last five years, the
Commonwealth has also expanded the income eligibility ceiling for the
Medicaid program from 100% to 133% of the federal poverty level. In
fiscal 1998, due to changes in state law and in the state's federal
waiver, the Medicaid program enrolled more than 150,000 new members. The
original appropriations for this expansion, based on census data that was
several years old, were estimated to fund services for 83,000 new members.
As a result of this higher than expected enrollment, the Acting Governor
has filed a request for supplemental appropriations of $46.1 million for
the health care expansion portion of the Medicaid program. The requested
appropriations were expected to bring fiscal 1998 Medicaid spending to
approximately $3.652 billion, an increase of 5.7% over fiscal 1997.
Traditional Medicaid spending has remained within the appropriated
spending amounts and expected population growth projections.
Fiscal 1998 Year-End Surplus
Legislation approved by the Acting Governor on July 21, 1998 increased the
ceiling, effective June 30, 1998, on the amount that can be maintained in
the Stabilization Fund from 5% to 7.5% of budgeted revenues. Based on
current estimates of fiscal 1998 results, this change increased the
statutory ceiling from approximately $984.8 million to approximately
$1.477 billion. The current projected fiscal 1998 ending balance in the
Stabilization Fund is $972.2 million, assuming enactment of additional tax
cuts aggregating $287.5 million as proposed by the Acting Governor.
The fiscal 1999 budget approved by the Acting Governor on July 30, 1998
contains a provision calling for the Comptroller to transfer $162.5
million, as of June 30, 1998, from the General Fund to a newly established
Tax Exemption Escrow Trust Fund. By June 30, 1999 the Comptroller is to
transfer $162.5 million plus interest from the new fund back to the
General Fund. The effect of this provision is to charge to fiscal 1998
the approximate cost allocable to fiscal 1998 of the retroactive income
tax reductions approved by the Acting Governor on July 21, 1998.
On August 5, 1998, the Acting Governor approved legislation establishing
a new Brownfields Revitalization Fund and providing for the transfer of
$45 million to that fund, to be used through fiscal year 2001 to fund a
$15 million access-to-capital program to be administered by the
Massachusetts Office of Business Development and a $30 million Brownfields
Redevelopment Fund to be administered by the Massachusetts Development
Finance Agency. The legislation also contains an additional $12 million
in fiscal 1998 appropriations, which are made available through fiscal
2001, to fund Brownfields-related costs of the Attorney General and the
Department of Environmental Protection.
On August 10, 1998 the Acting Governor approved legislation establishing
a $60 million Teacher Quality Endowment Fund. Earnings from the
investment of moneys credited to the new fund are to be used by the
Commissioner of Education to pay signing bonuses to incoming teachers and
salary bonuses to existing teachers under a new master teacher corps
program. The corpus of the fund is to be left intact. The legislation
also provided for the transfer from the General Fund of $200 million to
the Tax Reduction Fund (to be applied to a temporary increase in the
personal exemptions applicable to 1998 income taxes) and $150 million to
the Stabilization Fund (in addition to any other transfer required by
state finance law). In addition, the legislation authorized approximately
$62.9 million in additional revenues from the state lottery to be
distributed to cities and towns on account of fiscal 1998.
Also on August 10, 1998, the Acting Governor gave his partial approval to
legislation providing for a variety of capital appropriations to be
charged to fiscal 1998. The bill enacted by the Legislature called for
the transfer of approximately $272.4 million from the General Fund and
approximately $106.9 million from the Highway Fund to a Capital
Improvement and Investment Trust Fund to finance various specified capital
expenditures through fiscal 2000. The Acting Governor vetoed many of the
proposed capital expenditures, reducing the amount of the General Fund
transfer to approximately $96.2 million and the amount of the Highway Fund
transfer to $93 million. The Acting Governor filed legislation on the
same day calling for an additional $287.5 million to be transferred to the
Tax Reduction Fund. That bill has been referred to the House Committee on
Ways and Means. Under existing law, the effect of the vetoes is to
increase the amount of the fiscal 1998 surplus that will be credited to
the Stabilization Fund and the Capital Projects Fund.
On August 12, 1998, the Acting Governor approved a fiscal 1998
supplemental appropriations bill providing for approximately $70.9 million
in fiscal 1998 appropriations to be made available in fiscal 1999 to fund
various collective bargaining agreements.
In November 1980, voters in the Commonwealth approved a state-wide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees
imposed on cities and towns by certain government entities, including
county governments. The law is not a constitutional provision and
accordingly is subject to amendment or repeal by the legislature.
Proposition 2 1/2 limits the property taxes that a Massachusetts city or
town may assess in any fiscal year to the lesser of (i) 2.5% of the full
and fair cash value of real estate and personal property therein and (ii)
2.5% over the previous fiscal year's levy limit plus any growth in the
base from certain new construction and parcel subdivisions. In addition,
Proposition 2 1/2 limits any increase in the charges and fees assessed by
certain governmental entities, including county governments, on cities and
towns to the sum of (i) 2.5% of the total charges and fees imposed in the
preceding fiscal year, and (ii) any increase in charges for services
customarily provided locally or services obtained by the city or town.
The law contains certain override provisions and, in addition, permits
certain debt servicings and expenditures for identified capital projects
to be excluded from the limits by a majority vote, in a general or special
election.
During the 1980's, Massachusetts increased payments to its cities, towns
and regional school districts ("Local Aid") to mitigate the impact of
Proposition 2 1/2 on local programs and services. In fiscal year 1998,
approximately 20.6% of Massachusetts' budget is estimated to be allocated
to Local Aid. Direct Local Aid increased from $2.359 billion in fiscal
year 1992 to $2.547 billion in fiscal year 1993, to $2.727 billion in
fiscal year 1994 and to $2.976 billion in fiscal year 1995. Fiscal year
1996 expenditures for direct Local Aid were $3.246 billion, a 9.1%
increase over 1995. It is estimated that fiscal year 1997 expenditures
for Local Aid will be $3.534 billion, which will be an increase of
approximately 8.9% above the fiscal year 1996 level. In addition to
direct Local Aid, Massachusetts provides substantial indirect aid to local
governments.
In November 1990, voters approved a petition which regulates the
distribution of Local Aid by requiring, subject to appropriation,
distribution to cities and towns of no less than 40% of collection from
personal income taxes, sales and use taxes, corporate excise taxes, and
lottery fund proceeds. The Local Aid distribution to each city or town
would equal no less than 100% of the total Local Aid received for fiscal
year 1989. Distributions in excess of fiscal year 1989 levels would be
based on new formulas that would replace the current Local Aid
distribution formulas. By its terms, the new formulas would have called
for a substantial increase in direct Local Aid in fiscal year 1992, and
would call for such an increase in fiscal year 1993 and in subsequent
years. However, Local Aid payments expressly remain subject to annual
appropriation, and appropriations for Local Aid in fiscal years 1992
through 1998 have not met the levels set forth in the initiative law.
During Fiscal Years 1993, 1994, 1995, 1996 and 1997 Medicaid expenditures
of the Commonwealth were $3.151 billion, $3.313 billion, $3.898 billion,
$3.416 billion and $3.456 billion, respectively. The average annual growth
rate from Fiscal Year 1993 to Fiscal Year 1997 was 2.3 percent. The
Executive Office for Administration and Finance estimates that Fiscal Year
1998 Medicaid expenditures will be approximately $3.620 billion, an
increase of 4.7% from fiscal 1997.
The Division of Medical Assistance has implemented a number of savings and
cost control initiatives including managed care, utilization review and
the identification of third party liabilities. In spite of increasing
caseloads, Massachusetts has managed a substantial reduction in the
Medicaid growth rate in expenditures over the last six years. From fiscal
1993 through fiscal 1997, per capita costs grew on average less than 0.6%
annually. The total Medicaid caseload for fiscal 1997 was approximately
676,323 (approximately 11.1% of the most recently estimated population of
the Commonwealth), as compared to approximately 630,902 in fiscal 1993.
Litigation
There are pending in courts within the Commonwealth various suits in which
the Commonwealth is a defendant. In the opinion of the Attorney General,
as of September 2, 1998, no litigation was pending or, to his knowledge,
threatened which was likely to result, either individually or in the
aggregate, in final judgments against the Commonwealth that would affect
materially its financial condition. Listed below are certain litigation
affecting the Commonwealth.
In Massachusetts Wholesalers of Malt Beverages v. Commonwealth,
associations of bottlers challenged as an unconstitutional taking the 1990
amendments to the bottle bill which escheat abandoned deposits to the
Commonwealth. In August 1994, the Superior Court ruled that the
Commonwealth is liable for certain amounts. In February 1996, the
Commonwealth settled all remaining issues with one group of plaintiffs.
Payments to that group will total approximately $7 million. The
Legislature appropriated the funds necessary for these payments in its
final supplemental budget for fiscal 1996. The Legislature has
appropriated approximately $8 million to implement the terms of the
settlement with the remaining group of plaintiffs.
Year 2000
In June 1997, the Executive Office for Administration and Finance
established a Year 2000 Program Management Office within its Information
Technology Division. The purpose of the office is to ensure accurate
monitoring of the Commonwealth's progress in achieving year 2000
compliance, i.e., remediating or replacing and redeploying affected
systems, as well as to identify risk areas and risk mitigation activities
and serve as a resource for all state agencies and departments.
Legislation approved by the Acting Governor on August 10, 1998
appropriated $20.4 million for expenditure by the Information Technology
Division to achieve year 2000 compliance for the six Executive Offices and
other departments that report directly to the Governor. This amount,
together with previously appropriated amounts and expenditures at the
departmental level from existing funds, is anticipated to be sufficient to
meet most of the remediation efforts for such Executive Offices and
departments. The Secretary of Administration and Finance is to report
quarterly to the Legislature on the progress being made to address the
year 2000 compliance efforts, and to assess the sufficiency of funding
levels.
Special Considerations Relating to Puerto Rico
The following highlights some of the more significant financial trends and
problems affecting the Commonwealth of Puerto Rico (the "Commonwealth" or
"Puerto Rico"), and is based on information drawn from official statements
and prospectuses relating to the securities offerings of Puerto Rico, its
agencies and instrumentalities, as available on the date of this SAI. SSBC
has not independently verified any of the information contained in such
official statements, prospectuses, and other publicly available documents,
but is not aware of any fact that would render such information materially
inaccurate.
The economy of Puerto Rico is fully integrated with that of the United
States. In fiscal 1997, trade with the United States accounted for
approximately 88% of Puerto Rico's exports and approximately 62% of its
imports. In this regard, in fiscal 1997 Puerto Rico experienced a $2.7
billion positive adjusted merchandise trade balance.
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1997, aggregate
personal income was $32.1 billion ($30.0 billion in 1992 prices) and
personal per capita income was $8,509 ($7,957 in 1992 prices). Gross
product in fiscal 1993 was $25.1 billion ($24.5 billion in 1992 prices)
and gross product in fiscal 1997 was $32.1 billion ($27.7 billion in 1992
prices). This represents an increase in gross product of 27.7% from fiscal
1993 to 1997 (13.0% in 1992 prices).
Puerto Rico's economic expansion, which has lasted over ten years,
continued throughout the five-year period from fiscal 1993 through fiscal
1997. Almost every sector of the economy participated, and record levels
of employment were achieved. Factors behind the continued expansion
included Government-sponsored economic development programs, periodic
declines in the exchange value of the U.S. dollar, increases in the level
of federal transfers, and the relatively low cost of borrowing funds
during the period.
Average employment increased from 999,000 in fiscal 1993 to 1,128,300 in
fiscal 1997. Unemployment, although at relatively low historical levels,
remains above the U.S. average. Average unemployment decreased from 16.8%
in fiscal 1993 to 13.1% in fiscal 1997.
Manufacturing is the largest sector in the economy accounting for $19.8
billion or 41.2% of gross domestic product in fiscal 1997. The
manufacturing sector employed 153,273 workers as of March 1997.
Manufacturing in Puerto Rico is now more diversified than during earlier
phases of industrial development. In the last two decades industrial
development has tended to be more capital intensive and dependent on
skilled labor. This gradual shift is best exemplified by heavy investment
in pharmaceuticals, scientific instruments, computers, microprocessors,
and electrical products over the last decade. The service sector, which
includes wholesale and retail trade and finance, insurance, real estate,
hotels and related services, and other services, ranks second in its
contribution to gross domestic product and is the sector that employs the
greatest number of people.
In fiscal 1997, the service sector generated $18.4 billion in gross
domestic product or 38.2% of the total. Employment in this sector grew
from 467,000 in fiscal 1993 to 551,000 in fiscal 1997, a cumulative
increase of 17.8%. This increase was greater than the 12.9% cumulative
growth in employment over the same period providing 48% of total
employment. The Government sector of the Commonwealth plays an important
role in the economy of the island. In fiscal year 1997, the Government
accounted for $5.2 billion of Puerto Rico's gross domestic product and
provided 10.9% of the total employment. The construction industry has
experienced real growth since fiscal 1987. In fiscal 1997, investment in
construction rose to $4.7 billion, an increase of 14.7% as compared to
$4.1 billion for fiscal 1996. Tourism also contributes significantly to
the island economy, accounting for $2.0 billion of gross domestic product
in fiscal 1997.
The present administration has developed and is implementing a new
economic development program which is based on the premise that the
private sector should provide the primary impetus for economic development
and growth. This new program, which is referred to as the New Economic
Model, promotes changing the role of the Government from one of being a
provider of most basic services to that of a facilitator for private
sector initiatives and encourages private sector investment by reducing
Government-imposed regulatory restraints.
The New Economic Model contemplates the development of initiatives that
will foster private investment in, and private management of, sectors that
are served more efficiently and effectively by the private enterprise. One
of these initiatives has been the adoption of a new tax code intended to
expand the tax base, reduce top personal and corporate tax rates, and
simplify the tax system. Another initiative is the improvement and
expansion of Puerto Rico's infrastructure to facilitate private sector
development and growth, such as the construction of the water pipeline and
cogeneration facilities described below and the construction of a light
rail system for the San Juan metropolitan area.
The New Economic Model also seeks to identify and promote areas in which
Puerto Rico can compete more effectively in the global markets. Tourism
has been identified as one such area because of its potential for job
creation and contribution to the gross product. In 1993, a new Tourism
Incentives Act and a Tourism Development Fund were implemented in order to
provide special tax incentives and financing for the development of new
hotel projects and the tourism industry. As a result of these initiatives,
new hotels have been constructed or are under construction which have
increased the number of hotel rooms on the island from 8,415 in fiscal
1992 to 10,877 at the end of fiscal 1997 and to a projected 11,972 by the
end of fiscal 1998.
The New Economic Model also seeks to reduce the size of the Government's
direct contribution to gross domestic product. As part of this goal, the
Government has transferred certain Governmental operations and sold a
number of its assets to private parties. Among these are: (i) the
Government sold the assets of the Puerto Rico Maritime Authority; (ii) the
Government executed a five-year management agreement for the operation and
management of the Aqueducts and Sewer Authority by a private company;
(iii) the Aqueducts and Sewer Authority executed a construction and
operating agreement with a private consortium for the design,
construction, and operation of an approximately 75 million gallon per day
water pipeline to the San Juan metropolitan area from the Dos Bocas
reservoir in Utuado; (iv) the Electric Power Authority executed power
purchase contracts with private power producers under which two
cogeneration plants (with a total capacity of 800 megawatts) will be
constructed; (v) the Corrections Administration entered into operating
agreements with two private companies for the operation of three new
correctional facilities; (vi) the Government entered into a definitive
agreement to sell certain assets of a pineapple juice processing business
and sold certain mango growing operations; (vii) the Government is in the
process of transferring to local sugar cane growers certain sugar
processing facilities; (viii) the Government sold two hotel properties and
is currently negotiating the sale of a complex consisting of two hotels
and a convention center; and (ix) the Government has announced its
intention to sell the Puerto Rico Telephone Company and is currently
involved in the sale process.
One of the goals of the Rossello administration is to change Puerto Rico's
public health care system from one in which the Government provides free
health services to low income individuals through public health
facilities owned and administered by the Government to one in which all
medical services are provided by the private sector and the Government
provides comprehensive health insurance coverage for qualifying (generally
low income) Puerto Rico residents. Under this new system, the Government
selects, through a bidding system, one private health insurance company in
each of several designated regions of the island and pays such insurance
company the insurance premium for each eligible beneficiary within such
region. This new health insurance system is now covering 61 municipalities
out of a total of 78 on the island. It is expected that 11 municipalities
will be added by the end of fiscal 1998 and 5 more by the end of fiscal
1999. The total cost of this program will depend on the number of
municipalities included in the program, the number of participants
receiving coverage, and the date coverage commences. As of December 31,
1997, over 1.1 million persons were participating in the program at an
estimated annual cost to Puerto Rico for fiscal 1998 of approximately $672
million. In conjunction with this program, the operation of certain public
health facilities has been transferred to private entities. The
Government's current privatization plan for health facilities provides for
the transfer of ownership of all health
facilities to private entities. The Government sold six health facilities
to private companies and is currently in negotiations with other private
companies for the sale of thirteen health facilities to such companies.
One of the factors assisting the development of the manufacturing sector
in Puerto Rico has been the federal and Commonwealth tax incentives
available, particularly those under the Puerto Rico Industrial Incentives
Program and Sections 30A and 936 of the Internal Revenue Code 1986, as
amended (the "Code").
Since 1948, Puerto Rico has promulgated various industrial incentives laws
designed to stimulate industrial investment. Under these laws, companies
engaged in manufacturing and certain other designated activities were
eligible to receive full or partial exemption from income, property, and
other taxes. The most recent of these laws is Act No. 135 of December 2,
1997 (the "1998 Tax Incentives Law").
The benefits provided by the 1998 Tax Incentives Law are available to new
companies as well as companies currently conducting tax-exempt operations
in Puerto Rico that choose to renegotiate their existing tax exemption
grant. Activities eligible for tax exemption include manufacturing,
certain services performed for markets outside Puerto Rico, the production
of energy from local renewable sources for consumption in Puerto Rico, and
laboratories for scientific and industrial research. For companies
qualifying thereunder, the 1998 Tax Incentives Law imposes income tax
rates ranging from 2% to 7%. In addition, it grants 90% exemption from
property taxes, 100% exemption from municipal license taxes during the
first eighteen months of operation and between 80% and 60% thereafter, and
100% exemption from municipal excise taxes. The 1998 Tax Incentives Law
also provides various special deductions designated to stimulate
employment and productivity, research and development, and capital
investment in Puerto Rico.
Under the 1998 Tax Incentives Law, companies are able to repatriate or
distribute their profits free of tollgate taxes. In addition, passive
income derived from designated investments will continue to be fully
exempt from income and municipal license taxes. Individual shareholders of
an exempted business will be allowed a credit against their Puerto Rico
income taxes equal to 30% of their proportionate share in the exempted
business' income tax liability. Gain from the sale or exchange of shares
of an exempted business by its shareholders during the exemption period
will be subject to a 4% income tax rate.
For many years, U.S. companies operating in Puerto Rico enjoyed a special
tax credit that was available under Section 936 of the Code. Originally,
the credit provided an effective 100% federal tax exemption for operating
and qualifying investment income from Puerto Rico sources. Amendments to
Section 936 made in 1993 (the "1993 Amendments") instituted two
alternative methods for calculating the tax credit and limited the amount
of the credit that a qualifying company could claim. These limitations are
based on a percentage of qualifying income (the "percentage of income
limitation") and on qualifying expenditures on wages and other wage
related benefits (the "economic activity limitation", also known as the
"wage credit limitation"). As a result of amendments incorporated in the
Small Business Job Protection Act of 1996 enacted by the U.S. Congress and
signed into law by President Clinton on August 20, 1996 (the "1996
Amendments"), the tax credit, as described below, is now being phased out
over a ten-year period for existing claimants and is no longer available
for corporations that established operations in Puerto Rico after October
13, 1995 (including existing Section 936 Corporations (as defined below)
to the extent substantially new operations are established in Puerto
Rico). The 1996 Amendments also moved the credit based on the economic
activity limitation to Section 30A of the Code and phased it out over 10
years. In addition, the 1996 Amendments eliminated the credit previously
available for income derived from certain qualified investments in Puerto
Rico. The Section 30A credit and the remaining Section 936 credit are
discussed below.
Section30A. The 1996 Amendments added a new Section 30A to the Code.
Section 30A permits a "qualifying domestic corporation" ("QDC") that meets
certain gross income tests (which are similar to the 80% and 75% gross
income tests of Section 936 of the Code discussed below) to claim a credit
(the "Section 30A credit") against the federal income tax imposed on
taxable income derived from sources outside the United States from the
active conduct of a trade or business in Puerto Rico or from the sale of
substantially all the assets used in such business ("possession income").
A QDC is a U.S. corporation which (i) was actively conducting a trade or
business in Puerto Rico on October 13, 1995, (ii) had a Section 936
election in effect for its taxable year that included October 13, 1995,
(iii) does not have in effect an election to use the percentage limitation
of Section 936(a)(4)(B) of the Code, and (iv) does not add a "substantial
new line of business."
The Section 30A credit is limited to the sum of (i) 60% of qualified
possession wages as defined in the Code, which includes wages up to 85% of
the maximum earnings subject to the OASDI portion of Social Security taxes
plus an allowance for fringe benefits of 15% of qualified possession
wages, (ii) a specified percentage of depreciation deductions ranging
between 15% and 65%, based on the class life of tangible property, and
(iii) a portion of Puerto Rico income taxes paid by the QDC, up to a 9%
effective tax rate (but only if the QDC does not elect the profit-split
method for allocating income from intangible property).
A QDC electing Section 30A of the Code may compute the amount of its
active business income, eligible for the Section 30A Credit, by using
either the cost sharing formula, the profit-split formula, or the cost-
plus formula, under the same rules and guidelines prescribed for such
formulas as provided under Section 936 (see discussion below). To be
eligible for the first two formulas, the QDC must have a significant
presence in Puerto Rico.
In the case of taxable years beginning after December 31, 2001, the amount
of possession income that would qualify for the Section 30A credit would
be subject to a cap based on the QDC's possession income for an average
adjusted base period ending before October 14, 1995.
Section 30A applies only to taxable years beginning after December 31,
1995 and before January 1, 2006.
Section 936. Under Section 936 of the Code, as amended by the 1996
Amendments, and as an alternative to the Section 30A credit, U.S.
corporations that meet certain requirements and elect its application
("Section 936 Corporations") are entitled to credit against their U.S.
corporate income tax, the portion of such tax attributable to income
derived from the active conduct of a trade or business within Puerto Rico
("active business income") and from the sale or exchange of substantially
all assets used in the active conduct of such trade or business. To
qualify under Section 936 in any given taxable year, a corporation must
derive for the three-year period immediately preceding the end of such
taxable year (i) 80% or more of its gross income from sources within
Puerto Rico and (ii) 75% or more of its gross income from the active
conduct of a trade or business in Puerto Rico.
Under Section 936, a Section 936 Corporation may elect to compute its
active business income, eligible for the Section 936 credit, under one of
three formulas: (A) a cost-sharing formula, whereby it is allowed to claim
all profits attributable to manufacturing intangibles, and other functions
carried out in Puerto Rico, provided it contributes to the research and
development expenses of its affiliated group or pays certain royalties;
(B) a profit-split formula, whereby it is allowed to claim 50% of the net
income of its affiliated group from the sale of products manufactured in
Puerto Rico; or (C) a cost-plus formula, whereby it is allowed to claim a
reasonable profit on the manufacturing costs incurred in Puerto Rico. To
be eligible for the first two formulas, the Section 936 Corporation must
have a significant business presence in Puerto Rico for purposes of the
Section 936 rules.
As a result of the 1993 Amendments and the 1996 Amendments, the Section
936 credit is only available to companies that elect the percentage of
income limitation and is limited in amount to 40% of the credit allowable
prior to the 1993 Amendments, subject to a five-year phase-in period from
1994 to 1998 during which period the percentage of the allowable credit is
reduced from 60% to 40%.
In the case of taxable years beginning on or after 1998, the possession
income subject to the Section 936 credit will be subject to a cap based on
the Section 936 Corporation's possession income for an average adjusted
base period ending on October 14, 1995. The Section 936 credit is
eliminated for taxable years beginning in 2006.
Proposal to Extend the Phaseout of Section 30A. During 1997, the
Government of Puerto Rico proposed to Congress the enactment of a new
permanent federal incentive program similar to that provided under Section
30A. Such a program would provide U.S. companies a tax credit based on
qualifying wages paid and other wage-related expenses, such as fringe
benefits, as well as depreciation expenses for certain tangible assets and
research and development expenses. Under the Governor's proposal, the
credit granted to qualifying companies would continue in effect until
Puerto Rico shows, among other things, substantial economic improvements
in terms of certain economic parameters. The fiscal 1998 budget submitted
by President Clinton to Congress in February 1997 included a proposal to
modify Section 30A to (i) extend the availability of the Section 30A
credit indefinitely; (ii) make it available to companies establishing
operations in Puerto Rico after October 13, 1995; and (iii) eliminate the
income cap. Although this proposal, was not included in the final fiscal
1998 federal budget, President Clinton's fiscal 1999 budget submitted to
Congress again included these modifications to Section 30A. While the
Government of Puerto Rico plans to continue lobbying for this proposal, it
is not possible at this time to predict whether the Section 30A credit
will be so modified.
Outlook. It is not possible at this time to determine the long-term effect
on the Puerto Rico economy of the enactment of the 1996 Amendments. The
Government of Puerto Rico does not believe there will be short-term or
medium-term material adverse effects on Puerto Rico's economy as a result
of the enactment of the 1996 Amendments. The Government of Puerto Rico
further believes that during the phase-out period sufficient time exists
to implement additional incentive programs to safeguard Puerto Rico's
competitive position.
Alternative Minimum Tax
Under current federal income tax law, (1) interest on tax-exempt municipal
securities issued after August 7, 1986 which are "specified private
activity bonds," and the proportionate share of any exempt-interest
dividend paid by a regulated investment company which receives interest
from such specified private activity bonds, will be treated as an item of
tax preference for purposes of the alternative minimum tax ("AMT") imposed
on individuals and corporations, though for regular Federal income tax
purposes such interest will remain fully tax-exempt, and (2) interest on
all tax-exempt obligations will be included in "adjusted current earnings"
of corporations for AMT purposes. Such private activity bonds ("AMT-
Subject bonds"), which include industrial development bonds and bonds
issued to finance such projects as airports, housing projects, solid waste
disposal facilities, student loan programs and water and sewage projects,
have provided, and may continue to provide, somewhat higher yields than
other comparable municipal securities.
Investors should consider that, in most instances, no state, municipality
or other governmental unit with taxing power will be obligated with
respect to AMT-Subject bonds. AMT-Subject bonds are in most cases revenue
bonds and do not generally have the pledge of the credit or the taxing
power, if any, of the issuer of such bonds. AMT-Subject bonds are
generally limited obligations of the issuer supported by payments from
private business entities and not by the full faith and credit of a state
or any governmental subdivision. Typically the obligation of the issuer
of AMT-Subject bonds is to make payments to bond holders only out of and
to the extent of, payments made by the private business entity for whose
benefit the AMT-Subject bonds were issued. Payment of the principal and
interest on such revenue bonds depends solely on the ability of the user
of the facilities financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide specific detail
on each of these obligations in which Fund assets may be invested.
Risk of Concentration In a Single State
The primary purpose of investing in a portfolio of a single state's
municipal securities is the special tax treatment accorded the state's
resident individual investors. However, payment of interest and
preservation of principal is dependent upon the continuing ability of the
state's issuers and/or obligors on state, municipal and public authority
debt obligations to meet their obligations thereunder. Investors should be
aware of certain factors that might affect the financial condition of
issuers of municipal securities, consider the greater risk of the
concentration of a fund versus the safety that comes with a less
concentrated investment portfolio and compare yields available in
portfolios of the relevant state's issues with those of more diversified
portfolios, including out-of-state issues, before making an investment
decision.
Municipal securities in which a fund's assets are invested may include
debt obligations of the municipalities and other subdivisions of the
relevant state issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, schools, streets and water and sewer works.
Other purposes for which municipal securities may be issued include the
obtaining of funds to lend to public or private institutions for the
construction of facilities such as educational, hospital, housing, and
solid waste disposal facilities. The latter, including most AMT-Subject
bonds, are generally payable from private sources which, in varying
degrees, may depend on local economic conditions, but are not necessarily
affected by the ability of the state and its political subdivisions to pay
their debts. It is not possible to provide specific detail on each of
these obligations in which fund assets may be invested. However, all such
securities, the payment of which is not a general obligation of an issuer
having general taxing power, must satisfy, at the time of an acquisition
by the fund, the minimum rating(s). See "Appendix A: Bond and Commercial
Paper Ratings" for a description of ratings and rating criteria. Some
municipal securities may be rated based on a "moral obligation" contract
which allows the municipality to terminate its obligation by deciding not
to make an appropriation. Generally, no legal remedy is available against
the municipality that is a party to the "moral obligation" contract in the
event of such non-appropriation
Municipal Market Volatility. Municipal securities can be significantly
affected by political changes as well as uncertainties in the municipal
market related to taxation, legislative changes, or the rights of
municipal security holders. Because many municipal securities are issued
to finance similar projects, especially those relating to education,
health care, transportation and utilities, conditions in those sectors can
affect the overall municipal market. In addition, changes in the financial
condition of an individual municipal insurer can affect the overall
municipal market.
Interest Rate Changes. Debt securities have varying levels of sensitivity
to changes in interest rates. In general, the price of a debt security can
fall when interest rates rise and can rise when interest rates fall.
Securities with longer maturities can be more sensitive to interest rate
changes. In other words, the longer the maturity of a security, the
greater the impact a change in interest rates could have on the security's
price. In addition, short-term and long-term interest rates do not
necessarily move in the same amount or the same direction. Short-term
securities tend to react to changes in short-term interest rates, and
long-term securities tend to react to changes in long-term interest rates.
Issuer-Specific Changes. Changes in the financial condition of an issuer,
changes in specific economic or political conditions that affect a
particular type of security or issuer, and changes in general economic or
political conditions can affect the credit quality or value of an issuer's
securities. Lower-quality debt securities (those of less than investment-
grade quality) tend to be more sensitive to these changes than higher-
quality debt securities. Entities providing credit support or a maturity-
shortening structure also can be affected by these types of changes.
Municipal securities backed by current or anticipated revenues from a
specific project or specific assets can be negatively affected by the
discontinuance of the taxation supporting the project or assets or the
inability to collect revenues for the project or from the assets. If the
Internal Revenue Service determines an issuer of a municipal security has
not complied with applicable tax requirements, interest from the security
could become taxable and the security could decline significantly in
value. In addition, if the structure of a security fails to function as
intended, interest from the security could become taxable or the security
could decline in value.
INVESTMENT RESTRICTIONS
The fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions 1 through 6 below cannot be
changed without the approval of the holders of a majority of the
outstanding shares of the fund, defined as the lesser of (a) 67% of the
fund's shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (b) more than 50%
of the fund's outstanding shares. The remaining restrictions may be
changed by the fund's Board of Trustees at any time.
The fund will not:
1. Issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
2. Invest more than 25% of its total assets in securities, the
issuers of which are in the same industry. For purposes of
this limitation, U.S. government securities and securities of
state or municipal governments and their political
subdivisions are not considered to be issued by members of any
industry.
3. Borrow money, except that (a) the fund may borrow from banks
for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and
(b) the fund may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward
roll transactions and similar investment strategies and
techniques. To the extent that it engages in transactions
described in (a) and (b), the fund will be limited so that no
more than 33 1/3% of the value of its total assets (including
the amount borrowed), valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) valued at
the time the borrowing is made, is derived from such
transactions.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940
Act.
5. Engage in the business of underwriting securities issued by
other persons, except to the extent that the fund may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of portfolio
securities.
6. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the fund from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests
therein; (b) holding or selling real estate received in
connection with securities it holds or held; (c) trading in
futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the fund's
investment objective and policies); or (d) investing in real
estate investment trust securities.
7. Purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this
restriction, the deposit or payment by the fund of underlying
securities and other assets in escrow and collateral
agreements with respect to initial or maintenance margin in
connection with futures contracts and related options and
options on securities, indexes or similar items is not
considered to be the purchase of a security on margin.
8. Purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in
securities that are illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets in the
securities of issuers having a record, including predecessors,
of less than three years of continuous operation, except U.S.
government securities. (For purposes of this limitation,
issuers include predecessors, sponsors, controlling persons,
general partners, guarantors and originators of underlying
assets.)
11. Invest in companies for the purpose of exercising control.
12. Invest in securities of other investment companies, except as
they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent permitted by
Section 12 of the 1940 Act (currently, up to 5% of the total
assets of the fund and no more than 3% of the total
outstanding voting stock of any one investment company).
13. Engage in the purchase or sale of put, call, straddle or
spread options or in the writing of such options, except that
the fund may make margin deposits in connection with municipal
bond index and interest rate futures contracts and may
purchase and sell options on municipal bond index and interest
rate futures contracts.
Certain restrictions listed above permit the fund to engage in investment
practices that the fund does not currently pursue. The fund has no
present intention of altering its current investment practices as
otherwise described in the prospectus and this SAI and any future change
in those practices would require Board approval and appropriate notice to
shareholders. If a percentage restriction is complied with at the time of
an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the
amount of the fund's assets will not constitute a violation of such
restriction.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales
usually are placed with those dealers from which it appears that the best
price or execution will be obtained; those dealers may be acting as either
agents or principals. The purchase price paid by the fund to underwriters
of newly issued securities usually includes a concession paid by the
issuer to the underwriter, and purchases of after-market securities from
dealers normally are executed at a price between the bid and asked prices.
For the 1996, 1997 and 1998 fiscal years, the fund has paid no brokerage
commissions.
Allocation of transactions, including their frequency, to various dealers
is determined by the manager in its best judgment and in a manner deemed
fair and reasonable to shareholders. The primary considerations are
availability of the desired security and the prompt execution of orders in
an effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment research and
statistical or other services to the manager may receive orders for
portfolio transactions by the fund. Information so received is in
addition to, and not in lieu of, services required to be performed by the
manager, and the fees of the manager are not reduced as a consequence of
its of such supplemental information. Such information may be useful to
the manager in serving both the fund and other clients and, conversely,
supplemental information obtained by the placement of business of other
clients may be useful to the manager in carrying out its obligations to
the fund.
The fund will not purchase Exempt Obligations during the existence of any
underwriting or selling group relating thereto of which Salomon Smith
Barney is a member, except to the extent permitted by the SEC. Under
certain circumstances, the fund may be at a disadvantage because of this
limitation in comparison with other investment companies which have a
similar investment objective but which are not subject to such limitation.
The fund also may execute portfolio transactions through Salomon Smith
Barney and its affiliates in accordance with rules promulgated by the SEC.
While investment decisions for the fund are made independently from those
of the other accounts managed by the manager, investments of the type the
fund may make also may be made by those other accounts. When the fund and
one or more other accounts managed by the manager are prepared to invest
in, or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the
manager to be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by the fund or the size of the
position obtained or disposed of by the fund.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate (the lesser of purchases or sales of
portfolio securities during the year, excluding purchases or sales of
short-term securities, divided by the monthly average value of portfolio
securities) generally is not expected to exceed 100%, but the portfolio
turnover rate will not be a limiting factor whenever the fund deems it
desirable to sell or purchase securities. Securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold.
In addition, a security may be sold and another security of comparable
quality may be purchased at approximately the same time in order to take
advantage of what the fund believes to be a temporary disparity in the
normal yield relationship between the two securities. These yield
disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates,
such as changes in the overall demand for or supply of various types of
tax-exempt securities. For the 1996, 1997 and 1998 fiscal years, the
fund's portfolio turnover rates were 23%, 58% and 51%, respectively.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for purchase. See the
prospectus for a discussion of factors to consider in selecting which
Class of shares to purchase.
Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge
as follows:
Amount of
Investment
Sales Charge as
a %
Of Transaction
Sales Charge as
a %
of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
4.00%
4.17%
3.60%
$ 25,000 - 49,999
3.50
3.63
3.15
50,000 - 99,999
3.00
3.09
2.70
100,000 - 249,999
2.50
2.56
2.25
250,000 - 499,999
1.50
1.52
1.35
500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a
deferred sales charge of 1.00% on redemptions made within 12 months of
purchase. The deferred sales charge on Class A shares is payable to
Salomon Smith Barney, which compensates Salomon Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000
or more. The deferred sales charge is waived in the same circumstances
in which the deferred sales charge applicable to Class B and Class L
shares is waived. See "Purchase of Shares-Deferred Sales Charge
Alternatives" and "Purchase of Shares-Waivers of Deferred Sales
Charge."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the fund as defined in the Securities
Act of 1933. The reduced sales charges shown above apply to the aggregate
of purchases of Class A shares of the fund made at one time by "any
person," which includes an individual and his or her immediate family, or
a trustee or other fiduciary of a single trust estate or single fiduciary
account.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a deferred sales charge payable upon certain
redemptions. See "Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to
a deferred sales charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below. Until June 22, 2001 purchases of Class L
shares by investors who were holders of Class C shares of the fund on June
12, 1998 will not be subject to the 1% initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge
or deferred sales charge and are available only to investors investing a
minimum of $15,000,000 (except purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase
amount).
General
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors,
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the fund. When
purchasing shares of the fund, investors must specify whether the purchase
is for Class A, Class B, Class L or Class Y shares. Salomon Smith Barney
and Dealer Representatives may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data
Investor Services Group, Inc. ("First Data" or "transfer agent") are not
subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may open an account in
the fund by making an initial investment of at least $1,000 for each
account, in the fund. Investors in Class Y shares may open an account by
making an initial investment of $15,000,000. Subsequent investments of at
least $50 may be made for all Classes. For shareholders purchasing shares
of the fund through the Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A, Class B and Class L
shares and subsequent investment requirement for all Classes is $25. For
shareholders purchasing shares of the fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment
required for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes is $50. There are no minimum
investment requirements for Class A shares for employees of Citigroup and
its subsidiaries, including Salomon Smith Barney, unitholders who invest
distributions from a Unit Investment Trust ("UIT") sponsored by Salomon
Smith Barney, and Directors/Trustees of any of the Smith Barney Mutual
Funds, and their spouses and children. The fund reserves the right to
waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by First Data. Share certificates are
issued only upon a shareholder's written request to First Data.
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 the value of such shares represents: (a) capital appreciation of
fund assets; (b) reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class L shares and Class A
shares that are Deferred Sales Charge Shares, shares redeemed more than 12
months after their purchase.
Class L shares and Class A shares that are Deferred Sales Charge Shares
are subject to a 1.00% deferred sales charge if redeemed within 12 months
of purchase. In circumstances in which the deferred sales charge is
imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the
number of years since a purchase payment, all purchase payments made
during a month will be aggregated and deemed to have been made on the last
day of the preceding Salomon Smith Barney statement month. The following
table sets forth the rates of the charge for redemptions of Class B shares
by shareholders.
Year Since Purchase Payment Was Made
Deferred sales charge
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer
be subject to any distribution fees. There will also be converted at that
time such proportion of Class B Dividend Shares owned by the shareholders
as the total number of his or her Class B shares converting at the time
bears to the total number of outstanding Class B shares (other than Class
B Dividend Shares) owned by the shareholder.
The length of time that Deferred Sales Charge Shares acquired through an
exchange have been held will be calculated from the date the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the
amount of the deferred sales charge will reduce the gain or increase the
loss, as the case may be, on the amount realized on redemption. The amount
of any deferred sales charge will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares of
the fund at $10 per share for a cost of $1,000. Subsequently, the
investor acquired 5 additional shares of the fund through dividend
reinvestment. During the fifteenth month after the purchase, the investor
decided to redeem $500 of his or her investment. Assuming at the time of
the redemption the net asset value had appreciated to $12 per share, the
value of the investor's shares would be $1,260 (105 shares at $12 per
share). The deferred sales charge would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend
shares ($60). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4.00% (the applicable rate for Class
B shares) for a total deferred sales charge of $9.60.
Waivers of Deferred Sales Charge
The deferred sales charge will be waived on: (a) exchanges (see ''Exchange
Privilege''); (b) automatic cash withdrawals in amounts equal to or less
than 1.00% per month of the value of the shareholder's shares at the time
the withdrawal plan commences (see ''Automatic Cash Withdrawal Plan'')
(however, automatic cash withdrawals in amounts equal to or less than
2.00% per month of the value of the shareholder's shares will be permitted
for withdrawal plans established prior to November 7, 1994); (c)
redemptions of shares within 12 months following the death or disability
of the shareholder; (d) 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 days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Because of the differences in distribution fees and
class-specific expenses, the per share net asset value of each class may
differ. The following is a description of the procedures used by the fund
in valuing its assets.
Generally, the fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Board of Trustees. A security
that is primarily traded on a domestic or foreign exchange is valued at
the last sale price on that exchange or, if there were no sales during the
day, at the mean between the bid and asked price. Over-the-counter
securities are valued at the mean between the bid and asked price. If
market quotations for those securities are not readily available, they are
valued at fair value, as determined in good faith by the fund's Board of
Trustees. An option is generally valued at the last sale price or, in the
absence of a last sale price, the last offer price.
U.S. government securities will be valued at the mean between the closing
bid and asked prices on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good
faith by the fund's Board of Trustees.
Short-term investments maturing in 60 days or less are valued at amortized
cost whenever the Board of Trustees determines that amortized cost
reflects fair value of those investments. Amortized cost valuation
involves valuing an instrument at its cost initially and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the effect of fluctuating interest rates on the market value
of the instrument.
All other securities and other assets of the fund will be valued at fair
value as determined in good faith by the fund's Board of Trustees.
Determination of Public Offering Price
The fund offers its shares to the public on a continuous basis. The public
offering price per Class A and Class Y share of the fund is equal to the
net asset value per share at the time of purchase plus, for Class A
shares, an initial sales charge based on the aggregate amount of the
investment. The public offering price per Class B and Class L share (and
Class A share purchases, including applicable rights of accumulation,
equaling or exceeding $500,000) is equal to the net asset value per share
at the time of purchase and no sales charge is imposed at the time of
purchase. The method of computing the public offering price is shown in
the fund's financial statements, incorporated by reference in their
entirety into this SAI.
REDEMPTION OF SHARES
The fund is required to redeem the shares of the fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at
no charge other than any applicable deferred sales charge. Redemption
requests received after the close of regular trading on the NYSE are
priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a
failure to specify which Class, or if the investor owns fewer shares of
the Class than specified, the redemption request will be delayed until the
transfer agent receives further instructions from Salomon Smith Barney, or
if the shareholder's account is not with Salomon Smith Barney, from the
shareholder directly. The redemption proceeds will be remitted on or
before the third business day following receipt of proper tender, except
on any days on which the NYSE is closed or as permitted under the 1940 Act
in extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Salomon Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and
Salomon Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
Shares held by Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial
Consultant. Shares other than those held by Salomon Smith Barney as
custodian may be redeemed through an investor's Financial Consultant,
Dealer Representative or by submitting a written request for redemption
to:
Smith Barney Massachusetts Municipals Fund
Class A, B, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account
number and (c) be signed by each registered owner exactly as the shares
are registered. If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or be accompanied by
an endorsed stock power) and must be submitted to the transfer agent
together with the redemption request. Any signature appearing on a share
certificate, stock power or written redemption request in excess of
$10,000 must be guaranteed by an eligible guarantor institution, such as
a domestic bank, savings and loan institution, domestic credit union,
member bank of the Federal Reserve System or member firm of a national
securities exchange. Written redemption requests of $10,000 or less do not
require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. The transfer agent may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be
deemed properly received until the transfer agent receives all required
documents in proper form.
Automatic Cash Withdrawal Plan. The fund offers shareholders an automatic
cash withdrawal plan, under which shareholders who own shares with a value
of at least $10,000 may elect to receive cash payments of at least $50
monthly or quarterly. Retirement plan accounts are eligible for automatic
cash withdrawal plans only where the shareholder is eligible to receive
qualified distributions and has an account value of at least $5,000. The
withdrawal plan will be carried over on exchanges between Classes of a
fund. Any applicable deferred sales charge will not be waived on amounts
withdrawn by a shareholder that exceed 1.00% per month of the value of the
shareholder's shares subject to the deferred sales charge at the time the
withdrawal plan commences. (With respect to withdrawal plans in effect
prior to November 7, 1994, any applicable deferred sales charge will be
waived on amounts withdrawn that do not exceed 2.00% per month of the
value of the shareholder's shares subject to the deferred sales charge.)
For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Salomon Smith Barney Financial Consultant.
Telephone Redemption and Exchange Program. Shareholders who do not have
a brokerage account may be eligible to redeem and exchange shares by
telephone. To determine if a shareholder is entitled to participate in
this program, he or she should contact the transfer agent at 1-800-451-
2010. Once eligibility is confirmed, the shareholder must complete and
return a Telephone/Wire Authorization Form, along with a signature
guarantee, that will be provided by the transfer agent upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making
his/her initial investment in a fund.)
Redemptions. Redemption requests of up to $10,000 of any class or
classes of shares of a fund may be made by eligible shareholders by
calling the transfer agent at 1-800-451-2010. Such requests may be made
between 9:00 a.m. and 5:00 p.m. (Eastern time) on any day the NYSE is
open. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account
predesignated by the shareholder. Generally, redemption proceeds will be
mailed or wired, as the case may be, on the next business day following
the redemption request. In order to use the wire procedures, the bank
receiving the proceeds must be a member of the Federal Reserve System or
have a correspondent relationship with a member bank. The fund reserves
the right to charge shareholders a nominal fee for each wire redemption.
Such charges, if any, will be assessed against the shareholder's account
from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a
new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged. Such exchange
requests may be made by calling the transfer agent at 1-800-451-2010
between 9:00 a.m. and 5:00 p.m. (Eastern time) on any day on which the
NYSE is open.
Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The fund and its agents will employ procedures designed to
verify the identity of the caller and legitimacy of instructions (for
example, a shareholder's name and account number will be required and
phone calls may be recorded). The fund reserves the right to suspend,
modify or discontinue the telephone redemption and exchange program or to
impose a charge for this service at any time following at least seven (7)
days' prior notice to shareholders.
Redemptions in Kind. In conformity with applicable rules of the SEC,
redemptions may be paid in portfolio securities, in cash or any
combination of both, as the Board of Trustees may deem advisable; however,
payments shall be made wholly in cash unless the Board of Trustees
believes economic conditions exist that would make such a practice
detrimental to the best interests of the fund and its remaining
shareholders. If a redemption is paid in portfolio securities, such
securities will be valued in accordance with the procedures described
under "Determination of Net Asset Value" in the Prospectus and a
shareholder would incur brokerage expenses if these securities were then
converted to cash.
Distributions in Kind
If the fund's Board of Trustees determines that it would be detrimental to
the best interests of the remaining shareholders of the fund to make a
redemption payment wholly in cash, the fund may pay, in accordance with
SEC rules, any portion of a redemption in excess of the lesser of $250,000
or 1.00% of the fund's net assets by a distribution in kind of portfolio
securities in lieu of cash. Securities issued as a distribution in kind
may incur brokerage commissions when shareholders subsequently sell those
securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 and who wish
to receive specific amounts of cash monthly or quarterly. Withdrawals of
at least $50 may be made under the Withdrawal Plan by redeeming as many
shares of the fund as may be necessary to cover the stipulated withdrawal
payment. Any applicable deferred sales charge will not be waived on
amounts withdrawn by shareholders that exceed 1.00% per month of the value
of a shareholder's shares at the time the Withdrawal Plan commences. (With
respect to Withdrawal Plans in effect prior to November 7, 1994, any
applicable deferred sales charge will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of a shareholder's shares at
the time the Withdrawal Plan commences.) To the extent withdrawals exceed
dividends, distributions and appreciation of a shareholder's investment in
the fund, there will be a reduction in the value of the shareholder's
investment, and continued withdrawal payments will reduce the
shareholder's investment and may ultimately exhaust it. Withdrawal
payments should not be considered as income from investment in the fund.
Furthermore, as it generally would not be advantageous to a shareholder to
make additional investments in the fund at the same time he or she is
participating in the Withdrawal Plan, purchases by such shareholder in
amounts of less than $5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with the Transfer Agent as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the
fund. For additional information, shareholders should contact a Salomon
Smith Barney Financial Consultant. Withdrawal Plans should be set up with
a Salomon Smith Barney Financial Consultant. A shareholder who purchases
shares directly through the Transfer Agent may continue to do so and
applications for participation in the Withdrawal Plan must be received by
the Transfer Agent no later than the eighth day of the month to be
eligible for participation beginning with that month's withdrawals. For
additional information, shareholders should contact a Salomon Smith Barney
Financial Consultant.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser and Administrator - SSBC
SSBC (formerly known as Mutual Management Corp.) serves as investment
adviser to the fund pursuant to an investment advisory agreement (the
"Investment Advisory Agreement") with the trust which was approved by the
Board of Trustees, including a majority of trustees who are not
"interested persons" of the trust or the manager. The manager is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), which
in turn, is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
Subject to the supervision and direction of the trust's Board of Trustees,
the manager manages the fund's portfolio in accordance with the fund's
stated investment objective and policies, makes investment decisions for
the fund, places orders to purchase and sell securities, and employs
professional portfolio managers and securities analysts who provide
research services to the fund. The manager pays the salary of any officer
and employee who is employed by both it and the trust. The manager bears
all expenses in connection with the performance of its services. SSBC
(through its predecessor entities) has been in the investment counseling
business since 1968 and renders investment advice to a wide variety of
individual, institutional and investment company clients that had
aggregate assets under management as of January 31, 1999 in excess of $115
billion.
As compensation for investment advisory services, the fund pays the
manager a fee computed daily and payable monthly at 0.30% of the value of
the fund's average daily net assets. For the fiscal years ended November
30, 1996, 1997 and 1998, the fund paid the manager net of fee waivers and
expense reimbursements, $134,709, $202,259 and $189,712, respectively, in
investment advisory fees. For the fiscal years ended November 30, 1996 and
1997, the manager voluntarily waived investment advisory fees of $36,129
and $26,561, respectively.
The manager also serves as administrator to the fund pursuant to a written
agreement (the "Administration Agreement"). The services provided by the
manager under the Administration Agreement are described in the prospectus
under "Management.'' The manager pays the salary of all officers and
employees who are employed by both it and the fund and bears all expenses
in connection with the performance of its services.
As administrator SSBC: (a) assists in supervising all aspects of the
Fund's operations except those performed by the fund's investment manager
under its investment advisory agreement; b) supplies the fund with office
facilities (which may be in SSBC's own offices), statistical and research
data, data processing services, clerical, accounting and bookkeeping
services, including, but not limited to, the calculation of (i) the net
asset value of shares of the fund, (ii) applicable contingent deferred
sales charges and similar fees and charges and (iii) distribution fees,
internal auditing and legal services, internal executive and
administrative services, and stationary and office supplies; and (c)
prepares reports to shareholders of the fund, tax returns and reports to
and filings with the SEC and state blue sky authorities.
As compensation for administrative services rendered to the fund, the
manager receives a fee computed daily and payable monthly at the following
annual rates of average daily net assets: 0.20% up to $500 million; and
0.18% in excess of $500 million. For the fiscal year ended November 30,
1996, the fund paid $89,806 (net of fee waivers amounting to $24,086) in
administration fees. For the fiscal year ended November 30, 1997, the
fund paid the manager $99,811 (net of fee waivers amounting to $17,707) in
administration fees. For the fiscal year ended November 30, 1998, the
fund paid the manager $126,474 in administration fees.
The fund bears expenses incurred in its operations including: taxes,
interest, brokerage fees and commissions, if any; fees of trustees of the
fund who are not officers, directors, shareholders or employees of Salomon
Smith Barney or the manager; Securities and Exchange Commission (the
"SEC") fees and state Blue Sky notice fees; charges of custodians;
transfer and dividend disbursing agent's fees; certain insurance premiums;
outside auditing and legal expenses; costs of maintaining corporate
existence; costs of investor services (including allocated telephone and
personnel expenses); costs of preparing and printing of prospectuses for
regulatory purposes and for distribution to existing shareholders; costs
of shareholders' reports and shareholder meetings; and meetings of the
officers or Board of Trustees of the fund.
Auditors
KPMG LLP, independent auditors, 345 Park Avenue, New York, New York 10154,
have been selected to serve as auditors of the fund and to render opinions
on the fund's financial statements for the fiscal year ended November 30,
1999.
Distributor. CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts
02109-5408 serves as the fund's distributor pursuant to a written
agreement dated October 8, 1998 (the "Distribution Agreement") which was
approved by the fund's Board of Trustees, including a majority of the
Independent Trustees on July 15, 1998. Prior to the merger of Travelers
Group, Inc. and Citicorp Inc. on October 8, 1998, Salomon Smith Barney
served as the fund's distributor. For the 1996 and 1997 fiscal years,
Salomon Smith Barney, received $45,000 and $68,000, respectively, in sales
charges from the sale of Class A shares, and did not reallow any portion
thereof to dealers. For the period December 1, 1997 through October 7,
1998 the aggregate dollar amount of sales charges on Class A shares was
$55,400 all of which was paid to Salomon Smith Barney. For the period
October 8, 1998 through November 30, 1998 the aggregate dollar amount of
sales charges on Class A shares was $48,000, $43,200 of which was paid to
Salomon Smith Barney.
For the period June 12, 1998 through October 7, 1998 the aggregate dollar
amount of sales charges on Class L shares was $1,000, all of which was
paid to Salomon Smith Barney. For the period October 8, 1998 through
November 30, 1998 the aggregate dollar amount of sales charges on Class L
shares was $2,000, $1,800 of which was paid to Salomon Smith Barney.
For the fiscal years ended November 30, 1996, 1997 and 1998, Salomon Smith
Barney or its predecessor received from shareholders $56,000, $48,000 and
$39,000, respectively, in deferred sales charges on the redemption of
Class B shares. For the fiscal years ended November 30, 1996, 1997 and
1998, Salomon Smith Barney or its predecessor received from $1,000, $0 and
$1,000, respectively, in deferred sales charges on redemption of Class L
shares.
When payment is made by the investor before the settlement date, unless
otherwise noted by the investor, the funds will be held as a free credit
balance in the investor's brokerage account and Salomon Smith Barney may
benefit from the temporary use of the funds. The fund's Board of Trustees
has been advised of the benefits to Salomon Smith Barney resulting from
these settlement procedures and will take such benefits into consideration
when reviewing the Investment Management Agreement for continuance.
Distribution Arrangements. To compensate Salomon Smith Barney for the
service it provides and for the expense it bears, the fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the fund pays Salomon Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate
of 0.15% of the value of the fund's average daily net assets attributable
to the Class A, Class B and Class L shares. In addition, the fund pays
Salomon Smith Barney a distribution fee with respect to Class B and Class
L shares primarily intended to compensate Salomon Smith Barney for its
initial expense of paying Financial Consultants a commission upon sales of
those shares. The Class B and Class L distribution fee is calculated at
the annual rate of 0.50% and 0.55%, respectively, of the value of the
fund's average net assets attributable to the shares of each Class.
For the fiscal year ended November 30, 1998, Salomon Smith Barney incurred
distribution expenses totaling $178,073 consisting of approximately
$11,820 for advertising, $1,899 for printing and mailing of prospectuses,
$90,557 for support services, $72,507 to Salomon Smith Barney Financial
Consultants, and $1,290 in accruals for interest on the excess of Salomon
Smith Barney expenses incurred in distributing the fund's shares over the
sum of the distribution fees and deferred sales charge received by Salomon
Smith Barney from the fund.
The following service and distribution fees were incurred pursuant to a
Distribution Plan during the periods indicated:
Distribution Plan Fees
Fiscal Year
Ended
11/30/98
Fiscal Year
Ended 11/30/97
Fiscal Year
Ended
11/30/96
Class A
$ 50,498
$ 45,984
$ 42,635
Class B
$ 186,823
$ 180,545
$ 184,536
Class L*
$ 7,934
$ 2,291
$ 929
* Class L shares were called Class C shares until June 12, 1998.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Trustees,
including a majority of the Independent Trustees. The Plan may not be
amended to increase the amount of the service and distribution fees
without shareholder approval, and all material amendments of the Plan also
must be approved by the Trustees and Independent Trustees in the manner
described above. The Plan may be terminated with respect to a Class of
the fund at any time, without penalty, by vote of a majority of the
Independent Trustees or by a vote of a majority of the outstanding voting
securities of the Class (as defined in the 1940 Act). Pursuant to the
Plan, Salomon Smith Barney will provide the fund's Board of Trustees with
periodic reports of amounts expended under the Plan and the purpose for
which such expenditures were made.
VALUATION OF SHARES
The fund's net asset value per share is determined as of close of regular
trading on the NYSE, on each day that the NYSE is open, by dividing value
of the fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
When, in judgement of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side
of the market, these investments are valued at the mean between the quoted
bid and asked prices. Investments for which, in the judgement of the
pricing service, there is no readily obtainable market quotation (which
may contribute a majority of the portfolio securities) are carried at fair
value of securities of similar type, yield maturity. Pricing services
generally determine value by reference to transactions in municipal
obligations, quotations from municipal bond dealers, market transaction in
comparable securities and various relationships between securities.
Short-term investments that mature in 60 days or less are valued at
amortized cost whenever the board of trustees determines that amortized
cost is fair value. Amortized cost valuation involves valuing an
instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the
instrument. Securities and other assets that are not available will be
valued in good faith at fair value by or under the direction of the fund's
Board of Trustees.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class of the fund may be
exchanged for shares of the same Class of certain Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's
state of residence. Exchanges of Class A, Class B and Class L shares are
subject to minimum investment requirements and all shares are subject to
the other requirements of the fund into which exchanges are made.
Class B Exchanges. If a Class B shareholder wishes to exchange all or a
portion of his or her shares in any of the funds imposing a higher
deferred sales charge than that imposed by the fund, the exchanged Class
B shares will be subject to the higher applicable deferred sales charge.
Upon an exchange, the new Class B shares will be deemed to have been
purchased on the same date as the Class B shares of the fund that have
been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be
deemed to have been purchased on the same date as the Class L shares of
the fund that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
fund who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so
without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the fund's performance and its
shareholders. The manager may determine that a pattern of frequent
exchanges is excessive and contrary to the best interests of the fund's
other shareholders. In this event, the fund may, at its discretion, decide
to limit additional purchases and/or exchanges by the shareholder. Upon
such a determination, the fund will provide notice in writing or by
telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the fund or (b) remain
invested in the fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive
pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
''Redemption of Shares-Telephone Redemptions and Exchange Program.''
Exchanges will be processed at the net asset value next determined.
Redemption procedures discussed below are also applicable for exchanging
shares, and exchanges will be made upon receipt of all supporting
documents in proper form. If the account registration of the shares of
the fund being acquired is identical to the registration of the shares of
the fund exchanged, no signature guarantee is required. An exchange
involves a taxable redemption of shares, subject to the tax treatment
described in "Dividends, Distributions and Taxes" below, followed by a
purchase of shares of a different fund. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The fund reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.
Additional Information Regarding Telephone Redemption and Exchange
Program
Neither the fund nor its agents will be liable for instructions
communicated by telephone that are reasonably believed to be genuine. The
fund or its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded).
The fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this
service at any time following at least seven (7) days' prior notice to
shareholders.
PERFORMANCE INFORMATION
From time to time, the fund may quote total return of a class in
advertisements or in reports and other communications to shareholders.
The fund may include comparative performance information in advertising or
marketing the fund's shares. Such performance information may include
data from the following industry and financial publications: Barron's,
Business Week, CDA Investment Technologies, Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA Today and The Wall Street
Journal.
Yield and Equivalent Taxable Yield
A Class' 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD =2 [(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a'' in the
formula) on debt obligations that were purchased by the fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium. The amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
The Fund's equivalent taxable 30-day yield for a Class of shares is
computed by dividing that portion of the Class' 30-day yield which is tax-
exempt by one minus a stated income tax rate and adding the product to
that portion, if any, of the Class' yield that is not tax-exempt.
The yields on municipal securities are dependent upon a variety of
factors, including general economic and monetary conditions, conditions of
the municipal securities market, size of a particular offering, maturity
of the obligation offered and rating of the issue. Investors should
recognize that in periods of declining interest rates the fund's yield for
each Class of shares will tend to be somewhat higher than prevailing
market rates, and in periods of rising interest rates the fund's yield for
each Class of shares will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to the fund from the
continuous sale of its shares will likely be invested in portfolio
instruments producing lower yields than the balance of the fund's
portfolio, thereby reducing the current yield of the fund. In periods of
rising interest rates, the opposite can be expected to occur.
The fund's yield for Class A, Class B and Class L shares for the 30-day
period ended November 30, 1998 was 4.04%, 3.70% and 3.64%, respectively.
The equivalent taxable yield for Class A, Class B and Class L shares for
that same period was 8.41%, 7.64% and 7.52%, respectively, assuming the
payment of Federal income taxes at a rate of 39.6% and Massachusetts taxes
at a rate of 12%.
Average Annual Total Return
"Average annual total return," as described below, is computed according
to a formula prescribed by the SEC. The formula can be expressed as
follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
N = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or
10-year period at the end of a 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The fund's average annual total return for Class A shares assuming the
maximum applicable sales charge was as follows for the periods indicated
(reflecting the waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
3.35% for the one-year period ended November 30, 1998.
5.27% for the five-year period ended November 30, 1998.
7.84% per annum during the period from the fund's commencement
of operations on December 21, 1987 through November 30, 1998.
A Class' average annual total return assumes that the maximum applicable
sales charge or deferred sales charge assessed by the fund has been
deducted from the hypothetical investment. Had the maximum 4.00% sales
charge had not been deducted, Class A's average annual total return would
have been 7.66%, 6.13% and 8.25%, respectively, for those same periods.
The fund's average annual total return for Class B shares assuming the
maximum applicable deferred sales charge was as follows for the periods
indicated (reflecting the waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
2.55% for the one-year period ended November 30, 1998.
5.43% for the five-year period ended November 30, 1998.
6.64% per annum during the period from the fund's commencement
of operations on November 6, 1992 through November 30, 1998.
Had the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class B's average annual total return would have
been 7.05%, 5.59% and 6.64%, respectively, for the same periods.
The fund's average annual total return for Class L shares assuming the
maximum applicable deferred sales charge was as follows for the periods
indicated (reflecting the waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
5.06% for the one-year period ended November 30, 1998.
9.41% per annum during the period from the fund's commencement
of operations on November 10, 1994 through November 30, 1998.
Had the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class L's average annual total return for the one-
year period ended November 30, 1998 would have been 7.11%.
Aggregate Total Return
"Aggregate total return" represents the cumulative change in the value of
an investment in the Class for the specified period and is computed by the
following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV= Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of a 1-, 5-, or 10-year
period at the end of a 1-, 5-, or 10-year period (or
fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The fund's aggregate total return for Class A shares was as follows for
the periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
3.35% for the one-year period ended November 30, 1998.
29.3% for the five-year period ended November 30, 1998.
128.53% for the period from the fund's commencement of
operations on December 21, 1987 through November 30, 1998.
A Class' aggregate total return assumes that the maximum applicable sales
charge or maximum applicable deferred sales charge has been deducted from
the investment. If the maximum sales charge had not been deducted at the
time of purchase, Class A's aggregate total return for the same periods
would have been 7.66%, 34.67% and 138.15%, respectively.
The fund's aggregate total return for Class B shares was as follows for
the periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
2.55% for the one-year period ended November 30, 1998.
30.25% for the five-year period ended November 30, 1998.
47.7% for the period from commencement of operations on
November 6, 1992 through November 30, 1998.
If the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class B's aggregate total return for the same
periods would have been 7.05%, 31.25% and 47.7%, respectively.
The fund's aggregate total return for Class L shares was as follows for
the period indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
6.11% for the one-year period ended November 30, 1998.
45.46% for the period from commencement of operations on
November 10, 1994 through November 30, 1998.
If the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class L's aggregate total return for the one-year
period ended November 30, 1998 would have been 7.11%.
Performance will vary from time to time depending on market conditions,
the composition of the fund's portfolio and operating expenses and the
expenses exclusively attributable to the Class. Consequently, any given
performance quotation should not be considered as representative of the
Class' performance for any specified period in the future. Because
performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time. Investors comparing a
Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance. Each Class' net investment income changes in response to
fluctuations in interest rates and the expenses of the fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. The fund's policy is to declare and pay
exempt-interest dividends monthly. Dividends from net realized capital
gains, if any, will be distributed annually. The fund may also pay
additional dividends shortly before December 31 from certain amounts of
undistributed ordinary income and capital gains, in order to avoid a
Federal excise tax liability. If a shareholder does not otherwise
instruct, exempt-interest dividends and capital gain distributions will be
reinvested automatically in additional shares of the same Class at net
asset value, with no additional sales charge or deferred sales charge.
The per share amounts of the exempt-interest dividends on Class B and
Class L shares may be lower than on Class A and Class Y shares, mainly as
a result of the distribution fees applicable to Class B and Class L
shares. Similarly, the per share amounts of exempt-interest dividends on
Class A shares may be lower than on Class Y shares, as a result of the
service fee attributable to Class A shares. Capital gain distributions,
if any, will be the same across all Classes of fund shares (A, B, L and
Y).
Taxes. The following is a summary of the material United States federal
income tax considerations regarding the purchase, ownership and
disposition of shares of the fund. Each prospective shareholder is urged
to consult his own tax adviser with respect to the specific federal, state
and local consequences of investing in the fund. The summary is based on
the laws in effect on the date of this SAI, which are subject to change.
The fund and its investments
As described in the fund's prospectus, the fund is designed to provide
shareholders with current income which is excluded from gross income for
federal income tax purposes and which is exempt from Massachusetts
personal income taxes. The fund is not intended to constitute a balanced
investment program and is not designed for investors seeking capital gains
or maximum tax-exempt income irrespective of fluctuations in principal.
Investment in the fund would not be suitable for tax-exempt institutions,
qualified retirement plans, H.R. 10 plans and individual retirement
accounts because such investors would not gain any additional tax benefit
from the receipt of tax-exempt income.
The fund intends to continue to qualify to be treated as a regulated
investment company each taxable year under the Code. To so qualify, the
fund must, among other things: (a) derive at least 90% of its gross income
in each taxable year from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each
quarter of the fund's taxable year, (i) at least 50% of the market value
of the fund's assets is represented by cash, securities of other regulated
investment companies, United States government securities and other
securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the fund's assets and not
greater than 10% of the outstanding voting securities of such issuer and
(ii) not more than 25% of the value of its assets is invested in the
securities (other than United States government securities or securities
of other regulated investment companies) of any one issuer or any two or
more issuers that the fund controls and are determined to be engaged in
the same or similar trades or businesses or related trades or businesses.
As a regulated investment company, the fund will not be subject to United
States federal income tax on its net investment income (i.e., income other
than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes
to its shareholders, provided that an amount equal to at least 90% of 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 to a federal alternative minimum tax, the Federal
branch profits tax or the Federal "excess net passive income" tax.
The fund does not expect to realize a significant amount of capital gains.
Net realized short-term capital gains are taxable to a United States
shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any, that the fund
designates as capital gains dividends are taxable as long-term capital
gains, whether paid in cash or in shares and regardless of how long a
shareholder has held shares of the fund.
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss equal to the difference between the amount realized
and his basis in his shares. Such gain or loss will be treated as capital
gain or loss, if the shares are capital assets in the shareholder's hands,
and will be long-term capital gain or loss if the shares are held for more
than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the fund, within a 61-day period beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be increased to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of a fund
share held by the shareholder for six months or less (to the extent not
disallowed pursuant to the six-month rule described above relating to
exempt-interest dividends) will be treated for United States federal
income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received
by the shareholder with respect to such share.
If a shareholder incurs a sales charge in acquiring shares of the fund,
disposes of those shares within 90 days and then acquires shares in a
mutual fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (e.g., an exchange privilege), the original
sales charge will not be taken into account in computing gain or loss on
the original shares to the extent the subsequent sales charge is reduced.
Instead, the disregarded portion of the original sales charge will be
added to the tax basis in the newly acquired shares. Furthermore, the
same rule also applies to a disposition of the newly acquired shares made
within 90 days of the second acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by shifting his or
her investment in a family of mutual funds.
Backup Withholding. The fund may be required to withhold, for United
States federal income tax purposes, 31% of (a) taxable dividends and
distributions and (b) redemption proceeds payable to shareholders who fail
to provide the fund with their correct taxpayer identification number or
to make required certifications, or who have been notified by the IRS that
they are subject to backup withholding. Certain shareholders are exempt
from backup withholding. Backup withholding is not an additional tax and
any amount withheld may be credited against a shareholder's United States
federal income tax liabilities.
Notices. Shareholders will be notified annually by the fund as to the
United States federal income tax and Massachusetts personal income tax
status of the dividends and distributions made by the fund to its
shareholders. These statements also will designate the amount of exempt-
interest dividends that is a preference item for purposes of the Federal
individual and corporate alternative minimum taxes. The dollar amount of
dividends excluded or exempt from Federal income taxation and
Massachusetts personal income taxation and the dollar amount of dividends
subject to Federal income taxation and Massachusetts personal income
taxation, if any, will vary for each shareholder depending upon the size
and duration of each shareholder's investment in the fund. To the extent
the fund earns taxable net investment income, it intends to designate as
taxable dividends the same percentage of each day's dividend as its
taxable net investment income bears to its total net investment income
earned on that day.
Massachusetts Taxation
Individual shareholders who are otherwise subject to Massachusetts
personal income tax will not be subject to Massachusetts personal income
tax on exempt-interest dividends received from the fund to the extent the
dividends are attributable to interest on obligations of the Commonwealth
of Massachusetts and its political subdivisions, agencies and public
authorities (or on obligations of certain other governmental issuers such
as Puerto Rico, the Virgin Islands and Guam) that pay interest which is
excluded from gross income for Federal income tax purposes and exempt from
Massachusetts personal income taxes. Other distributions from the fund,
including those related to long-and short-term capital gains, other than
certain gains from certain Massachusetts Municipal Securities identified
by the Massachusetts Department of revenue, generally will not be exempt
from Massachusetts personal income tax. Businesses should note that the
fund's distributions derived from Massachusetts Municipal Securities are
not exempt from Massachusetts corporate excise tax.
The foregoing is only a summary of certain material tax consequences
affecting the fund and its shareholders. Shareholders are advised to
consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the fund.
ADDITIONAL INFORMATION
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the fund's custodian. Under the custody agreement, PNC
holds the fund's portfolio securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon the
month-end market value of securities held in custody and also receives
securities transaction charges. The assets of the fund are held under
bank custodianship in compliance with the 1940 Act.
First Data, located at Federal Street, Boston, Massachusetts 02110, serves
as the fund's transfer agent. Under the transfer agency agreement, First
Data maintains the shareholder account records for the fund, handles
certain communications between shareholders and the fund, and distributes
dividends and distributions payable by the fund. For these services,
First Data receives a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the fund during the month, and is
reimbursed for out-of-pocket expenses.
The fund is a Massachusetts business trust established under the laws of
the Commonwealth of Massachusetts pursuant to a Master Trust Agreement
dated January 13, 1987, as amended from time to time. The fund commenced
operations on December 21, 1987, under the name Shearson Lehman
Massachusetts Municipals. On July 30, 1993 and October 14, 1994, the fund
changed its name to Smith Barney Shearson Massachusetts Municipals Fund
and Smith Barney Massachusetts Municipals Fund, respectively.
Under Massachusetts's law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the fund.
The Master Trust Agreement disclaims shareholder liability for acts or
obligations of the fund, however, and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the fund or a trustee. The Master Trust Agreement
provides for indemnification from fund property for all losses and
expenses of any shareholder held personally liable for the obligations of
the fund. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
fund itself would be unable to meet its obligations, a possibility which
management of the fund believes is remote. Upon payment of any liability
incurred by the fund, a shareholder paying such liability will be entitled
to reimbursement from the general assets of the fund. The trustees intend
to conduct the operation of the fund in such a way so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
fund.
Description of Shares
The Master Trust Agreement of the fund permits the trustees of the fund to
issue an unlimited number of full and fractional shares of a single class
and to divide or combine the shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in
the fund. Each share in the fund represents an equal proportional
interest in the fund with each other share. Shareholders of the fund are
entitled upon its liquidation to share pro rata in its net assets
available for distribution. No shareholder of the fund has any preemptive
or conversion rights. Shares of the fund are fully paid and non-
assessable.
Pursuant to the Master Trust Agreement, the fund's trustees may authorize
the creation of additional series of shares (the proceeds of which would
be invested in separate, independently managed portfolios) and additional
classes of shares within any series (which would be used to distinguish
among the rights of different categories of shareholders, as might be
required by future regulations or other unforeseen circumstances).
Voting Rights
The shareholders of the fund are entitled to a full vote for each full
share held (and a fractional vote for any fractional share held). The
trustees of the fund have the power to alter the number and the terms of
office of the trustees, and have terms of unlimited duration (subject to
certain removal procedures) and may appoint their own successors, provided
at least a majority of the trustees at all times have been elected by the
shareholders of the fund. The voting rights of the shareholders of the
fund are not cumulative, so that the holders of more than 50% of the
shares can, if they choose, elect all of the trustees of the fund; the
holders of the remaining shares of the fund would be unable to elect any
of the trustees.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended November 30, 1998 is
incorporated herein by reference in its entirety. The annual report was
filed on February 22, 1999, Accession Number 0000091155-99-000074.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue
bonds. General obligation bonds are usually secured by all resources
available to the municipality and the factors outlined in the rating
definitions below are weighed in determining the rating. Because revenue
bonds in general are payable from specifically pledged revenues, the
essential element in the security for a revenue bond is the quantity and
quality of the pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality
of general obligation bond credit is usually appropriate in the rating
analysis of a revenue bond, other factors are important, including
particularly the competitive position of the municipal enterprise under
review and the basic security covenants. Although a rating reflects S&P's
judgment as to the issuer's capacity for the timely payment of debt
service, in certain instances it may also reflect a mechanism or procedure
for an assured and prompt cure of a default, should one occur, i.e., an
insurance program, Federal or state guarantee or the automatic withholding
and use of state aid to pay the defaulted debt service.
AAA
Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds - In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue
structure appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally
strong, due to the competitive position of the municipal enterprise or to
the nature of the revenues. Basic security provisions (including rate
covenant, earnings test for issuance of additional bonds, and debt service
reserve requirements) are rigorous. There is evidence of superior
management.
AA
High Grade - The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of
the prime quality issues. Bonds rated "AA'' have the second strongest
capacity for payment of debt service.
A
Good Grade - Principal and interest payments on bonds in this category are
regarded as safe. This rating describes the third strongest capacity for
payment of debt service. It differs from the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the
issuer to meet debt obligations at some future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management
performance appears adequate.
BBB
Medium Grade - Of the investment grade ratings, this is the lowest.
General Obligation Bonds - Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between "A'' and "BBB" ratings is that the
latter shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among
the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) by S&P to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated SP-
1 have a very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are
given the designation of SP-1+. Notes rated SP-2 have a satisfactory
capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge.'' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A
Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured; interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal
or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a
high degree. These issues are often in default or have other marked
short-comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction is in recognition of the differences between short- and long-
term credit risk. Loans bearing the designation MIG 1 or VMIG 1 are of
the best quality, enjoying strong protection by established cash flows of
funds for their servicing, from established and broad-based access to the
market for refinancing, or both. Loans bearing the designation MIG 2 or
VMIG 2 are of high quality, with margins of protection ample although not
as large as the preceding group. Loans bearing the designation MIG 3 or
VMIG 3 are of favorable quality, with all security elements accounted for
but lacking the undeniable strength of the preceding grades. Liquidity
and cash flow may be narrow and market access for refinancing is likely to
be less well established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the
direct credit support of an issuer or guarantor that possesses excellent
long-term operating and financial strengths combined with strong liquidity
characteristics (typically, such issuers or guarantors would display
credit quality characteristics which would warrant a senior bond rating of
"AA-'' or higher), or the direct credit support of an issuer or guarantor
that possesses above-average long-term fundamental operating and financing
capabilities combined with ongoing excellent liquidity characteristics.
Paper rated A-1 by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; long-term senior debt is
rated "A'' or better; the issuer has access to at least two additional
channels of borrowing; basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; typically, the issuer's
industry is well established and the issuer has a strong position within
the industry; and the reliability and quality of management are
unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer's products in relation to competition
and customer acceptance; (4) liquidity; (5) amount and quality of long-
term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the
issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and
preparations to meet such obligations.
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
Statement of
Additional
Information
March 30, 1999
Smith Barney Massachusetts Municipals Fund
388 Greenwich Street
New York, NY 10013
SALOMON SMITH BARNEY
A Member of Citigroup
[Symbol]
10
u:\fundaccounting\legal\funds\mamu\massmunisai99
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 is incorporated by reference to Post-
Effective Amendment No. 19 filed on March 4, 1999
("Post-Effective Amendment No. 19").
(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 incorporated by reference to Post-
Effective Amendment No. 19.
(e)(3) Selling Group Agreement 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)(a) Opinion of Counsel regarding legality of shares being
registered is incorporated by reference to the
Registration Statement filed on January 26, 1987..
(i)(b) Legal Counsel's Consent is filed herein.
(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 incorporated by reference to Post-
Effective Amendment No. 19.
(n) Financial Data Schedule is filed herein.
(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 incorporated by reference to Post-Effective
Amendment No. 19.
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 - - SSBC Fund Management Inc.
SSBC Fund Management Inc.("SSBC") was incorporated in December 1968
under the laws of the State of Delaware. SSBC 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"). SSBC 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
SSBC 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
SSBC 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) SSBC Fund Management Inc.
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.
101 Federal Street
Boston, Massachusetts 02110
(5) CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None.
Exhibit Index
Exhibit No. Exhibit
(e)(3) Selling Group Agreement
(i) Consent of Counsel
(j) Consent of Independent Accountants
(n) Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the
"Securities Act") and the Investment Company Act of 1940, the
Registrant, SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND, certifies
that it meets all of the requirements for effectiveness of this
registration statement under rule 485(b) under the Securities Act 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 30th 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 30,
1999
(Chief Executive Officer)
/s/Lewis E. Daidone *
Lewis E. Daidone Treasurer March 30, 1999
(Chief Financial and
Accounting Officer)
/s/Herbert Barg *
Herbert Barg Trustee
March 30, 1999
/s/Alfred Bianchetti *
Alfred J. Bianchetti Trustee
March 30, 1999
/s/Martin Brody *
Martin Brody Trustee
March 30, 1999
/s/Dwight B. Crane *
Dwight B. Crane Trustee
March 30, 1999
/s/Burt N. Dorsett *
Burt N. Dorsett Trustee
March 30, 1999
/s/Elliot S. Jaffe *
Elliot S. Jaffe Trustee
March 30, 1999
/s/Stephen E. Kaufman *
Stephen E. Kaufman Trustee
March 30, 1999
/s/Joseph J. McCann *
Joseph J. McCann Trustee March 30,
1999
/s/Cornelius C. Rose, Jr. *
Cornelius C. Rose, Jr. Trustee
March 30, 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 MUTUAL FUNDS
BROKER DEALER CONTRACT
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We, CFBDS, Inc. ("CFBDS"), have agreements with certain
investment companies for which Mutual Management Corp. serves as
investment adviser and/or administrator (each a "Fund") pursuant to
which we act as nonexclusive principal underwriter and distributor
for the sale of shares of capital stock ("shares") of the various
series of such Funds, and as such have the right to distribute shares
for resale. Each Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act")
and the shares being offered to the public are registered under the
Securities Act of 1933, as amended (the "1933 Act"). Each series of
each Fund covered by a Distribution Agreement from time to time is
referred to in this agreement as a "Series" and collectively as the
"Series." The term "Prospectus", as used herein, refers to the
prospectus and related statement of additional information (the
"Statement of Additional Information") incorporated therein by
reference (as amended or supplemented) on file with the Securities
and Exchange Commission at the time in question. As a broker in the
capacity of principal underwriter and distributor for the Trust, we
offer to sell to you, as a broker or dealer, shares of each Fund upon
the following terms and conditions:
1. In all sales to the public you shall act as broker
for your customers or as dealer for your own account, and in no
transaction shall you have any authority to act as agent for the
Trust, for us or for any other dealer.
2. Orders received from you will be accepted through us
only at the public offering price per share (i.e. the net asset value
per share plus the applicable front-end sales charge, if any)
applicable to each order, and all orders for redemption of any shares
shall be executed at the net asset value per share less any
contingent deferred sales charge, if any, in each case as set forth
in the Prospectus. You will be entitled to receive and retain any
contingent deferred sales charge amounts in partial consideration of
your payment to financial consultants of commission amounts at the
time of sale and we will obligate any other brokers with whom we
enter into similar agreements to pay such amounts directly to you.
The procedure relating to the handling of orders shall be subject to
paragraph 4 hereof and instructions which we or the Fund shall
forward from time to time to you. All orders are subject to
acceptance or rejection by the applicable Fund or us in the sole
discretion of either. The minimum initial purchase and the minimum
subsequent purchase of any shares shall be as set forth in the
Prospectus pertaining to the relevant Series.
3. You shall not place orders for any shares unless you
have already received purchase orders for those shares at the
applicable public offering price and subject to the terms hereof.
You agree that you will not offer or sell any shares except under
circumstances that will result in compliance with the applicable
Federal and state securities laws, the applicable rules and
regulations thereunder and the rules and regulations of applicable
regulatory agencies or authorities and that in connection with sales
and offers to sell shares you will furnish to each person to whom any
such sale or offer is made, a copy of the Prospectus and, upon
request, the Statement of Additional Information, and will not
furnish to any person any information relating to shares which is
inconsistent in any respect with the information contained in the
Prospectus or Statement of Additional Information (as then amended or
supplemented). You shall not furnish or cause to be furnished to any
person or display or publish any information or materials relating to
the shares (including, without limitation, promotional materials and
sales literature, advertisements, press releases, announcements,
statements, posters, signs or other similar material), except such
information and materials as may be furnished to you by or on behalf
of us or the Funds, and such other information and materials as may
be approved in writing by or on behalf of us or the Funds.
4. As a broker dealer, you are hereby authorized (i) to
place orders directly with the applicable Fund or Series for shares
subject to the applicable terms and conditions governing the
placement of orders by us set forth in the Prospectus and (ii) to
tender shares directly to each Fund or its agent for redemption
subject to the applicable terms and conditions governing the
redemption of shares applicable to us set forth in the Prospectus.
5. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such
withholding, e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. In determining the amount of any sales concession
payable to you hereunder, we reserve the right to exclude any sales
which we reasonably determine are not made in accordance with the
terms of the Prospectus and the provisions of this Agreement. Unless
at the time of transmitting an order we advise you or the transfer
agent to the contrary, the shares ordered will be deemed to be the
total holdings of the specified investor.
7. (a) You agree that payment for orders from you for
the purchase of shares will be made in accordance with the terms of
the Prospectus. On or before the business day following the
settlement date of each purchase order for shares, you shall transfer
same day funds to an account designated by us with the transfer agent
in an amount equal to the public offering price on the date of
purchase of the shares being purchased less your sales concession, if
any, with respect to such purchase order determined in accordance
with the Prospectus. If payment for any purchase order is not
received in accordance with the terms of the Prospectus, we reserve
the right, without notice, to cancel the sale and to hold you
responsible for any loss sustained as a result thereof.
(b) If any shares sold under the terms of this Agreement
are sold with a sales charge and are redeemed or are tendered for
redemption within seven (7) business days after confirmation of your
purchase order for such shares: (i) you shall forthwith refund to us
the full sales concession received by you on the sale; and (ii) we
shall forthwith pay to the applicable Series our portion of the sales
charge on the sale which has been retained by us, if any, and shall
also pay to the applicable Series the amount refunded by you.
(c) We will not be obligated to pay or cause to be paid
to you any ongoing trail commission or shareholder service fees with
respect to shares of the Series purchased through you and held by or
for your customers, which you shall collect directly from the Funds.
(d) Certificates evidencing shares shall be available
only upon request. Upon payment for shares in accordance with
paragraph 7(a) above, the transfer agent will issue and transmit to
you or your customer a confirmation statement evidencing the purchase
of such shares. Any transaction in uncertificated shares, including
purchases, transfers, redemptions and repurchases, shall be effected
and evidenced by book-entry on the records of the transfer agent.
8. No person is authorized to make any representations
concerning shares except those contained in the current Prospectus
and Statement of Additional Information and in printed information
subsequently issued by us or the Funds as information supplemental to
the Prospectus and the Statement of Additional Information. In
purchasing or offering shares pursuant to this Agreement you shall
rely solely on the representations contained in the Prospectus, the
Statement of Additional Information and the supplemental information
above mentioned.
9. You agree to deliver to each purchaser making a
purchase of shares from or through you a copy of the Prospectus at or
prior to the time of offering or sale, and, upon request, the
Statement of Additional Information. You may instruct the transfer
agent to register shares purchased in your name and account as
nominee for your customers. You agree thereafter to deliver to any
purchaser whose shares you or your nominee are holding as record
holder copies of the annual and interim reports and proxy
solicitation materials and any other information and materials
relating to the Trust and prepared by or on behalf of us, the Funds
or the investment adviser, custodian, transfer agent or dividend
disbursing agent for distribution to beneficial holders of shares.
The Funds shall be responsible for the costs associated with
forwarding such reports, materials and other information and shall
reimburse you in full for such costs. You further agree to make
reasonable efforts to endeavor to obtain proxies from such purchasers
whose shares you or your nominee are holding as record holder. You
further agree to obtain from each customer to whom you sell shares
any taxpayer identification number certification required under
Section 3406 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations promulgated thereunder, and to provide
us or our designee with timely written notice of any failure to
obtain such taxpayer identification number certification in order to
enable the implementation of any required backup withholding in
accordance with Section 3406 of the Code and the regulations
thereunder. Additional copies of the Prospectus, Statement of
Additional Information, annual or interim reports, proxy solicitation
materials and any such other information and materials relating to
the Trust will be supplied to you in reasonable quantities upon
request.
10. (a) In accordance with the terms of the Prospectus,
a reduced sales charge may be available to customers, depending on
the amount of the investment or proposed investment. In each case
where a reduced sales charge is applicable, you agree to furnish to
the transfer agent sufficient information to permit confirmation of
qualification for a reduced sales charge, and acceptance of the
purchase order is subject to such confirmation. Reduced sales
charges may be modified or terminated at any time in the sole
discretion of each Fund.
(b) You acknowledge that certain classes of investors
may be entitled to purchase shares at net asset value without a sales
charge as provided in the Prospectus and Statement of Additional
Information.
(c) You agree to advise us promptly as to the amount of
any and all sales by you qualifying for a reduced sales charge or no
sales charge.
(d) Exchanges (i.e., the investment of the proceeds from
the liquidation of shares of one Series in the shares of another
Series, each of which is managed by the same or an affiliated
investment adviser) shall, where available, be made in accordance
with the terms of each Prospectus.
11. We and each Fund reserve the right in our
discretion, without notice, to suspend sales or withdraw the offering
of any shares entirely. Each party hereto has the right to cancel
the portions of this Agreement to which it is party upon notice to
the other parties; provided, however, that no cancellation shall
affect any party's obligations hereunder with respect to any
transactions or activities occurring prior to the effective time of
cancellation. We reserve the right to amend this Agreement in any
respect effective on notice to you.
12. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering of shares. We shall be under no liability to you
except for lack of good faith and for obligations expressly assumed by
us herein. Nothing contained in this paragraph 12 is intended to
operate as, and the provisions of this paragraph 12 shall not in any way
whatsoever constitute a waiver by you of compliance with, any provisions
of the 1933 Act or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
13. You agree that: (a) you shall not effect any
transactions (including, without limitation, any purchases and
redemptions) in any shares registered in the name of, or beneficially
owned by, any customer unless such customer has granted you full
right, power and authority to effect such transactions on his behalf,
(b) we shall have full authority to act upon your express
instructions to sell, repurchase or exchange shares through us on
behalf of your customers under the terms and conditions provided in
the Prospectus and (c) we, the Funds, the investment adviser, the
administrator, the transfer agent and our and their respective
officers, directors or trustees, agents, employees and affiliates
shall not be liable for, and shall be fully indemnified and held
harmless by you from and against, any and all claims, demands,
liabilities and expenses (including, without limitation, reasonable
attorneys' fees) which may be incurred by us or any of the foregoing
persons entitled to indemnification from you hereunder arising out of
or in connection with (i) the execution of any transactions in shares
registered in the name of, or beneficially owned by, any customer in
reliance upon any oral or written instructions believed to be genuine
and to have been given by or on behalf of you, (ii) any statements or
representations that you or your employees or representatives make
concerning the Funds that are inconsistent with the applicable Fund's
Prospectus, (iii) any written materials used by you or your employees
or representatives in connection with making offers or sales of
shares that were not furnished by us, the Funds or the investment
adviser or an affiliate thereof and (iv) any sale of shares of a Fund
where the Fund or its shares were not properly registered or
qualified for sale in any state, any U.S. territory or the District
of Columbia, when we have indicated to you that the Fund or its
shares were not properly registered or qualified. The
indemnification agreement contained in this Paragraph 13 shall
survive the termination of this Agreement.
14. You represent that: (a) you are a member in good
standing of the National Association of Securities Dealers, Inc. (the
"NASD"), or, if a foreign dealer who is not eligible for membership
in the NASD, that (i) you will not make any sales of shares in, or to
nationals of, the United States of America, its territories or its
possessions, and (ii) in making any sales of shares you will comply
with the NASD's Conduct Rules and (b) you are a member in good
standing of the Securities Investor Protection Corporation ("SIPC").
You agree that you will provide us with timely written notice of any
change in your NASD or SIPC status.
15. We shall inform you as to the states or other
jurisdictions in which the Fund has advised us that shares have been
qualified for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your qualification to sell shares
in any jurisdiction.
16. 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.
17. All communications to us should be sent, postage
prepaid, to 21 Milk Street, Boston, Massachusetts 02109 Attention:
Philip Coolidge. Any notice to you shall be duly given if mailed,
telegraphed or telecopied to you at the address specified by you
below. Communications regarding placement of orders for shares
should be sent, postage prepaid, to First Data Investor Services
Group, Inc., P.O. Box 5128, Westborough, Massachusetts 01581-5128.
18. This Agreement shall be binding upon both parties
hereto when signed by us and accepted by you in the space provided
below.
19. 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.
CFBDS, INC.
By:
(Authorized Signature)
Accepted:
Firm Name:
Address:
Accepted By (signature):
Name (print):
Title: Date:
u:\legal\general\forms\agreemts\dist12b-1\dealerag1.doc
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Massachusetts Municipals Fund:
We consent to the use of our report dated January 15, 1999, with
respect to the Smith Barney Massachusetts Municipals Fund,
incorporated herein by reference and to the references to our Firm
under the headings "Financial Highlights" in the Prospectus and
"Counsel and Auditors" in the Statement of Additional Information.
KPMG LLP
New York, New York
March 25, 1999
Consent of Counsel
We hereby consent to the use of our name and to the references to
our firm under the caption "Counsel" included in the Statement of
Additional Information that is included in Post-Effective Amendment
No. 19 to the Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (File Nos. 33-11417 and 811-
04994), of Smith Barney Massachusetts Municipals Fund Inc.
Willkie Farr & Gallagher
March 29, 1999
New York, New York
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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