Smith Barney
NEW JERSEY MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney New Jersey
Municipals Fund Inc. (the "Fund"), dated November 7, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from a Smith Bar-
ney Financial Consultant or by writing or calling the Fund at the address
or telephone number set forth above. This Statement of Additional Informa-
tion, although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference the same section headings are used in both the Pro-
spectus and the Statement of Additional Information, except where shown
below:
<TABLE>
<CAPTION>
<S>
<C>
Management of the Fund
1
Investment Objective and Management Policies
5
Municipal Bonds (See in the Prospectus "New Jersey Municipal
Securities")
10
Purchase of Shares
24
Redemption of Shares
24
Distributor
25
Valuation of Shares
27
Exchange Privilege
27
Performance Data (See in the Prospectus "The Fund's Performance")
28
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")
31
Additional Information
34
Financial Statements
34
Appendix
A-1
</TABLE>
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the organi-
zations that provide services to the Fund. These organizations are as fol-
lows:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc. Investment Adviser
and
("SBMFM") Administrator
The Boston Company Advisors, Inc.
("Boston Advisors") Sub-Administrator
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc. ("TSSG"),
a subsidiary of First Data Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Fund are dis-
cussed in the Prospectus and in this Statement of Additional Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The Directors and executive officers of the Fund, together with informa-
tion as to their principal business occupations during the past five
years, are shown below. Each Director who is an "interested person" of the
Fund, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
Herbert Barg, Director. Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director. Retired; formerly Senior Consultant to
Dean Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New
Jersey 17466.
Martin Brody, Director. Vice Chairman of the Board of Restaurant Associ-
ates Industries Corp.; a Director of Jaclyn, Inc. His address is HMK Asso-
ciates, Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director. Professor, Graduate School of Business Adminis-
tration, Harvard University; a Director of Peer Review Analysis, Inc. His
address is Graduate School of Business Administration, Harvard University,
Boston, Massachusetts 02163.
James J. Crisona, Director. Attorney; formerly Justice of the Supreme
Court of the State of New York. His address is 118 East 60th Street, New
York, New York 10022.
Burt N. Dorsett, Director. Managing Partner of Dorsett McCabe Management,
Inc., an investment counseling firm; Director of Research Corporation
Technologies, Inc., a non-profit patent-clearing and licensing firm. His
address is 201 East 62nd Street, New York, New York 10021.
Robert A. Frankel, Director. Management Consultant; retired Vice President
of The Reader's Digest Association, Inc. His address is 102 Grand Street,
Croton-on-Hudson, New York 10520.
Dr. Paul Hardin, Director. Chancellor of the University of North Carolina
at Chapel Hill; a Director of The Summit Bancorporation. His address is
University of North Carolina, 103 S. Building, Chapel Hill, North Carolina
27599.
Elliot S. Jaffe, Director. Chairman of the Board and President of The
Dress Barn, Inc. His address is 88 Hamilton Avenue, Stamford, Connecticut
06904.
Stephen E. Kaufman, Director. Attorney. His address is 277 Park Avenue,
New York, New York 10017.
Joseph J. McCann, Director. Financial Consultant; formerly Vice President
of Ryan Homes, Inc., Pittsburgh, Pennsylvania. His address is 200 Oak Park
Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney and Chairman of Smith Barney Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"), Vice Chairman
of Shearson Asset Management, a Director of PanAgora Asset Management,
Inc. and PanAgora Asset Management Limited. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director. President, Cornelius C. Rose Associates,
Inc., Financial Consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. His address is Fair Oaks, En-
field, New Hampshire 03748.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and
SBMFM; and Trustee of Corporate
Realty Income Trust I nc . His address is 388 Greenwich Street, New
York,
New
York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney and President of Smith Barney Strategy Advisers Inc.; prior to July
1993, Senior Vice President of Shearson Lehman Brothers and Vice President
of Shearson Lehman Investment Strategy Advisors Inc. His address is 388
Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer. Investment
Officer of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors the predecessor to Greenwich Street Advisors. His address is 388
Greenwich Street, New York, New York 10013.
Karen L. Mahoney-Malcomson, Investment Officer. Investment Officer of
SBMFM; prior to July 1993, Vice President of Shearson Lehman Advisors. Her
address is 388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New
York, New York 10013.
Each Director also serves as a director, trustee and/ or general
partner of
certain other mutual funds for which Smith Barney serves as
distributor.
As of
September 30, 1994, the Directors and officers of the Fund as a group
owned less than 1.00% of the outstanding common stock of the Fund.
No director, officer or employee of Smith Barney or of any parent or sub-
sidiary receives any compensation from the Fund for serv-
ing as an officer or Director of the Fund. The Fund pays each Director who
is not an officer, director or employee of Smith Barney or any of its af-
filiates a fee of $1,000 per annum plus $100 per meeting attended and re-
imburses them for travel and out-of-pocket expenses. For the fiscal year
ended March 31, 1994, such fees and expenses totaled $16,869.
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a transfer of
the investment advisory agreement effective November 7, 1994, from its af-
filiate, Mutual Management Corp. (Mutual Management Corp. and SBMFM are
both wholly owned subsidiaries of Smith Barney Holdings Inc. ("Hold-
ings").) Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"). The advisory agreement is dated July 30, 1993 (the
"Advisory
Agreement") and was first approved by the Board of Directors, including a
majority of those Directors who are not "interested persons" of the Fund
or Smith Barney, on April 7, 1993. The services provided by SBMFM under
the Advisory Agreement are described in the Prospectus under "Management
of the Fund.". SBMFM
pays the
salary of any officer or employee who is employed by both it and the Fund.
As compensation for investment advisory services, the Fund pays
SBMFM a fee computed daily and pa id monthly
at the following annual rates of the Fund's average daily net
assets :
.35% up to $500
million; .32% in excess of $500 million. For
the 1992, 1993 and 1994 fiscal years, the Fund incurred $284,515,
$378,146 and $559,176, respectively. Shearson Lehman Advisors and/or Mu-
tual Management Corp. voluntarily waived investment advisory fees for the
fiscal years ended March 31, 1992, 1993 and 1994 in the amounts of
$76,727, $110,602 and $49,482, respectively.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement")
, which was
most recently approved by the Fund's Board of Directors, including a ma-
jority of Directors who are not "interested persons" of the Fund or
SBMFM
, on July 20, 1994. The services provided by SBMFM under the
Administration Agreement are described in the Prospectus under "Management
of the Fund". SBMFM pays the salary of any officer and employee who is
employed by both it and the Fund and bears all expenses in connection with
the performance of its services.
As compensation for administrati ve services ren-
dered to the Fund , SBMFM receives a fee paid
at the following annual
rates: .20% of average daily net assets up to $500 million; .18% of aver-
age daily net assets of the next $1 billion; and .16% of average daily net
assets in excess of $1.5 billion.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors currently serves as sub-administrator to the Fund
pursuant to a written agreement (the "Sub-Administration Agreement")
dated April
20, 1994, which was most recently approved by the Fund's Board of Direc-
tors, including a majority of Directors who are not "interested persons"
of the Fund or Boston Advisors on April 20, 1994. Under the Sub-
Administration Agreement, Boston Advisors is paid a portion of the
administration fee paid by the Fund to SBMFM at a rate agreed upon
from time to time between Boston Advisors and SBMFM. . Boston Advisors
is a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"), a financial
services holding company, which is in turn a wholly owned subsidiary of
Mellon Bank Corporation ("Mellon").
Prior to April 20, 1994, Boston Advisors served as the Fund's
sub-investment
advisor and/or administrator. For the fiscal years ended March 31,
1992,
1993
and 1994, such fees
amounted to $162,580, $216,083 and $319,529, respectively. Boston Advisors
voluntarily waived sub-investment advisory and/or administration fees for
the fiscal years ended March 31, 1992, 1993 and 1994 in the amounts of
$43,844, $63,201 and $28,275, respectively.
Certain of the services provided to the Fund by Boston Advisors
pursuant to the Sub-
Administration Agreement are described in the Prospectus under "Management
of the Fund." In addition to those services, and Boston Advisors
pay
the salaries of all officers and employees who are employed by both
it
and
the Fund, maintains office facilities for the
Fund, furnishes the Fund with statistical and research data, clerical help
and accounting, data processing, bookkeeping, internal auditing and legal
services and certain other services required by the Fund, prepares reports
to the Fund's shareholders, and prepares tax returns, reports to and fil-
ings with the Securities and Exchange Commission (the "SEC") and state
B lue S ky authorities. Boston Advisors bear s
all expenses in con-
nection with the performance of its services.
The Fund bears expenses incurred in its operations, including: taxes, in-
terest, brokerage fees and commissions, if any; fees of Directors who are
not officers, directors, shareholders or employees of Smith Barney ,
SBMFM
or Boston Advisors ; SEC
fees and state B lue S ky qualification fees; charges of
custodian;
transfer
and dividend disbursing agent's fees; certain insurance premiums; outside
auditing and legal expenses; costs of any independent pricing service;
costs of maintaining corporate existence; costs attributable to investors
services (including allocated telephone and personnel expenses); costs of
preparation 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 Directors of
the Fund.
SBMFM and Boston Advisors have agreed that if in any fiscal year the ag-
gregate expenses of the Fund (including fees payable pursuant to the Advi-
sory Agreement and Administration Agreement but excluding interest, taxes,
brokerage fees paid pursuant to the Fund's services and distribution
plan,
and, with the prior written consent of the necessary state secu-
rities commissions, extraordinary expenses) exceed the expense limitation
of any state having jurisdiction over the Fund, SBMFM and Boston Advisors
will, to the extent required by state law, reduce their management fees by
the amount of such excess expenses, such amount to be allocated between
them in the proportion that their respective fees bear to the aggregate of
such fees paid by the Fund. Such fee reductions, if any, will be recon-
ciled on a monthly basis. For the fiscal year ended March 31, 1994 no such
fee reduction was required.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. McCarter &
English serves as special New Jersey counsel for the Fund and has reviewed
the portions of the Prospectus and this Statement of Additional Informa-
tion concerning New Jersey taxes and the description of the special con-
siderations relating to investments in New Jersey Municipal Securities (as
defined below). The Directors who are not "interested persons" of the Fund
have selected Stroock & Stroock & Lavan as their legal counsel.
KPMG Peat Marwick, LLP, independent accountants, 345 Park Avenue,
New York, New York 10154, serve as auditors of the Fund and will render an
opinion
on the Fund's financial statements annually. Prior to October 19, 1994,
Coopers and Lybrand LLP, independent auditors, served as auditors of the
Fund and rendered an opinion on the financial statements for the fiscal
year
ended
March 31, 1994. .
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 Statement of Additional Information, obligations of non-
New Jersey municipal issuers, the interest on which is at least exempt
from Federal income taxation ("Other Municipal Securities"), and obliga-
tions of the State of New Jersey and its political subdivisions, agencies
and public authorities (together with certain municipal issuers such as
the Commonwealth of Puerto Rico, the Virgin Islands and Guam) that pay in-
terest which is excluded from gross income for Federal income tax purposes
and exempt from New Jersey personal income taxes ("New Jersey Municipal
Securities") are collectively referred to as "Municipal Bonds."
As noted in the Prospectus, the Fund is classified as a non-diversified
investment company under the 1940 Act, which means that the Fund is not
limited by the 1940 Act in the proportion of its assets that may be in-
vested in the obligations of a single issuer. The identification of the
issuer of Municipal Bonds generally depends upon the terms and conditions
of the security. When the assets and revenues of an agency, authority, in-
strumentality 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 se-
curity and would be treated as an issue of such government or other en-
tity.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") represent the opinions of those
agencies as to the quality of the Municipal Bonds and short-term invest-
ments 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 SBMFM to evalu-
ate potential investments. Among the factors that will be considered are
the long-term ability of the issuer to pay principal and interest and gen-
eral 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 SBMFM's credit analysis of such securi-
ties than would be the case for a portfolio consisting entirely of higher-
rated securities.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds may
cease to be rated or its rating may be reduced below the rating given at
the time the securities were acquired by the Fund. Neither event will re-
quire the sale of such Municipal Bonds by the Fund, but SBMFM will con-
sider such event in its determination of whether the Fund should continue
to hold the Municipal Bonds. In addition, to the extent the ratings change
as a result of changes in such organizations or their rating systems or
due to a corporate restructuring of Moody's or S&P, the Fund will attempt
to use comparable ratings as standards for its investments in accordance
with its investment objective and policies. The Appendix contains informa-
tion concerning the ratings of Moody's and S&P and their significance.
TEMPORARY INVESTMENTS
The Fund may invest in short-term investments ("Temporary Investments")
consisting of (a) the following tax-exempt securities: notes of municipal
issuers having, at the time of purchase, a rating within the three highest
grades of Moody's or S&P or, if not rated, having an issue of outstanding
Municipal Bonds rated within the three highest grades by Moody's or S&P;
and (b) the following taxable securities: obligations of the United States
government, its agencies or instrumentalities ("U.S. government securi-
ties"), repurchase agreements, 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 de-
posit of domestic banks with assets of $1 billion or more. The Fund in-
tends to purchase tax-exempt Temporary Investments pending the investment
of the proceeds of the sale of portfolio securities or shares of the
Fund's common stock, or in order to have highly liquid securities avail-
able to meet anticipated redemptions. 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; provided, however, that the
Fund will seek, to the extent that it makes Temporary Investments for de-
fensive purposes, to make such investments in conformity with the require-
ments of a qualified investment fund under New Jersey law.
Repurchase Agreements. As a defensive position only, the Fund may enter
into repurchase agreements with banks which are the issuers of instruments
acceptable for purchase by the Fund and with certain dealers on the Fed-
eral Reserve Bank of New York's list of reporting dealers. A repurchase
agreement is a contract under which the buyer of a security simultaneously
commits to resell the security to the seller at an agreed-upon price on an
agreed-upon date. Under the terms of a typical repurchase agreement, the
Fund would acquire an underlying debt obligation for a relatively short
period (usually not more than seven days) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-
upon price and time, thereby determining the yield during the Fund's hold-
ing period. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Fund's holding period. Under
each repurchase agreement, the selling institution will be required to
maintain the value of the securities subject to the repurchase agreement
at not less than their repurchase price. Repurchase agreements could in-
volve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability
to dispose of the underlying securities, the risk of a possible decline in
the value of the underlying securities during the period in which the Fund
seeks to assert its rights to them, the risk of incurring expenses associ-
ated with asserting those rights and the risk of losing all or part of the
income from the agreement SBMFM or Boston Advisors, acting under the su-
pervision of the Fund's Board of Directors, reviews on an ongoing basis
the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the protec-
tion of shareholders. Restrictions 1 through 7 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 Board of Directors at any time. The Fund may not:
1. Issue senior securities as defined in the 1940 Act and any rules and
orders thereunder, except insofar as the Fund may be deemed to have issued
senior securities by reason of: (a) borrowing money or purchasing securi-
ties on a when-issued or delayed-delivery basis; (b) purchasing or selling
futures contracts and options on futures contracts and other similar in-
struments; and (c) issuing separate classes of shares.
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. gov-
ernment 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 the Fund may borrow from banks for temporary
or emergency (not leveraging) purposes, including the meeting of redemp-
tion requests which might otherwise require the untimely disposition of
securities, in an amount not exceeding 10% of the value of the Fund's
total assets (including the amount borrowed) valued at market less liabil-
ities (not including the amount borrowed) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the Fund's total as-
sets, the Fund will not make additional investments.
4. Make loans. This restriction does not apply to: (a) the purchase of
debt obligations in which the Fund may invest consistent with its invest-
ment objective and policies; (b) repurchase agreements; and (c) loans of
its portfolio securities.
5. Engage in the business of underwriting securities issued by other per-
sons, 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, real estate in-
vestment trust securities, commodities or commodity contracts, but this
shall not prevent the Fund from: (a) investing in securities of issuers
engaged in the real estate business and securities which are secured by
real estate or interests therein; (b) holding or selling real estate re-
ceived in connection with securities it holds; or (c) trading in futures
contracts and options on futures contracts.
7. Purchase any securities on margin (except for such short-term credits
as are necessary for the clearance of purchases and sales of portfolio se-
curities) or sell any securities short (except against the box). For pur-
poses of this restriction, the deposit or payment by the Fund of initial
or maintenance margin in connection with futures contracts and related op-
tions and options on securities 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 securi-
ties of issuers having a record, including predecessors, of less than
three years of continuous operation, except U.S. government securities.
(For purposes of this restriction issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators of under-
lying 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 as-
sets 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 op-
tions or in the writing of such options, except that the Fund may engage
in transactions involving municipal bond index and interest rate futures
contracts and options thereon after approval of these investment strate-
gies by the Board of Directors and notice thereof to the Fund's sharehold-
ers.
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 de-
scribed in the Prospectus and this Statement of Additional Information and
any future change in those practices would require Board of Directors ap-
proval and appropriate disclosure to investors.
If a percentage restriction is complied with at the time of an investment,
a later increase or decrease in the percentage of assets resulting from a
change in the values of portfolio securities or in the amount of the
Fund's assets will not constitute a violation of such restriction. In
order to permit the sale of the Fund's shares in certain states, the Fund
may make commitments more restrictive than the restrictions described
above. Should the Fund determine that any such commitment is no longer in
the best interests of the Fund and its shareholders, it will revoke the
commitment by terminating sales of its shares in the state involved.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales usually
are placed with those dealers from which it appears that the best price or
execution will be obtained; those dealers may be acting as either agents
or principals. The purchase price paid by the Fund to underwriters of
newly issued securities usually includes a concession paid by the issuer
to the underwriter, and purchases of after-market securities from dealers
normally are executed at a price between the bid and asked prices. The
Fund has paid no brokerage commissions since its commencement of opera-
tions.
Allocation of transactions, including their frequency, to various dealers
is determined by SBMFM in its best judgment and in the manner deemed fair
and reasonable to shareholders. The primary considerations are the avail-
ability of the desired security and prompt execution of orders in an ef-
fective manner at the most favorable prices. Subject to these consider-
ations, dealers which provide supplemental investment research and statis-
tical or other services to SBMFM may receive orders for portfolio
transactions by the Fund. Information so received enables SBMFM to supple-
ment its own research and analysis with the views and information of other
securities firms. Such information may be useful to SBMFM in serving both
the Fund and its other clients, and, conversely, supplemental information
obtained by the placement of business of other clients may be useful to
SBMFM in carrying out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence of any un-
derwriting or selling group relating thereto of which SBMFM is a member,
except to the extent permitted by the SEC. Under certain circumstances,
the Fund may be at a disadvantage because of this limitation in comparison
with other investment companies which have a similar investment objective
but which are not subject to such limitation. The Fund also may execute
portfolio transactions through Smith Barney and its affiliates in accor-
dance with rules promulgated by the SEC.
While investment decisions for the Fund are made independently from those
of the other accounts managed by SBMFM, investments of the type that the
Fund may make also may be made by such other accounts. When the Fund and
one or more other accounts managed by SBMFM are prepared to invest in, or
desire to dispose of, the same security, available investments or opportu-
nities for sales will be allocated in a manner believed by SBMFM to be eq-
uitable 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 de-
sirable to sell or purchase securities. Securities may be sold in antici-
pation of a rise in interest rates (market decline) or purchased in antic-
ipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of comparable qual-
ity may be purchased at approximately the same time in order to take ad-
vantage of what the Fund believes to be a temporary disparity in the nor-
mal 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 supply of various types of tax-exempt
securities. For the fiscal years ended March 31, 1993 and 1994, the Fund's
portfolio turnover rates were 58% and 32%, respectively.
MUNICIPAL BONDS
GENERAL INFORMATION
Municipal Bonds generally are understood to include debt obligations is-
sued to obtain funds for various public purposes, including the construc-
tion of a wide range of public facilities, refunding of outstanding obli-
gations, payment of general operating expenses and extensions of loans to
public institutions and facilities. Private activity bonds that are issued
by or on behalf of public authorities to finance privately operated facil-
ities are included within the term Municipal Bonds if the interest paid
thereon qualifies as excludable from gross income (but not necessarily
from alternative minimum taxable income) for Federal income tax purposes
in the opinion of bond counsel to the issuer.
The yields on Municipal Bonds are dependent upon a variety of factors, in-
cluding general economic and monetary conditions, general money market
factors, the financial condition of the issuer, the general conditions of
the Municipal Bond market, the size of a particular offering, the maturity
of the obligation offered and the rating of the issue. Municipal Bonds are
subject to the provisions of bankruptcy, insolvency and other laws affect-
ing the rights and remedies of creditors, such as the Federal Bankruptcy
Code, and laws, if any that may be enacted by Congress or state legisla-
tures extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of the obligations or upon the
ability of municipalities to levy taxes. The possibility also exists that
as a result of litigation or other conditions, the power or ability of any
one or more issuers to pay, when due, principal of and interest on its, or
their, Municipal Bonds may be materially and adversely affected.
WHEN-ISSUED SECURITIES
The Fund may purchase Municipal Bonds on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield).
The payment obligation and the interest rate that will be received on the
Municipal Bonds purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment. Although the Fund will purchase
Municipal Bonds on a when-issued basis only with the intention of actually
acquiring the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strat-
egy.
Municipal Bonds are subject to changes in value based upon the public's
perception of the creditworthiness of the issuers and changes, real or an-
ticipated, in the level of interest rates. In general, Municipal Bonds
tend to appreciate when interest rates decline and depreciate when inter-
est rates rise. Purchasing Municipal Bonds on a when-issued basis, there-
fore, can involve the risk that the yields available in the market when
the delivery takes place may actually be higher than those obtained in the
transaction itself. To account for this risk, a segregated account of the
Fund consisting of cash or liquid debt securities equal to the amount of
the when-issued commitments will be established at the Fund's custodian
bank. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value.
If the market or fair value of such securities declines, additional cash
or securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund. Placing se-
curities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets. That is, to the extent the Fund remains
substantially fully invested in securities at the same time it has commit-
ted to purchase securities on a when-issued basis, there will be greater
fluctuations in its net assets than if it had set aside cash to satisfy
its purchase commitments. Upon the settlement date of the when-issued se-
curities, the Fund will meet its obligations from then-available cash
flow, sale of securities held in the segregated account, sale of other se-
curities or, although it normally would not expect to do so, from the sale
of the when-issued securities themselves (which may have a value greater
or less than the Fund's payment obligations). Sales of securities to meet
such obligations may involve the realization of capital gains, which may
not be exempt from New Jersey personal income taxes, and from Federal in-
come taxes.
When the Fund engages in when-issued transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price con-
sidered to be advantageous.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY
MUNICIPAL SECURITIES
Some of the significant financial considerations relating to the invest-
ments of the Fund are summarized below. The following information consti-
tutes only a brief summary, does not purport to be a complete description
and is largely based on information drawn from official statements relat-
ing to securities offerings of New Jersey municipal obligations available
as of the date of this Statement of Additional Information. The accuracy
and completeness of the information contained in such offering statements
has not been independently verified.
On November 2, 1993, Christine Todd Whitman was elected to replace James
Florio as Governor of the State. Governor Whitman took office on January
18, 1994. As a matter of public record, Governor Whitman during her cam-
paign publicized her intention to reduce taxes in New Jersey. There can be
no assurance that Governor Whitman will in fact reduce taxes or as to what
effects any such reduction might have.
State Finance/Economic Information. New Jersey is the ninth largest state
in population and the fifth smallest in land area. With an average of
1.062 people per square mile, it is the most densely populated of all the
states. New Jersey's economic base is diversified, consisting of a variety
of manufacturing, construction and service industries, supplemented by
rural areas with selective commercial agriculture. Historically, New Jer-
sey's average per capita income has been well above the national average,
and in 1993 New Jersey ranked second among the states in per capita per-
sonal income ($26,967).
By the beginning of the national recession (which officially started in
July 1990 according to the National Bureau of Economic Research), con-
struction activity had already been declining in New Jersey for nearly two
years. As the rapid acceleration of real estate prices forced many would-
be homeowners out of the market and high non-residential vacancy rates re-
duced new commitments for offices and commercial facilities, construction
employment began to decline; also, growth had tapered off markedly in the
service sectors and the long-term downtrend of factory employment had ac-
celerated, partly because of a leveling off of industrial demand nation-
ally. The onset of recession caused an acceleration of New Jersey's job
losses in construction and manufacturing, as well as an employment down-
turn in such previously growing sectors as wholesale trade, retail trade,
finance, utilities, trucking and warehousing.
Reflecting the economic downturn, the rate of unemployment in New Jersey
rose from 3.6% during the first quarter of 1989 to a recessionary peak of
9.3% during 1992. The unemployment rate fell to 6.7% during the fourth
quarter of 1993.
In the first half of 1994, relative to the same period a year ago, robust
job growth took place in services (3.6%) and construction (4.2%), more
moderate growth took place in trade (1.5%), transportation and utilities
(1.3%) and finance/insurance/real estate (1.4%), while manufacturing and
government declined by 1.5% and 0.1%, respectively. The net result was a
1.5% increase in average employment during the first half of 1994 compared
to the first half of 1993.
Just as New Jersey was hurt by the national recession, evidence of its im-
proving economy can be found in increased home-building and other areas of
construction activity. Total construction contracts awarded in New Jersey
rose by 7.0% in 1993 compared with 1992, with the biggest increase being
in residential construction awards, which increased by 26% in 1993 com-
pared to 1992.
New Jersey's Budget and Appropriate System. New Jersey operates on a fis-
cal year ending on June 30. The General Fund is the fund into which all
New Jersey revenues not otherwise restricted by statute are deposited and
from which appropriations are made. The largest part of the total finan-
cial operations of New Jersey is accounted for in the General Fund, which
includes revenues received from taxes and unrestricted by statute, most
Federal revenues, and certain miscellaneous revenue items. The Appropria-
tion Acts enacted by the New Jersey Legislature and approved by the Gover-
nor provide the basic framework for the operation of the General Fund. The
undesignated General Fund balance at year end for fiscal year 1991 was
$1.4 million, for fiscal year 1992 was $760.8 million and for fiscal year
1993 was $937.0 million. For fiscal year 1994, the balance in the undesig-
nated General Fund is estimated to be $797.5 million, subject to change
upon completion of the year-end audit. The estimated balance for fiscal
year 1995 is $292.4 million, based on the amounts contained in the fiscal
year 1995 Appropriation Acts. The fund balances are available for appro-
priation in succeeding fiscal years.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may by statutory authority prevent any expendi-
ture under any appropriation. No supplemental appropriation may be enacted
after adoption of an appropriations act except where there are sufficient
revenues on hand or anticipated to meet such appropriation. In the past
when actual revenues have not been less than the amount anticipated in the
budget, the Governor has exercised plenary powers leading to, among other
actions, a hiring freeze for all New Jersey departments and discontinua-
tion of programs for which appropriations were budgeted but not yet spent.
General Obligation Bonds. New Jersey finances capital projects primarily
through the sale of its general obligation bonds. These bonds are backed
by the full faith and credit of New Jersey. Tax revenues and certain other
fees are pledged to meet the principal and interest payments required to
pay the debt fully.
The aggregate outstanding general obligation bonded indebtedness of New
Jersey as of June 30, 1993 was $3.5947 billion. The appropriation for the
debt service obligation on outstanding indebtedness is $103.5 million for
fiscal year 1995.
In addition to payment from bond proceeds, capital construction can also
be funded by appropriation of current revenues on a pay-as-you-go basis.
This amount represents 2.9% of the total fiscal year 1995 budget.
Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey initi-
ated a program under which it issued tax and revenue anticipation notes to
aid in providing effective cash flow management to fund imbalances which
occur in the collection and disbursement of the General Fund and Property
Tax Relief Fund revenues. For fiscal year 1995, there are no tax and reve-
nue anticipation notes outstanding. It is anticipated that this program
will be continued in fiscal year 1995. Such tax and revenue anticipation
notes do not constitute a general obligation of New Jersey or a debt or
liability within the meaning of the New Jersey Constitution. Such notes
constitute special obligations of New Jersey payable solely from moneys on
deposit in the General Fund and Property Tax Relief Fund which are attrib-
utable to New Jersey's 1995 fiscal year and are legally available for such
payment.
Lease Financing. New Jersey has entered into a number of leases relating
to the financing of certain real property and equipment. New Jersey leases
the Richard J. Hughes Justice Complex in Trenton from the Mercer County
Improvement Authority (the "MCIA"). Under the lease agreements with the
New Jersey Economic Development Authority (the "EDA"), New Jersey leases
(a) office buildings that house the New Jersey Division of Motor Vehicles,
New Jersey Network, a branch of the United States Postal Service and a
parking facility, (b) approximately 13 acres of real property and certain
infrastructure improvements thereon located in the city of Newark, and (c)
two parking lots, certain infrastructure improvements and related elements
located at Liberty State Park in the city of Jersey City. Pursuant to var-
ious leases with the New Jersey Building Authority (the "NJBA"), New Jer-
sey leases several office buildings in the Trenton area, as well as the
State Capital Complex. Rental payments under each of the foregoing leases
are sufficient to pay debt service on the related bonds issued by MCIA,
EDA and NJBA, and in each case are subject to annual appropriation by the
New Jersey Legislature.
Beginning in April 1984, New Jersey, acting through the Director of the
Division of Purchase and Property, entered into a series of lease purchase
agreements which provide for the acquisition of equipment, services and
real property to be used by various departments and agencies of New Jer-
sey. To date, New Jersey has completed eleven lease purchase agreements
which have resulted in the issuance of Certificates of Participation to-
talling $749,350,000. The agreements relating to these transactions pro-
vide for semi-annual rental payments. New Jersey's obligation to pay rent-
als due under these leases is subject to annual appropriations being made
by the New Jersey Legislature.
State Supported School and County College Bonds. Legislation provides for
future appropriations for New Jersey aid to local school districts equal
to debt service on a maximum principal amount of $280,000,000 of bonds is-
sued by such local school districts for construction and renovation of
school facilities and for New Jersey aid to counties equal to debt service
on up to $80,000,000 of bonds issued by counties for construction of
county college facilities. The New Jersey Legislature is not legally bound
to make such future appropriations, but has done so to date on all out-
standing obligations issued under these laws.
"Moral Obligations" Financing. The authorizing legislation for certain
New Jersey entities provides for specific budgetary procedures with re-
spect to certain obligations issued by such entities. Pursuant to such
legislation, a designated official is required to certify any deficiency
in a debt service reserve fund maintained to meet payments of principal of
and interest on the obligations, and a New Jersey appropriation in the
amount of the deficiency is to be made. However, the New Jersey Legisla-
ture is not legally bound to make such an appropriation. Bonds issued pur-
suant to authorizing legislation of this type are sometimes referred to as
"moral obligation" bonds. There is no statutory limitation on the amount
of "moral obligation" bonds which may be issued by eligible New Jersey en-
tities.
The following table sets forth the "moral obligation" bonded indebtedness
issued by New Jersey entities as of June 30, 1993.
<TABLE>
<CAPTION>
MAXIMUM
ANNUAL
DEBT
SERVICE
SUBJECT TO
OUTSTANDING MORAL
OBLIGATION
<S> <C> <C>
New Jersey Housing and Mortgage Finance Agency $576,626,318.78
$54,099,863.41
South Jersey Port Corporation 88,750,000.00
7,374,000.00
Higher Education Assistance Authority 57,519,832.00
2,000,000.00
</TABLE>
Higher Education Assistance Authority. The Higher Education Assistance
Authority ("HEAA") has issued $79,996,064 aggregate principal amount of
revenue bonds. It is anticipated that the HEAA's revenues will be suffi-
cient to cover debt service on its bonds.
New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey
Housing and Mortgage Finance Agency nor its predecessors, the New Jersey
Housing Finance Agency and the New Jersey Mortgage Finance Agency, have
had a deficiency in a debt service reserve fund which required New Jersey
to appropriate funds to meet its "moral obligation." It is anticipated
that this agency's revenues will continue to be sufficient to cover debt
service on its bonds.
South Jersey Port Corporation. New Jersey provides the South Jersey Port
Corporation (the "Corporation") with funds to cover all debt service and
property tax requirements, when earned revenues are anticipated to be in-
sufficient to cover these obligations. For calendar years 1986 through
1993, New Jersey has made appropriations totaling $31,831,384.25 which
covered deficiencies in revenues of the Corporation, for debt service and
property tax payments. The total appropriation for calendar year 1994 is
$7,547,700.
New Jersey Commission on Science and Technology. In April 1988, the New
Jersey Commission on Science and Technology (the "Science Commission")
agreed pursuant to a grant agreement with Rutgers, the State University,
the University of Medicine and Dentistry of New Jersey and the New Jersey
Institute of Technology (the "Institutions") to provide moneys annually to
said Institutions sufficient to pay the amounts required under separate
lease purchase agreements which resulted in the issuance of Certificates
of Participation in an aggregate amount of $26,460,000. The Science Com-
mission's obligation to make grant payments under the grant agreement is
subject to annual appropriations being made by the New Jersey Legislature.
The Institutions' obligations to pay rentals under the lease purchase
agreements are subject to receipt of moneys from the Science Commission
pursuant to a grant agreement.
New Jersey Sports and Exposition Authority. On March 2, 1992, the New
Jersey Sports and Exposition Authority (the "Sports Authority") issued
$147,490,000 in New Jersey guaranteed bonds and defaced all previously
outstanding New Jersey guaranteed bonds of the Sports Authority. New Jer-
sey officials have stated the belief that the revenue of the Sports Au-
thority will be sufficient to provide for the payment of debt service on
these obligations without recourse to New Jersey's guarantee.
Legislation enacted in 1992 authorizes the Sports Authority to issue bonds
for various purposes payable from New Jersey appropriations. Pursuant to
this legislation, the Sports Authority and the New Jersey Treasurer have
entered into an agreement (the "State Contract") pursuant to which the
Sports Authority will undertake certain projects, including the refunding
of certain outstanding bonds of the Sports Authority, and the New Jersey
Treasurer will credit to the Sports Authority and the New Jersey Treasurer
will credit to the Sports Authority Fund amounts from the General Fund
sufficient to pay debt service and other costs related to the bonds. The
payment of all amounts under the State Contract is subject to and depen-
dent upon appropriations being made by the New Jersey Legislature.
New Jersey Transportation Trust Fund Authority. In July 1984, New Jersey
created the New Jersey Transportation Trust Fund Authority (the "TTFA"),
an instrumentality of New Jersey organized and existing under the New Jer-
sey Transportation Trust Fund Authority Act of 1984, as amended (the
"Act") for the purpose of funding a portion of New Jersey's share of the
cost of improvements to New Jersey's transportation system. The Act autho-
rizes the New Jersey Treasurer to credit to the TTFA a minimum of
$320,250,000 per year. Pursuant to the Act, the TTFA, the New Jersey Trea-
surer and the Commissioner of Transportation executed a contract (the
"Contract") which provides for the payment of these revenues to the TTFA.
The payment of all such amounts is subject to and dependent upon appropri-
ations being made by the New Jersey Legislature and there is no require-
ment that the Legislature make such appropriation. The Act specifies that
the TTFA's legal existence shall not continue beyond 22 years from the
date of enactment of the Act.
Pursuant to the Act, the aggregate principal amount of TTFA's bonds, notes
or other obligations outstanding at any one time may not exceed $1.7 bil-
lion. This amount is reduced by certain payments to the TTFA by New Jersey
in excess of the contract amount. These bonds are special obligations of
the TTFA payable from the payments made by New Jersey pursuant to the Con-
tract.
Economic Recovery Fund Bonds. Legislation enacted during 1992 by New Jer-
sey authorizes the EDA to issue bonds for various economic development
purposes. Pursuant to that legislation, EDA and the New Jersey Treasurer
have entered into an agreement (the "ERF Contract") through which EDA has
agreed to undertake the financing of certain projects and the New Jersey
Treasurer has agreed to credit to the Economic Recovery Fund from the Gen-
eral Fund amounts equivalent to payments due to New Jersey under an agree-
ment with the Port Authority of New York and New Jersey. The payment of
all amounts under the ERF Contract is subject to and dependent upon appro-
priations being made by the New Jersey Legislature.
SUMMARY OF OTHER NEW JERSEY RELATED OBLIGATIONS AS
OF JUNE 30, 1993
<TABLE>
<CAPTION>
TYPE OF ISSUE
OUTSTANDING
<S> <C> <C>
Lease Financing
$731,405,017.95
MCIA $94,750,000.00
EDA 140,390,202.20
NJBA 199,534,815.75
State COP 296,730,000.00
State-Supported School and
County College Bonds
102,701,186.00
Moral Obligation
722,896,150.78
New Jersey Commission on
Science and Technology
9,400,000.00
Sports Authority
626,620,000.00
TTFA
906,165,000.00
Economic Recovery Fund Bonds
235,232,868.90
TOTAL
$3,334,420,223.63
</TABLE>
[CAPTION]
SUBSEQUENT ISSUES SINCE JUNE 30, 1993 PAR AMOUNT DATE OF
ISSUE
HEAA $20,000,000.00
9/15/93
NJBA 314,970,112.80
1/01/94
TTFA 61,470,000.00
9/15/93
EDA<F1> 705,270,000.00
7/1/94
<F1> Legislation enacted in June 1994 authorizes the EDA to issue bonds to
pay the current and anticipated liabilities and expenses of the Mar-
ket Transition Facility, which issued private passenger automobile
insurance policies for drivers who could not be insured by private
insurance companies on a voluntary basis. The EDA and the New Jersey
Treasurer have entered into an agreement which provides for the pay-
ment to the EDA of amounts on deposit in the DMV Surcharge Fund to
pay debt service on the bonds. Such payments are subject to and de-
pendent upon appropriation by the New Jersey Legislature.
Municipal Finance. New Jersey's local finance system is regulated by var-
ious statutes designed to assure that all local governments and their is-
suing authorities remain on a sound financial basis. Regulatory and reme-
dial statutes are enforced by the Division of Local Government Services
(the "Division") in the New Jersey State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A. 40A:4-1 et
seq.) imposes specific budgetary procedures upon counties and municipali-
ties ("local units"). Every local unit must adopt an operating budget
which is balanced on a cash basis, and items of revenue and appropriation
must be examined by the Director of the Division of Local Government Ser-
vices in the Department of Community Affairs (the "Director"). The ac-
counts of each local unit must be independently audited by a registered
municipal accountant. New Jersey law provides that budgets must be submit-
ted in a form promulgated by the Division and further provides for limita-
tions on estimates of tax collection and for reserves in the event of any
shortfalls in collections by the local unit. The Division reviews all mu-
nicipal and county annual budgets prior to adoption for compliance with
the Local Budget Law. The Director is empowered to require changes for
compliance with law as a condition of approval; to disapprove budgets not
in accordance with law; and to prepare the budget of a local unit, within
the limits of the adopted budget of the previous year with suitable ad-
justments for legal compliance, if the local unit is unwilling to prepare
a budget in accordance with law. This process insures that every munici-
pality and county annually adopts a budget balanced on a cash basis,
within limitations on appropriations or tax levies, respectively, and mak-
ing adequate provision for principal of and interest on indebtedness fall-
ing due in the fiscal year, deferred charges and other statutory expendi-
ture requirements. The Director also oversees changes to local budgets
after adoption as permitted by law, and enforces regulations pertaining to
execution of adopted budgets and financial administration.
The Local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of
any municipality and the tax levy of any county to either 5% or an index
rate determined annually by the Director, whichever is less. However,
where the index percentage rate exceeds 5%, the Cap Law permits the gov-
erning body of any municipality or county to approve the use of a higher
percentage rate up to the index rate. Further, where the index percentage
rate is less than 5%, the Cap Law also permits the governing body of any
municipality or county to approve the use of a higher percentage rate up
to 5%. Regardless of the rate utilized, certain exceptions exist to the
Cap Law's limitation on increases in appropriations. The principal excep-
tions to these limitations are municipal and county appropriations to pay
debt service requirements; to comply with certain other New Jersey or Fed-
eral mandates; amounts approved by referendum; and, in the case of munici-
palities only, to fund the preceding year's cash deficit or to reserve for
shortfalls in tax collections.
New Jersey law also regulates the issuance of debt by local units. The
Local Bond Law limits the amount of tax anticipation notes that may be is-
sued by local units and requires the repayment of such notes within 120
days of the end of the fiscal year (six months in the case of the coun-
ties) in which issued. The Local Bond Law (N.J.S.A. 40A:2-1 et seq.) gov-
erns the issuance of bonds and notes by the local units. No local unit is
permitted to issue bonds for the payment of current expenses (other than
Fiscal Year Adjustment Bonds described more fully below). Local units may
not issue bonds to pay outstanding bonds, except for refunding purposes,
and then only with the approval of the Local Finance Board. Local units
may issue bond anticipation notes for temporary periods not exceeding in
the aggregate approximately ten years from the date of first issue. The
debt that any local unit may authorize is limited to a percentage of its
equalized valuation basis, which is the average of the equalized value of
all taxable real property and improvements within the geographic bound-
aries of the local unit, as annually determined by the Director of the Di-
vision of Taxation, for each of the three most recent years. In the calcu-
lation of debt capacity, the Local Bond Law and certain other statutes
permit the deduction of certain classes of debt ("statutory deductions")
from all authorized debt of the local unit ("gross capital debt") in com-
puting whether a local unit has exceeded its statutory debt limit. Statu-
tory deductions from gross capital debt consist of bonds or notes (a) au-
thorized for school purposes by a regional school district or by a munici-
pality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations
set forth in the School Bond Line (as hereinafter defined); (b) authorized
for purposes which are self-liquidating, but only to the extent permitted
by the Local Bond Law; (c) authorized by a public body other than a local
unit the principal of and interest on which is guaranteed by the local
unit, but only to the extent permitted by law; (d) that are bond anticipa-
tion notes; (e) for which provision for payment has been made or (f) au-
thorized for any other purpose for which a deduction is permitted by law.
Authorized net capital debt (gross capital debt minus statutory deduc-
tions) is limited to 3.5% of the equalized valuation basis in the case of
municipalities and 2% of the equalized valuation basis in the case of
counties. The debt limit of a county or municipality, with certain excep-
tions, may be exceeded only with the approval of the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991, signed into law on March 28,
1991, required certain municipalities and permits all other municipalities
to adopt the New Jersey fiscal year in place of existing calendar fiscal
year. Municipalities that change fiscal years must adopt a six month tran-
sition budget for January through June. Since expenditures would be ex-
pected to exceed revenues primarily because state aid for the calendar
year would not be received by the municipality until after the end of the
transition year budget, the act authorizes the issuance of Fiscal Year Ad-
justment Bonds to fund the one-time deficit for the six month transition
budget. The act provides that the deficit in the six month transition bud-
get may be funded initially with bond anticipation notes based on the es-
timated deficit in the six month transition budget. Notes issued in antic-
ipation of Fiscal Year Adjustment Bonds, including renewals, can only be
issued for up to one year unless the Local Finance Board permits the mu-
nicipality to renew them for a further period of time. While the act does
not authorize counties to change their fiscal years, it does provide that
counties with cash flow deficits may issue Fiscal Year Adjustment Bonds as
well.
There are 567 municipalities and 21 counties in New Jersey. During 1990,
1991 and 1992 no county exceeded its statutory debt limitations or in-
curred a cash deficit in excess of 4% of its tax levy. The number of mu-
nicipalities which have a cash deficit greater than 4% of their tax levies
was zero for 1992. The number of municipalities which exceed statutory
debt limits was five as of December 31, 1993. No New Jersey municipality
or county has defaulted on the payment of interest or principal on any
outstanding debt obligation since the 1930s.
School Districts. New Jersey's school districts operate under the same
comprehensive review and regulation as do its counties and municipalities.
Certain exceptions and differences are provided, but New Jersey supervi-
sion of School finance closely parallels that of local governments.
All New Jersey school districts are coterminous with the boundaries of one
or more municipalities. They are characterized by the manner in which the
board of education, the governing body of the school district, takes of-
fice. Type I school districts, most commonly found in cities, have a board
of education appointed by the mayor or the chief executive officer of the
municipality constituting the school district. In a Type II school dis-
trict, the board of education is elected by the voters of the district.
Nearly all regional and consolidated school districts are Type II school
districts.
The New Jersey Department of Education has been empowered with the neces-
sary and effective authority in extreme cases to take over the operation
of local school districts which cannot or will not correct severe and com-
plex educational deficiencies. Pursuant to a 1987 amendment to the Public
School Education Act of 1975 (N.J.S.A. 18A:7A-1 et seq.) (the "School
Act"), the New Jersey Board of Education may direct the removal of the
local district board of education and the creation of a New Jersey oper-
ated school district, which would be under the direction of a New Jersey
appointed superintendent. Pursuant to the authority granted under the
School Act, on October 4, 1989, the New Jersey Board of Education ordered
the creation of a New Jersey operated school district in the city of Jer-
sey City. Similarly, on August 7, 1991, the New Jersey Board of Education
ordered the creation of a New Jersey operated school district in the city
of Paterson.
School Budgets. In every school district having a board of school esti-
mate, the board of school estimate examines the budget request and fixes
the appropriate amounts of the next year's operating budget after a public
hearing at which the taxpayers and other interested persons shall have an
opportunity to raise objections and to be heard with respect to the bud-
get. This board certifies the budget to the municipal governing bodies and
to the local board of education. If either disagrees, they must appeal to
the New Jersey Commissioner of Education (the "Commissioner") to request
the changes.
In Type II school district without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously autho-
rized debt service is not subject to referendum in the annual budget pro-
cess. If approved, the budget goes into effect. If defeated, the governing
body of each municipality in the school district has approximately 20 days
to determine the amount necessary to be appropriated for each item appear-
ing in such budget. Should the governing body fail to certify any amount
determined by the board of education to be necessary for any item rejected
at the election, the board of education may appeal the action to the Com-
missioner.
The Quality Education Act of 1990 (N.J.S.A. 18A:7D-1 et seq.) limits the
annual increase of a school district's net current expense budget. The
Commissioner certifies the allowable amount of increase for each school
district but may grant a higher level of increase in certain limited in-
stances. A school district may also submit a proposal to the voters to
raise amounts above the allowable amount of increase. If defeated, such a
proposal is subject to further review or appeal only if the Commissioner
determines that additional funds are required to provide a thorough and
efficient education.
The Commissioner must also review every proposed local school district
budget for the next school year. The Commissioner examines every item of
appropriation for the current expenses and budgeted capital outlay to de-
termine their adequacy in relation to the identified needs and goals of
the school district. If, in his view they are insufficient, the Commis-
sioner must order remedial action. If necessary, the Commissioner is au-
thorized to order changes in the school district's budget.
In New Jersey operated school districts the New Jersey District Superin-
tendent has the responsibility for the development of the budget subject
to appeal by the governing body of the municipality to the Commissioner
and the Director of the Division of Local Government Services in the New
Jersey Department of Community Affairs. Based upon his review, the Direc-
tor is required to certify the amount of revenues which an be raised lo-
cally to support the budget of the New Jersey operated district. Any dif-
ference between the amount which the Director certifies and the total
amount of local revenues required by the budget approved by the Commis-
sioner is to be paid by New Jersey in the fiscal year in which the expen-
ditures are made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary notes are is-
sued in conformity with N.J.S.A. 18A:24-1 et seq. (the "School Bond Law"),
which closely parallels the Local Bond Law (for further information relat-
ing to the Local Bond Law, see "Municipal Finance -- Counties and Munici-
palities" herein). Although school districts are exempted from the 5 per-
cent down payment provision generally applied to bonds issued by munici-
palities and counties, they are subject to debt limits (which vary
depending on the type of school system provided) and to New Jersey regula-
tion of their borrowing. The debt limitation on school district bonds de-
pends upon the classification of the school district, but may be as high
as 4 percent of the average equalized valuation basis of the constituent
municipality. In certain cases involving school districts in cities with
populations exceeded 100,000, the debt limit is 8 percent of the average
equalized valuation basis of the constituent municipality, and in cities
with populations in excess of 80,000 the debt limit is 6 percent of the
aforesaid average equalized valuation.
School bonds are authorized by (a) an ordinance adopted by the governing
body of a municipality within a Type I school district; (b) adoption of a
proposal by resolution by the board of education of a Type II school dis-
trict having a board of school estimate, or (c) adoption of a proposal by
resolution by the board of education and approval of the proposal by the
legal voters of any other Type II school district. If school bonds will
exceed the school district borrowing capacity, a school district (other
than a regional school district) may use the balance of the municipal bor-
rowing capacity. If the total amount of debt exceeds the school district's
borrowing capacity and any available remaining municipal borrowing capac-
ity, the Commissioner and the Local Finance Board must approve the pro-
posed authorization before it is submitted to the voters. All authoriza-
tions of debt in a Type II school district without a board of school esti-
mate require an approving referendum, except where, after hearing, the
Commissioner and the New Jersey Board of Education determine that the is-
suance of such debt is necessary to meet the constitutional obligation to
provide a thorough and efficient system of public schools. When such obli-
gations are issued, they are issued by, and in the name of, the school
district.
In Type I and II school districts with a board of school estimate, that
board examines the capital proposal of the board of education and certi-
fies the amount of bonds to be authorized. When it is necessary to exceed
the borrowing capacity of the municipality, the approval of a majority of
the legally qualified voters of the municipality is required, together
with the approval of the Commissioner and the Local Finance Board. When
such bonds are issued for a Type I school district, they are issued by the
municipality and identified as school bonds. When bonds are issued by a
Type II school district having a board of school estimate, they are issued
by, and in the name of, the school district.
School District Lease Purchase Financings. In 1982, school districts were
given an alternative to the traditional method of bond financing capital
improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase
Law"). The Lease Purchase Law permits school districts to acquire a site
and school building through a lease purchase agreement with a private les-
sor corporation. For Type II school districts, the lease purchase agree-
ment does not require vote approval. The rent payments attributable to the
lease purchase agreement are subject to annual appropriation by the school
district and are required, pursuant to N.J.A.C. 6:22A-1.2(h), to be in-
cluded in the annual current expense budget of the school district. Fur-
thermore, the rent payments attributable to the lease purchase agreement
do not constitute debt of the school district and therefore do not impact
on the school district's debt limitation. Lease purchase agreements in ex-
cess of five years require the approval of the Commissioner and the Local
Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c.38 and
c.39) which provides for the issuance by municipalities and school dis-
tricts of "qualified bonds." Whenever a local board of education or the
,governing body of a municipality determines to issue bonds, it may file an
application with the Local Finance Board, and, in the case of a local
board of education, the Commissioner, to qualify bonds pursuant to P.L.
1976, c.38 or c.39. Upon approval of such an application and after receipt
of a certificate stating the name and address of the paying agent for such
bonds, the maturity schedule, interest rates and payment dates, the New
Jersey Treasurer shall, in the case of qualified bonds for school dis-
tricts, withhold from the school aid payable to such municipality or
school district and, in the case of qualified bonds for municipalities,
withhold from the amount of business personal property tax replacement
revenues, gross receipts tax revenues, municipal purposes tax assistance
fund distributions, New Jersey urban aid, New Jersey revenue sharing, and
any other funds appropriated as New Jersey aid and not otherwise dedicated
to specific municipal programs, payable to such municipalities, an amount
sufficient to cover debt service on such bonds. These "qualified bonds"
are not direct, guaranteed or moral obligations of New Jersey, and debt
service on such bonds will be provided by New Jersey only if the above-
mentioned appropriations are made by New Jersey. Total outstanding indebt-
edness for "qualified bonds" consisted of $239,235,650 by various school
districts as of June 30, 1994 and $861,123,338 by various municipalities
as of June 30, 1993.
New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve
Act (N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve within
the constitutionally dedicated Fund for the Support of Free Public
Schools. Under this law the reserve is maintained at an amount equal to
1.5% of the aggregate outstanding bonded indebtedness of counties, munici-
palities or school districts for school purposes (exclusive of bonds whose
debt service is provided by New Jersey appropriations), but not in excess
of monies available in such fund. If a municipality, county or school dis-
trict is unable to meet payment of the principal of or interest on any of
its school bonds, the trustee of the school bond reserve will purchase
such bonds at the face amount thereof or pay the holders thereof the in-
terest due or to become due. At June 30, 1993, the book value of the
Fund's assets aggregate $73,711,364 and the reserve, computed as of June
30, 1993, amounted to $27,361,913. There has never been an occasion to
call upon this fund.
Local Financing Authorities. The Local Authorities Fiscal Control Law
(N.J.S.A. 40A:5A-I et seq.) provides for state supervision of the fiscal
operations and debt issuance practices of independent local authorities
and special taxing districts by the New Jersey Department of Community Af-
fairs. The Local Authorities Fiscal Control Law applies to all autonomous
public bodies created by counties or municipalities, which are empowered
to issue bonds, to impose facility or service charges, or to levy taxes in
their districts. This encompasses most autonomous local authorities (sew-
erage, municipal utilities, parking, pollution control, improvement, etc.)
and special taxing districts (fire, water, etc.). Authorities which are
subject to differing New Jersey or federal financial restrictions are ex-
empted, but only to the extent of that difference.
The Local Finance Board reviews, conducts public hearings and issues find-
ings and recommendations on any proposed project financing of an authority
or district, and on any proposed financing agreement between a municipal-
ity or county and an authority or special district. The Director of the
Division of Local Government Services reviews and approves annual budgets
of authorities and special districts.
As of June 30, 1993, there were 200 locally created authorities with a
total outstanding capital debt of $6,963,564,405 (figures do not include
housing authorities and redevelopment agencies). This amount reflects out-
standing bonds, notes, loans and mortgages payable by the authorities as
of their respective fiscal years ended nearest to June 30, 1993.
Litigation. At any given time, there are various numbers of claims and
cases pending against New Jersey, New Jersey agencies and employees, seek-
ing recovery of monetary damages that are primarily paid out of the fund
created pursuant to the Tort Claims Act, N.J.S.A. 59:1-1 et seq. (the
"Tort Claims Act"). At any given time there are various contract and other
claims against New Jersey and New Jersey agencies, including environmental
claims arising from the alleged disposal of hazardous waste, seeking
recovery
of monetary damages or other relief which would require the expenditure of
funds. In addition, at any given time there are various number of claims
and
cases pending against the University of Medicine and Dentistry of New
Jersey
and its employees, seeking recovery of monetary damages that are primarily
paid out of the Self-Insurance Reserve Fund created pursuant to the Tort
Claims
Act, and various numbers of contract and other claims against the Univer-
sity of Medicine and Dentistry, seeking recovery of monetary damages or
other relief which would require the expenditure of funds. New Jersey is
unable to estimate its exposure for these claims.
As of August, 1994, the following cases are presently pending or threat-
ened in which New Jersey has the potential for either a significant loss
of revenue or significant unanticipated expenditures: Abbot v. Burke,
challenging the constitutionality of the Quality Education Act of 1990,
which was found to be unconstitutional by the Trial Court and was recently
affirmed by the New Jersey Supreme Court and requires that a funding for-
mula be adopted by September, 1996 which will achieve by the 1997-98
school year the mandated parity in spending and will address the special
educational needs of children in poor and urban school districts; County
of Essex v. Waldman, et al. and similar cases involving eleven other coun-
ties, challenging the methods by which the New Jersey Department of Human
Services shares with county governments and maintenance recoveries and
costs for residents in New Jersey psychiatric hospitals and residential
facilities for the developmentally disabled, all of which are on appeal in
the New Jersey courts; County of Essex v. Commissioner of Human Services,
et al. and similar cases involving ten other counties, in which the Appel-
late Division ruled that all counties were entitled to 100% of Social Se-
curity benefits and other maintenance recoveries received by New Jersey
and were entitled to credits for payments made to New Jersey for the main-
tenance of Medicare and Medicaid-eligible county residents of certain New
Jersey facilities, which is on petition for review by the New Jersey Su-
preme Court; New Jersey Association of Health Care Facilities, Inc., et
al. v. Gibbs, et al., a class action on behalf of all New Jersey long-term
care facilities providing services to Medicaid patients, seeking a decla-
ration that the New Jersey Department of Human Services has violated Fed-
eral law in the setting and paying of 1990 long-term care facility Medic-
aid payment rates, where the Third Circuit affirmed the District Court's
denial of plaintiff's motion for preliminary injunction, and the parties
are currently negotiating the form of an order to dismiss the action with
prejudice; Exxon v. Hunt and related cases, where taxpayers sought refund
of taxes paid to the Spill Compensation Fund and the New Jersey Supreme
Court, on remand from the U.S. Supreme Court, ruled that plaintiffs would
receive refunds only in the event the New Jersey Legislature refused to
reimburse the Spill Compensation Fund for expenditures for preempted pur-
poses and, after exhaustion of appeals and other legal avenues, a motion
by the State for dismissal of all such claims is pending before the Tax
Court; Fair Automobile Insurance Reform Act ("FAIR Act") litigation chal-
lenging various portions of FAIR Act, including surtax and assessment pro-
visions, is still pending; County of Passaic v. State of New Jersey alleg-
ing tort and contractual claims against New Jersey and the New Jersey De-
partment of Environmental Protection in connection with a resource
recovery facility plaintiffs had planned to build in Passaic County, seek-
ing approximately $30 million in damages; Pelletier, et al., v. Waldman,
et al., a challenge by State Medicaid-eligible children to the adequacy of
Medicaid reimbursement for services rendered by doctors and dentists, is
currently in mediation; Barnett Memorial Hospital v. Commission of Health,
an appeal by several hospitals of the Commissioner's calculation of the
hospital assessment required by the Health Care Cost Reduction Act of
1991, was decided against the Commission and successful claimants were re-
funded the amount of their overpayment in April, 1994, which amount to-
taled $4,636,576; New Jersey Hospital Association, et al. v. Leonard Fish-
man, seeking the same relief as in Barnett; Robert E. Brennan v. Richard
Barry, et al., a suit filed against two members of the New Jersey Bureau
of Securities alleging causes of action for defamation, injury to reputa-
tion, abuse of process and improper disclosure, based on the Bureau's in-
vestigation of certain publicly-traded securities to which the state has
filed a motion to dismiss and/or for summary judgment; Camden Co. v.
Waldman, et al., now consolidated with similar suits filed by Middlesex,
Monmouth and Atlantic Counties, seeking reimbursement of federal funds re-
ceived by New Jersey for disproportionate share hospital payments made to
county psychiatric facilities from July 1, 1998 through July 1, 1991 has
been transferred to the Appellate Division; Interfaith Community Organiza-
tion v. Fox, et al., a suit filed by a coalition of churches and church
leaders in Hudson County against the Governor, the Commissioners of the
Department of Environmental Protection and Energy and the Department of
Health, concerning chromium contamination in Liberty State Park in Jersey
City; American Trucking Associations, Inc. and Tri-State Motor Transit v.
State of New Jersey, challenging the constitutionality of annual hazardous
and solid waste licensure fees collected by the Department of Environmen-
tal Protection, seeking a permanent injunction enjoining future collection
of fees and refund of all renewal fees, fines and penalties collected; and
Waste Management of Pennsylvania, et al. v. Shinn, et al., an action filed
in federal district court seeking declaratory and injunctive relief and
compensatory damages from Department of Environmental Protection Commis-
sioner Shinn and Acting Commissioner Fox, alleging violations of the Com-
merce Clause and the Contracts Clause of the United States Constitution
based on emergency redirection orders and a draft permit.
In addition to litigation against New Jersey, at any given time there are
various numbers of claims and cases pending or threatened against the po-
litical subdivisions of New Jersey, including but not limited to New Jer-
sey authorities, counties, municipalities and school districts, which have
potential for either a significant loss of revenue or significant unantic-
ipated expenditures
Ratings. In July 1991, S&P downgraded its rating of New Jersey General
Obligation Bonds from AAA to AA+. Subsequently on June 4, 1992 S&P moved
New Jersey's General Obligation Bonds from Credit Watch and affirmed its
AA+ ratings of New Jersey's general obligation and various lease and ap-
propriation backed debt, but its ratings outlook was revised to negative
for the longer term horizon (beyond four months) for resolution of two
items cited in the Credit Watch listing: (a) the Federal Health Care Fa-
cilities Administration ruling concerning retroactive Medicaid hospital
reimbursements and (b) New Jersey's uncompensated health care funding sys-
tem, which is pending review by the United States Supreme Court. Citing a
developing pattern of reliance on non-recurring measures to achieve bud-
getary balance, four years of financial operations marked by revenue
shortfalls and operating deficits, and the likelihood that financial pres-
sures will persist, on August 24, 1992 Moody's lowered its rating of New
Jersey General Obligation Bonds from Aaa to Aa1. There is no assurance
that the ratings of New Jersey General Obligation Bonds will continue for
any given period of time or that they will not be revised downward or
withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of the New Jersey's general obligation
bonds.
The various political subdivisions of New Jersey are rated independently
from S&P and/or Moody's. These ratings are based upon information supplied
to the rating agency by the political subdivision. There is no assurance
that such ratings will continue for any given period of time or that they
will not be revised downward or withdrawn entirely. Any such downward re-
vision or withdrawal could have an adverse effect on the market prices of
bonds issued by the political subdivision.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges on Class A shares described in the Prospec-
tus applies to purchases made by any "purchaser," which is defined to in-
clude the following: (a) an individual; (b) an individual's spouse and his
or her children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and qualified employee benefit plans of
employers who are "affiliated persons" of each other within the meaning of
the 1940 Act; (e) tax-exempt organizations enumerated in Section 501(c)(3)
or (13) of the Code; and (f) 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
should contact a Smith Barney Financial Consultant .
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other funds of the
Smith Barney Mutual Funds that are offered with a sales charge, including
the purchase being made, of any purchaser is $25,000 or more. The reduced
sales charge is subject to confirmation of the shareholder's holdings
through a check of appropriate records. The Fund reserves the right to
terminate or amend the combined right of accumulation at any time after
written
notice to shareholders. For further information regarding the right of ac-
cumulation, shareholders should contact a Smith Barney Financial Consult-
ant.
DETERMINATION OF PUBLIC OFFERING PRICE
The Fund offers its shares to the public on a continuous basis. The public
offering price for a 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 for a Class B and Class C share
(and Class A
share purchases, including applicable right s of accumulation,
equaling or
exceeding $500,000), is equal to the net asset value per share at the time
of purchase and no sales charge is imposed at the time of purchase. A con-
tingent deferred sales charge ("CDSC"), however, is imposed on certain re-
demptions of Class B and Class C shares, and Class A shares when purchased
in amounts exceeding $500,000. The method of computation of the public of-
fering price is shown in the Fund's financial statements, incor-
porated by reference in their entirety into this Statement of
Additional
Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the New York Stock Exchange, Inc. ("NYSE")
is closed (other than for customary weekend and holiday closings), (b)
when trading in markets the Fund normally utilizes is restricted, or an
emergency exists, as determined by the SEC, so that disposal of the Fund's
investments or determination of net asset value is not reasonably practi-
cable or (c) for such other periods as the SEC by order may permit for
protection of the Fund's shareholders.
DISTRIBUTION IN KIND
If the Board of Directors of the Fund 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% of the Fund's net assets by a distribution in
kind of portfolio securities in lieu of cash. S ecurities 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 $100 may be made under the Withdrawal Plan by redeeming as many
shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. Any applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences. (With respect to With-
drawal Plans in effect prior to November 7, 1994, any applicable CDSC will
be waived on amounts withdrawn that do not exceed 2.00% per month of the
value of a shareholder's shares at the time the Withdrawal Plan com-
mences.) To the extent withdrawals exceed dividends, distributions and ap-
preciation of a shareholder's investment in the Fund, there will be a re-
duction in the value of the shareholder's investment, and continued with-
drawal payments will reduce the shareholder's investment and may
ultimately exhaust it. Withdrawal payments should not be considered as in-
come 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 shareholders 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 TSSG as agent for Withdrawal Plan members. All dividends and distri-
butions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund. Effective November 7,
1994, Withdrawal Plans should be set up with a Smith Barney
Financial
Consultant. A shareholder who purchases shares directly through TSSG may
continue to do so and applications for participation in the Withdrawal
Plan must be received by TSSG no later than the eighth day of the month to
be eligible for participation beginning with that month's withdrawal. For
additional information, shareholders should contact a Smith Barney Finan-
cial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis pur-
suant to a written agreement dated July 30, 1993 (the "Distribution Agree-
ment") which was most recently approved by the Fund's Board of Directors
on July 20, 1994. For the fiscal years ended March 31, 1992, 1993 and
1994, Shearson Lehman Brothers, the Fund's distributor prior to Smith Bar-
ney and/or Smith Barney received $1,086,608, $749,550 and $586,302, re-
spectively, in sales charges from the sale of the Fund's Class A shares,
and did not reallow any portion thereof to dealers. For the period from
November 6, 1993 through March 31, 1994, Shearson Lehman Brothers and its
successor Smith Barney, received $49,338, representing CDSC on redemptions
of the Fund's Class B shares.
When payment is made by the investor before settlement date, unless other-
wise noted by the investor, the funds will be held as a free credit bal-
ance in the investor's brokerage account and Smith Barney may benefit from
the temporary use of the funds. The investor may designate another use for
the funds prior to settlement date, such as an investment in a money mar-
ket fund (other than Smith Barney Exchange Reserve Fund) of the Smith Bar-
ney Mutual Funds. If the investor instructs Smith Barney to invest the
funds in a Smith Barney money market fund , the amount of the
in-
vestment will be included as part of the average daily net assets of both
the Fund and the money market fund, and affiliates of Smith Barney
that
serve the funds in an investment advisory or administrative capacity will
benefit from the fact that by receiving fees from both such
investment
companies for managing these assets , computed on the basis of their
average
daily net assets. The
Fund's Board of Directors has been advised of the benefits to Smith Barney
resulting from these settlement procedures and will take such benefits
into consideration when reviewing the Advisory, Administration and Distri-
bution Agreements for continuance.
For the fiscal year ended March 31, 1994 Smith Barney incurred
distribution expenses totaling approximately $98,300, consisting of
approximately $3,000 for advertising, $3,000 for printing and mailing of
Prospectuses, $255,000, for support services, $691,000 to Smith Barney
Financial Consultants, and $31,000,respectively in accruals for interest
on the excess of Smith Barney
expenses incurred in distributing the Fund's shares over the sum of the
distribution fees and CDSC received by Smith Barney from the Fund.
No comparable information is available for 1992 the
year that the variable pricing system was implemented.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the ex-
pense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of .15% of
the value of the Fund's average daily net assets attributable to the Class
A, Class B and Class C shares. In addition, the Fund pays Smith Barney
a distribution fee primarily intended to compensate Smith Barney
for its
initial expense of paying Financial Consultants a commission upon sales of
those shares. The Class B distribution fee is calculated at the
annual rate of .50% of the value of the Fund's average net assets attrib-
utable to the shares of the Class. The Class C distribution fee is calcu-
lated at the annual rate of .55% of the value of the Fund's average net
assets attributable to the shares of the Class.
For the period from Novem-
ber 6, 1992 through March 31, 1993. The Fund's Class A and Class B shares
paid $65,689, $14,830, respectively, in service fees. For the same period
the Fund's Class B shares paid $16,100 in distribution fees. For the fis-
cal year ended March 31, 1994, the Fund's Class A and Class B shares paid
$186,615 and $53,031, respectively in service fees. For the same period
the Fund's Class B shares paid $176,771 in distribution fees.
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Fund's Board of Directors,
including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the op-
eration of the Plan or in the Distribution Agreement (the "Independent Di-
rectors"). The Plan may not be amended to increase the amount of the ser-
vice and distribution fees without shareholder approval, and all material
amendments of the Plan also must be approved by the Directors and the In-
dependent Directors in the manner described above. The Plan may be termi-
nated with respect to a Class at any time , without penalty,
by vote of a
majority of the Independent Directors 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, Smith Barney will provide the Board of Directors
with periodic reports of amounts expended under the Plan and the purpose
for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's 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 de-
scription of the procedures used by the Fund in valuing its assets.
The valuation of the Fund's assets is made by Boston Advisors after con-
sultation with an independent pricing service (the "Service") approved by
the Board of Directors. When, in the judgment of the 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 judgment of
the Service, there is no readily obtainable market quotation (which may
constitute a majority of the portfolio securities) are carried at fair
value as determined by the Service. For the most part, such investments
are liquid and may be readily sold. The Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. The
procedures of the Service are reviewed periodically by the officers of the
Fund under the general supervision and responsibility of the Board of Di-
rectors, which may replace any such Service at any time if it determines
it to be in the best interests of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund in the Smith Barney Group
of Funds may exchange all or part of their shares for shares of the same
Class of other funds in the Smith Barney Group of Funds, to the extent
such shares are offered for sale in the shareholder's state of residence,
as listed in the Prospectus, on the basis of relative net asset value per
share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may be ex-
changed for Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied. Class A shares of any fund may be
exchanged without a sales charge for shares of the funds that are offered
without a sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales charge, and the
appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of any
of the other funds, and the sales charge differential, if any, will be ap-
plied.
C. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates and conversion periods, will be deemed
to have been held since the date the shares being exchanged were deemed to
be purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
Shearson High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the
fund shares being acquired may legally be sold. This privilege is
available
to shareholders residing a any state in which the fund shares being
acquired
may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of
each fund into which an exchange is being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and subject to any applicable CDSC, the proceeds are immedi-
ately invested, at a price as described above, in shares of the fund being
acquired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of a Class in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week,
CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune, Insti-
tutional Investor, Investors Daily, Money Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the extent
any advertisement or sales literature of the Fund describes the expenses
or performance of any Class, it will also disclose such information for
the other Classes.
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-bcd+1)6--1]
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 pe-
riod 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 com-
puted 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 fac-
tors, 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 recog-
nize 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 pro-
ducing lower yields than the balance of the Fund's portfolio, thereby re-
ducing 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 and Class B shares for the 30-day period
ended March 31, 1994 (reflecting the partial waiver of the investment ad-
visory and administration fees) was 4.93% and 4.58%, respectively. Had
fees not been partially waived the Fund's yield for Class A and Class B
shares for the same period would have been 4.88% and 4.55%, respectively.
The equivalent taxable yield for Class A and Class B shares for that same
period, such yields (reflecting the partial waiver of the investment advi-
sory and administration fees) was 7.89% and 7.33%, respectively, assuming
the payment of Federal income taxes at a rate of 31% and New Jersey taxes
at a rate of 6.50%. Had these fees not been partially waived the Fund's
equivalent taxable yield for Class A and Class B shares for the same pe-
riod would have been 7.81% and 7.28%, respectively.
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures described below are computed accord-
ing 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 the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and distri-
butions.
The av-
erage annual total return for Class A shares was as follows for the period
indicated:
(7.68) % for the one-year period beginning October 1, 1993
through September 30, 1994.
7.11 % per annum during the five-year period beginning on
October 1, 1989
through September 30, 1994.
7.97 % per annum during the period from the Fund's commencement
of opera-
tions on April 22, 1988 through September 30, 1994 .
These total return figures assume that the maximum 4.00% sales charge as-
sessed by the Fund has been deducted from the investment at the time of
purchase. Had the investment advisory, sub-investment advisory and/or ad-
ministration fees not been partially waived (and assuming that the maximum
4.50% sales charge had not been deducted), the Class A's average
annual
total
return would have been (3.89)%, 7.78% and 8.34 %, respectively,
for those
same pe-
riods.
The average annual total return for Class B shares was as follows for the
periods indicated:
(8.41) % for the one-year period from October 31, 1993 through
September 30, 1994.
2.70% per annum during the period from the Fund's commencement of
operations on November 6, 1992 through September 30, 1994.
These average annual total return figures assume that the applicable maxi-
mum CDSC has been deducted from the investment. Had the investment advi-
sory and sub-investment advisory and/or administration fees not been par-
tially waived and the CDSC had not been deducted, the average annual total
return on the Fund's Class B shares would have been (4.40)% and
4.59 %, re-
spectively, for those same periods.
AGGREGATE TOTAL RETURN
Aggregate total return figures described below represent the cumulative
change in the value of an investment in the Class for the specified period
and are computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of the 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and distri-
butions.
The aggregate total return for Class A shares was as follows for the peri-
ods indicated (reflecting the partial waiver of the investment advisory
and sub-investment advisory and/or administration fees):
(7.68) % for the one-year period beginning October 31, 1993
through September 30, 1994.
40.96% for the five-year period beginning October 1, 1989 through
September 30, 1994.
63.84 % for the period from the Fund's commencement of operations
on April
22, 1988 through September 30, 1994 .
These aggregate total return figures assume that the maximum 4.00% sales
charge assessed by the Fund has been deducted from the investment at the
time of purchase. If the maximum sales charge had not been deducted at the
time of purchase, the Fund's aggregate total return reflecting the partial
waiver of the investment advisory and sub-investment advisory and adminis-
tration fees for those same periods would have been (3.84)%, 46.83% and
70.67 %, respectively.
The Fund's aggregate total return for Class B shares was as follows for
the periods indicated:
(4.35) % for the one-year period from October 1, 1993 through
September 30, 1994.
9.07 % for the period beginning on November 6, 1992 through
September 30, 1994.
These figures do not assume that the maximum 4.50% sales charge has been
deducted from the investment at the time of purchase. If the investment
advisory and administration fees had not been partially waived and the
maximum CDSC had been deducted at the time of purchase the Fund's aggre-
gate total returns for the same period would have been (8.41)% and 5.19%
.
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 per-
formance. Each Class' net investment income changes in response to fluctu-
ation in interest rates and the expenses of the Fund. Performance will
vary from time to time depending upon market conditions, the composition
of the Fund's portfolio and its operating expenses and the expenses exclu-
sively attributable to the Class. Consequently, any given performance quo-
tation should not be considered representative of the Class' performance
for any specified period in the future. In addition, because the perfor-
mance 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' perfor-
mance with that of other mutual funds should give consideration to the
quality and maturity of the respective investment companies' portfolio se-
curities.
TAXES
The following is a summary of selected Federal income tax
considerations
that may affect the Fund and its shareholders. The summary is not intended
as a substitute for individual tax advice and investors are urged to con-
sult their own tax advisors as to the tax consequences of an investment in
the Fund.
As described above and in the Prospectus, the Fund is designed to provide
investors with current income which is excluded from gross income for Fed-
eral income tax purposes and exempt from New Jersey 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 since such inves-
tors would not gain any additional tax benefit from the receipt of tax-
exempt income.
The Fund has qualified and intends to continue to qualify each
succeeding
year as a "regulated investment company" under the Code. Provided the Fund
(a) qualifies as a regulated investment company and (b) distributes at
least 90% of the sum of its taxable net investment income and net realized
short-term capital gains, and 90% of its tax-exempt interest income (re-
duced by certain expenses), the Fund will not be liable for Federal income
taxes to the extent its taxable net investment income and net realized
long-term and short-term capital gains, if any, are distributed to its
shareholders. Although the Fund expects to be relieved of substantially
all Federal and state income or franchise taxes, depending upon the extent
of its activities in states and localities in which its offices are main-
tained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, that portion of
the Fund's income which is treated as earned in any such state or locality
could be subject to state and local tax. Any such taxes paid by the Fund
would reduce the amount of income and gains available for distribution to
shareholders. All net investment income and net capital gains earned by
the Fund will be reinvested automatically in additional shares of the same
Class of the Fund at net asset value, unless the shareholder elects to re-
ceive dividends and distributions in cash.
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 and New Jersey personal income tax pur-
poses. If a shareholder receives an exempt-interest dividend with respect
to any share and if the share is held by the shareholder for six months or
less, then, for Federal income tax purposes, any loss on the sale or ex-
change of such share may, to the extent of the exempt-interest dividend,
be disallowed. In addition, the Code may require a shareholder, if he or
she receives exempt-interest dividends, to treat as Federal taxable in-
come, a portion of certain otherwise non-taxable social security and rail-
road retirement benefit payments. Furthermore, that portion of any divi-
dend paid by the Fund which represents income derived from private activ-
ity 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 fi-
nanced by such bonds, or a "related person" thereof. Moreover, as noted in
the Fund's Prospectus, (a) some or all of the Fund's dividends and distri-
butions may be a specific tax preference item, or a component of an ad-
justment item, for purposes of the Federal individual and corporate alter-
native minimum taxes, and (b) the receipt of Fund dividends and distribu-
tions may affect a corporate shareholder's Federal "environmental" tax
liability. In addition, the receipt of Fund dividends and distributions
may affect a foreign corporate shareholder's Federal "branch profits" tax
liability and a Subchapter S corporation shareholder's Federal "excess net
passive income" tax liability. Shareholders should consult their own tax
advisors to determine whether they are (a) "substantial users" with re-
spect to a facility or related to such users within the meaning of the
Code and (b) subject to a Federal alternative minimum tax, the Federal en-
vironmental tax, the Federal "branch profits" tax and the Federal "excess
net passive income" tax.
As described above and in the Prospectus, the Fund may invest in municipal
bond index and interest rate futures contracts and options on these fu-
tures contracts. The Fund anticipates that these investment activities
would not prevent the Fund from qualifying as a regulated investment com-
pany. As a general rule, these investment activities would increase or de-
crease the amount of long-term and short-term capital gains or losses re-
alized by the Fund and, accordingly, would affect the amount of capital
gains distributed to the Fund's shareholders.
For Federal income tax purposes, gain or loss on municipal bond index and
interest rate futures contracts and options on these futures contracts
(collectively referred to as "section 1256 contracts") is taxed pursuant
to a special "mark-to-market" system, these instruments are treated as if
sold at the Fund's fiscal year end for their fair market value. As a re-
sult, the Fund will be recognizing gains or losses before they are actu-
ally realized. Gain or loss on section 1256 contracts generally is treated
as 60% long-term capital gain or loss and 40% short-term capital gain or
loss, and, accordingly, the mark-to-market system will generally affect
the amount of capital gains or losses taxable to the Fund and the amount
of distributions to a shareholder. Moreover, if the Fund invests in both
section 1256 contracts and offsetting positions in those contracts, which
together constitute a straddle, then the Fund may be required to defer re-
ceiving the benefit of certain recognized losses. The Fund expects that
its activities with respect to section 1256 contracts and offsetting posi-
tions in those contracts will not cause it to be treated as recognizing a
materially greater amount of capital gains than actually realized and will
permit it to use substantially all of the losses of the Fund for the fis-
cal years in which the losses actually occur.
While the Fund does not expect to realize a significant amount of net
long-term capital gains, any such gains will be distributed annually as
described in the Prospectus. Such distributions ("capital gain divi-
dends"), if any, may be taxable to shareholders as long-term capital
gains, regardless of how long they have held Fund shares, and will be des-
ignated as capital gain dividends in a written notice mailed by the Fund
to shareholders after the close of the Fund's prior taxable year. If a
shareholder receives a capital gain dividend with respect to any share and
if such share has been held by the shareholder for six months or less,
then any loss (to the extent not disallowed pursuant to the other six
month rule described above) on the sale or exchange of such share will be
treated as a long-term capital loss to the extent of the capital gain div-
idend.
When a shareholder incurs a sales charge when acquiring shares of the
Fund, disposes of those shares within 90 days and acquires shares in a mu-
tual fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (that is, exchange privilege), the original
sales charge increases the shareholder's tax basis in the original shares
only to the extent the otherwise applicable sales charge for the second
acquisition is not reduced. The portion of the original sales charge that
does not increase the shareholder's tax basis in the original shares would
be treated as incurred with respect to the second acquisition and, as a
general rule, would increase the shareholder's tax basis in the newly ac-
quired shares. Furthermore, the same rule also applies to a disposition of
the newly acquired or redeemed shares made within 90 days of the second
acquisition. This provision prevents a shareholder from immediately de-
ducting the sales charge or CDSC by shifting his or her investment in a
family of mutual funds.
Each shareholder will receive after the close of the calendar year an an-
nual statement as to the Federal income tax and New Jersey personal income
tax status of his or her dividends and distributions from the Fund for the
prior calendar year. These statements also will designate the amount of
exempt-interest dividends that is a preference item for purposes of the
Federal individual and corporate alternative minimum taxes. Each share-
holder also will receive, if appropriate, various written notices after
the close of the Fund's prior taxable year as to the Federal income tax
status of his or her dividends and distributions which were received from
the Fund during the Fund's prior taxable year. Shareholders should consult
their tax advisors as to any other state and local taxes that may apply to
these dividends and distributions. The dollar amounts of dividends ex-
cluded or exempt from Federal income taxation or New Jersey personal in-
come taxation and the dollar amount of dividends subject to Federal income
taxation or New Jersey personal income taxation, if any, will vary for
each shareholder depending upon the size and duration of each sharehold-
er's investment in the Fund. To the extent that the Fund earns taxable net
investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend as its actual taxable net investment in-
come bears to its total net investment income earned on that day. There-
fore, the percentage of each day's dividend designated as taxable, if any,
may vary from day-to-day.
Investors considering buying shares of the Fund just prior to a record
date for a capital gain distribution should be aware that, regardless of
whether the price of the Fund shares to be purchased reflects the amount
of the forthcoming distribution payment, any such payment will be a tax-
able distribution payment.
If a shareholder fails to furnish the Fund with a correct taxpayer identi-
fication number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identifi-
cation number and that he or she is not subject to "backup withholding,"
then the shareholder may be subject to a 31% "backup withholding" tax with
respect to (a) taxable dividends and distributions, if any, and (b) pro-
ceeds of any redemption of Fund shares. An individual's taxpayer identifi-
cation number is his or her social security number. The "backup withhold-
ing" tax is not an additional tax and may be credited against a sharehold-
er's Federal income tax liability.
In the opinion of the Fund's New Jersey counsel, income distributions, in-
cluding interest income and gains realized by the Fund upon disposition of
investments paid from a "qualified investment fund" are exempt from the
New Jersey personal income tax to the extent attributable to New Jersey
Municipal Securities or to obligations that are free from state or local
taxation under New Jersey or Federal laws ("Tax-Exempt Obligations"). A
"qualified investment fund" is any investment or trust company, or series
of such investment company or trust registered with the SEC, which for the
calendar year in which a distribution is paid, has no investments other
than interest-bearing obligations, obligations issued at a discount, fi-
nancial options, futures, forward contracts or other similar financial in-
struments related to interest-bearing obligations, obligations issued at a
discount or related bond indexes and cash and cash items, including re-
ceivables, and which has, at the close of each quarter of the taxable
year, at least 80% of the aggregate principal amount of all of its invest-
ments, excluding financial options, futures, forward contracts, or other
similar financial instruments related to interest-bearing obligations, ob-
ligations issued at a discount or bond indexes related there to as autho-
rized under the Code, cash and cash items, such as receivables, invested
in New Jersey Municipal Securities or in Tax-Exempt Obligations. Further-
more, gains resulting from the redemption or sale of shares of the Fund to
the extent attributable to interest or gain from obligations issued by New
Jersey or its local government entities or obligations which are free from
state or local taxes under New Jersey or Federal law, are exempt from the
New Jersey personal income tax.
The New Jersey personal income tax is not applicable to corporations. For
all corporations subject to the New Jersey Corporation Business Tax, divi-
dends and distributions from a "qualified investment fund" are included in
the net income tax base for purposes of computing the Corporation Business
Tax. Furthermore, any gain upon the redemption or sale of Fund shares by a
corporate shareholder is also included in the net income tax base for pur-
poses of computing the Corporation Business Tax.
The foregoing is only a summary of certain Federal and New Jersey tax con-
siderations generally affecting the Fund and its shareholders, and is not
intended as a substitute for careful tax planning. Shareholders are urged
to consult their tax advisors with specific reference to their own tax
situations.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on No-
vember 12, 1987. The Fund commenced operations on April 22, 1988 under the
name Shearson Lehman New Jersey Municipals Inc. On December 15, 1988,
March 31, 1992, July 30, 1993 and October 14, 1994, the Fund changed its
name to SLH New Jersey Municipals Fund Inc., Shearson Lehman Brothers New
Jersey Municipals Fund Inc., Smith Barney Shearson New Jersey Municipals
Fund Inc. and Smith Barney New Jersey Municipals Fund Inc., respectively.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place, Boston, Massachusetts 02108, and serves as the Fund's custodian
pursuant to a custody agreement. Under the custody agreement, Boston Safe
holds the Fund's portfolio securities and keeps all necessary accounts and
records. For its services, Boston Safe 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.
TSSG is located at Exchange Place, Boston, Massachusetts 02109 and serves
as the Fund's transfer agent. Under the transfer agency agreement, TSSG
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, TSSG 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.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended March 31, 1994, accom-
panies this Statement of Additional Information and is incorporated herein
by reference in its entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P RATINGS FOR MUNICIPAL BONDS
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue
bonds. General obligation bonds are usually secured by all resources
available to the municipality and the factors outlined in the rating defi-
nitions 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 partic-
ularly the competitive position of the municipal enterprise under review
and the basic security covenants. Although a rating reflects S&P's judg-
ment 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. Qual-
ity of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to re-
main, 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 cov-
enant, earnings test for issuance of additional bonds, and debt service
reserve requirements) are rigorous. There is evidence of superior manage-
ment.
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 ca-
pacity 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 be-
cause:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expen-
ditures, 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. Sta-
bility of the pledged revenues could show some variations because of in-
creased 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 rev-
enues 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 cat-
egories, 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 ele-
ments are likely to change, such changes as can be visualized are most un-
likely 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 ele-
ments 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 se-
curity 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 protec-
tive elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment charac-
teristics and in fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their fu-
ture cannot be considered as well assured. Often the protection of inter-
est and principal payments may be very moderate and thereby not well safe-
guarded during both good and bad times over the future. Uncertainty of po-
sition characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable in-
vestment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in de-
fault 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 de-
mand obligations are designated Variable Moody's Investment Grade
("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term credit risk. Loans bearing the desig-
nation MIG 1 or VMIG 1 are of the best quality, enjoying strong protection
by established cash flows of funds for their servicing or from established
and broad-based access to the market for refinancing, or both. Loans bear-
ing the designation MIG 2 or VMIG 2 are of high quality, with ample mar-
gins of protection 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 tight and market ac-
cess for refinancing, in particular, is likely to be less well estab-
lished.
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 allow-
ance 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: (a) evaluation of the management of the issuer; (b) eco-
nomic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and cus-
tomer acceptance; (d) liquidity; (e) amount and quality of long-term debt;
(f) trend of earnings over a period of ten years; (g) financial strength
of a parent company and the relationships which exist with the issuer; and
(h) 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
NEW JERSEY MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
Fund 66, 206
Smith Barney
NEW JERSEY
MUNICIPALS FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
