July 28, 2000
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY NEW JERSEY MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is not a prospectus
and is meant to be read in conjunction with the prospectus of the
Smith Barney New Jersey Municipals Fund Inc. (the "fund") dated July
28, 2000, as amended or supplemented from time to time (the
prospectus), and is incorporated by reference in its entirety into
the prospectus. Additional information about the fund's investments
is available in the fund's annual and semi-annual reports to
shareholders that are incorporated herein by reference. The
prospectus and copies of the reports may be obtained free of charge
by contacting a Salomon Smith Barney Financial Consultant, or by
writing or calling Salomon Smith Barney at the address or telephone
number above.
TABLE OF CONTENTS
Directors and Executive Officers of the Fund 2
Investment Objective and Management Policies 5
Investment Restrictions 15
Risk Factors 17
Special Considerations Relating to New Jersey Municipal Securities 20
Special Considerations Regarding Puerto Rico,
the U.S. Virgin Islands and Guam 24
Portfolio Transactions 26
Portfolio Turnover 27
Purchase of Shares 27
Determination of Net Asset Value 33
Redemption of Shares 34
Investment Management and Other Services 37
Valuation of Shares 41
Exchange Privilege 42
Performance Data 43
Dividends, Distributions and Taxes 47
Additional Information 51
Financial Statements 52
Other Information 52
Appendix A 54
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The names of the Directors of the fund and executive officers of the
fund, together with information as to their principal business
occupations, are set forth below. The executive officers of the
fund are employees of organizations that provide services to the
fund. Each 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 (Age 77). Director
Private Investor. Director or trustee of 16 investment companies
associated with Citigroup Inc. (Citigroup) His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti (Age 77). Director
Retired; formerly Senior Consultant to Dean Witter Reynolds Inc.
Director or trustee of 11 investment companies associated with
Citigroup. His address is 19 Circle End Drive, Ramsey, New Jersey
07466.
Martin Brody (Age 78). Director
Consultant, HMK Associates; Retired Vice Chairman of the Board of
Restaurant Associates Corp. Director or trustee of 20 investment
companies associated with Citigroup. His address is c/o HMK
Associates, 30 Columbia Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane (Age 62). Director
Professor, Harvard Business School. Director or trustee of 23
investment companies associated with Citigroup. His address is c/o
Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02163.
Burt N. Dorsett (Age 69). Director
Managing Partner of Dorsett McCabe Management Inc., an investment
counseling firm; Director of Research Corporation Technologies,
Inc., a nonprofit patent clearing and licensing firm. Director or
trustee of 11 investment companies associated with Citigroup. His
address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe (Age 74). Director
Chairman of the Board and President of The Dress Barn, Inc. Director
or trustee of 11 investment companies associated with Citigroup. His
address is 30 Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 68). Director
Attorney. Director or trustee of 13 investment companies associated
with Citigroup. His address is 277 Park Avenue, New York, New York
10172.
Joseph J. McCann (Age 69). Director
Financial Consultant; Retired Financial Executive, Ryan Homes, Inc.
Director or trustee of 11 investment companies associated with
Citigroup. His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania 15243.
*Heath B. McLendon (Age 67). Chairman of the Board and Investment
Officer
Managing Director of Salomon Smith Barney Inc. (Salomon Smith
Barney); President of SSB Citi Fund Management LLC (SSB Citi or
the manager), successor to SSBC Fund Management Inc., and
Travelers Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman
of the Board and Director or trustee of 78 investment companies
associated with Citigroup. His address is 7 World Trade Center, New
York, New York 10048.
Cornelius C. Rose, Jr. (Age 67). Director
President, Cornelius C. Rose Associates, Inc., financial
consultants, and Chairman and Director of Performance Learning
Systems, an educational consultant. Director or trustee of 11
investment companies associated with Citigroup. His address is
Meadowbrook Village, Building 4, Apt 6, West Lebanon, New Hampshire
03784.
Lewis E. Daidone (Age 42). Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney; Chief Financial Officer
of the Smith Barney Mutual funds; Director and Senior Vice President
of SSB Citi and TIA. Senior Vice President or Executive Vice
President and Treasurer of 61 investment companies associated with
Citigroup. His address is 125 Broad Street, New York, New York
10004.
Joseph P. Deane (Age 52). Vice President and Investment Officer
Investment Officer of SSB Citi; Managing Director of Salomon Smith
Barney. Investment officer of 9 Smith Barney Mutual Funds. His
address is 7 World Trade Center, New York, New York 10048.
Paul Brook (Age 46). Controller
Director of Salomon Smith Barney; from 1997-1998 Managing Director
of AMT Capital Services Inc.; prior to 1997 Partner with Ernst &
Young LLP. Controller or Assistant Treasurer of 43 investment
companies associated with Citigroup. His address is 125 Broad
Street, New York, New York 10004.
Christina T. Sydor (Age 49). Secretary
Managing Director of Salomon Smith Barney; General Counsel and
Secretary of SSB Citi and TIA. Secretary of 61 investment companies
associated with Citigroup. Her address is 388 Greenwich Street, New
York, New York 10013.
As of July 7, 2000, the Directors and officers of the funds, as a
group, owned less than 1% of the outstanding shares of beneficial
interest of the fund.
To the best knowledge of the Directors, as of July 7, 2000, no
single shareholder or "group" (as such term is defined in Section
13(d) of the Securities Exchange Act of 1934, as amended)
beneficially owned more than 5% of the outstanding shares of the
fund.
No officer, Director or employee of Salomon Smith Barney or any of
its affiliates receives any compensation from the fund for serving
as an officer of the fund or Director of the fund. The fund pays
each Director who is not an officer, Director or employee of Salomon
Smith Barney or any of its affiliates a fee of $1,000 per annum plus
$100 per in-person meeting and $100 per telephonic meeting. Each
Director emeritus who is not an officer, Director or employee of
Salomon Smith Barney or its affiliates receives a fee of $500 per
annum plus $50 per in-person meeting and $50 per telephonic meeting.
All Directors are reimbursed for travel and out-of-pocket expenses
incurred to attend such meetings. For the fiscal year ended March
31, 2000, such expenses totaled $14,437.83.
For the fiscal year ended March 31, 2000, the Directors of the fund
were paid the following compensation:
Name of Person
Aggregate
Compensati
on
from Fund
Total
Pension or
Retirement
Benefits
Accrued
as part of
Fund
Expenses
Compensati
on
From Fund
And Fund
Complex
Paid to
Directors
Number of
Funds for
Which
Directors
Serves
Within
Fund Complex
Herbert Barg **
$1,500
$0
$114,288
16
Alfred
Bianchetti *
1,400
0
53,900
11
Martin Brody **
1,300
0
138,600
20
Dwight B. Crane
**
1,400
0
155,363
23
Burt N. Dorsett
**
1,500
0
57,950
11
Elliot S. Jaffe
**
1,400
0
45,100
11
Stephen E.
Kaufman **
1,500
0
110,650
13
Joseph J. McCann
**
1,500
0
58,050
11
Heath B.
McLendon *
0
-
0
78
Cornelius C.
Rose, Jr. **
1,500
0
53,500
11
* Designates an "interested" Director.
** Designates member of Audit Committee.
Upon attainment of age 80, fund Directors are required to
change to emeritus status. Directors emeritus are entitled to
serve in emeritus status for a maximum of 10 years. A
Director emeritus may attend meetings but has no voting
rights. During the fund s last fiscal year, aggregate
compensation paid by the fund to Directors achieving emeritus
status totaled $700.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the fund's investment objective and
policies. The following discussion supplements the description of
the fund's investment policies in the prospectus. For purposes of
this SAI, obligations of non-New Jersey municipal issuers, the
interest on which is at least exempt from federal income taxation
("Other Municipal Securities"), and obligations 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
interest 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." SSB Citi serves as investment manager and
administrator to the fund.
The fund operates subject to an investment policy providing that,
under normal market conditions, the fund will invest at least 80% of
its net assets in Municipal Securities and at least 65% of the
aggregate principal amount of its investments in New Jersey
Municipal Securities. Whenever less than 80% of the fund's assets
are invested in New Jersey Municipal Securities, the fund, in order
to maintain its status as a "qualified investment fund" under New
Jersey law, will seek to invest in debt obligations which, in the
opinion of counsel to the issuers, are free from state or local
taxation under New Jersey or federal laws ("Tax-Exempt
Obligations"). The fund's investments in New Jersey Municipal
Securities and Tax-Exempt Obligations will represent at least 80% of
the aggregate principal amount of all of its investments, excluding
cash and cash items (including receivables). Subject to these
minimum investment requirements, the fund also may acquire
intermediate- and long-term debt obligations consisting of Other
Municipal Securities, the interest on which is at least exempt from
federal income taxation (not including the possible applicability of
the alternative minimum tax). When the manager believes that
market conditions warrant adoption of a temporary defensive
investment posture, the fund may invest without limit in Other
Municipal Securities and in "Temporary Investments" as described
below.
Non-Diversified Classification
The fund is classified as a non-diversified fund under the 1940 Act,
which means the fund is not limited by the Act in the proportion of
its assets it may invest in the obligations of a single issuer. The
fund intends to conduct its operations, however, so as to qualify as
a regulated investment company for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"), which will relieve
the fund of any liability for federal income tax and Oregon
franchise tax, as applicable, to the extent its earnings are
distributed to shareholders. To qualify as a regulated investment
company, the fund will, among other things, limit its investments so
that, at the close of each quarter of the taxable year (a) not more
than 25% of the market value of the fund's total assets will be
invested in the securities of a single issuer and (b) with respect
to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the
securities of a single issuer and the fund will not own more than
10% of the outstanding voting securities of a single issuer.
As a result of the fund's non-diversified status, an investment in
the fund may present greater risks to investors than an investment
in a diversified fund. The investment return on a non-diversified
fund typically is dependent upon the performance of a smaller number
of securities relative to the number of securities held in a
diversified fund. The fund's assumption of large positions in the
obligations of a small number of issuers will affect the value of
its portfolio to a greater extent than that of a diversified fund in
the event of changes in the financial condition, or in the market's
assessment, of the issuers.
The identification of the issuer of Tax-Exempt Obligations generally
depends upon the terms and conditions of the security. When the
assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the
government creating the issuing entity and the security is backed
only by the assets and revenues of such entity, such entity would be
deemed to be the sole issuer. Similarly, in the case of a private
activity bond, if that bond is backed only by the assets and
revenues of the nongovernmental user, then such nongovernmental user
is deemed to be the sole issuer. If in either case, however, the
creating government or some other entity guarantees a security, such
a guarantee would be considered a separate security and would be
treated as an issue of such government or other entity.
Ratings as Investment Criteria. In general, the ratings of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P") and other nationally recognized statistical ratings
organizations ("NRSROs") represent the opinions of those agencies as
to the quality of the Municipal Bonds and short-term investments
which they rate. It should be emphasized, however, that such ratings
are relative and subjective, are not absolute standards of quality
and do not evaluate the market risk of securities. These ratings
will be used by the fund as initial criteria for the selection of
portfolio securities, but the fund also will rely upon the
independent advice of the manager to evaluate potential investments.
Among the factors that will be considered are the long-term ability
of the issuer to pay principal and interest, as well as general
economic trends. To the extent the fund invests in lower-rated and
comparable unrated securities, the fund's achievement of its
investment objective may be more dependent on the manager's credit
analysis of such securities than would be the case for a portfolio
consisting entirely of higher-rated securities. The Appendix
contains information concerning the ratings of Moody's, S&P and
other NRSROs and their significance.
Subsequent to its purchase by the fund, an issue of Municipal Bonds
may cease to be rated or its rating may be reduced below the rating
given at the time the securities were acquired by the fund. Neither
event will require the sale of such Municipal Bonds by the fund, but
the manager will consider such event in its determination of whether
the fund should continue to hold the Municipal Bonds. In addition,
to the extent that 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 or other NRSRO's, the fund will
attempt to use comparable ratings as standards for its investments
in accordance with its investment objective and policies.
The fund generally will invest at least 75% of its total assets in
investment grade debt obligations rated no lower than Baa, MIG 3 or
Prime-1 by Moody's or BBB, SP-2 or A-1 by S&P, or have the
equivalent rating by any NRSRO or in unrated obligations of
comparable quality. Unrated obligations will be considered to be of
investment grade if deemed by the manager to be comparable in
quality to instruments so rated, or if other outstanding obligations
of the issuers thereof are rated Baa or better by Moody's or BBB or
better by S&P. The balance of the fund's assets may be invested in
securities rated as low as C by Moody's or D by S&P or have the
equivalent rating by any NRSRO, or deemed by the manager to be
comparable unrated securities, which are sometimes referred to as
"junk bonds." Securities in the fourth highest rating category,
though considered to be investment grade, have speculative
characteristics. Securities rated as low as D are extremely
speculative and are in actual default of interest and/or principal
payments.
Low and Comparable Unrated Securities. While the market values of
low-rated and comparable unrated securities tend to react less to
fluctuations in interest rate levels than the market values of
higher rated securities, the market values of certain low-rated and
comparable unrated municipal securities also tend to be more
sensitive than higher-rated securities to short-term corporate and
industry developments and changes in economic conditions (including
recession) in specific regions or localities or among specific types
of issuers. In addition, low-rated securities and comparable
unrated securities generally present a higher degree of credit risk.
During an economic downturn or a prolonged period of rising
interest rates, the ability of issuers of low-rated and comparable
unrated securities to service their payment obligations, meet
projected goals or obtain additional financing may be impaired. The
risk of loss due to default by such issuers is significantly greater
because low-rated and comparable unrated securities generally are
unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The fund may incur additional expenses to the
extent it is required to seek recovery upon a default in payment of
principal or interest on its portfolio holdings.
While the market for municipal securities is considered to be
generally adequate, the existence of limited markets for particular
low-rated and comparable unrated securities may diminish the fund's
ability to (a) obtain accurate market quotations for purposes of
valuing such securities and calculating its net asset value and (b)
sell the securities at fair value either to meet redemption requests
or to respond to changes in the economy or in the financial markets.
The market for certain low-rated and comparable unrated securities
has not fully weathered a major economic recession. Any such
recession, however, would likely disrupt severely the market for
such securities and adversely affect the value of the securities and
the ability of the issuers of such securities to repay principal and
pay interest thereon.
Fixed-income securities, including low-rated securities and
comparable unrated securities, frequently have call or buy-back
features that permit their issuers to call or repurchase the
securities from their holders, such as the fund. If an issuer
exercises these rights during periods of declining interest rates,
the fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to the fund.
Because many issuers of New Jersey Municipal Securities may choose
not to have their obligations rated, it is possible that a large
portion of the fund's portfolio may consist of unrated obligations.
Unrated obligations are not necessarily of lower quality than rated
obligations, but to the extent the fund invests in unrated
obligations, the fund will be more reliant on the manager's
judgment, analysis and experience than would be the case if the fund
invested only in rated obligations.
Municipal Bonds. Municipal Bonds generally are understood to
include debt obligations issued to obtain funds for various public
purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations, payment of general
operating expenses and extensions of loans to public institutions
and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Bonds if the
interest paid thereon qualifies as excluded from gross income (but
not necessarily from alternative minimum taxable income) for federal
income tax purposes in the opinion of bond counsel to the issuer.
The yield on Municipal Bonds is dependent upon a variety of factors,
including general economic and monetary conditions, general money
market conditions, general conditions of the Municipal Bond market,
the financial condition of the issuer, the size of a particular
offering, the maturity of the obligation offered and the rating of
the issue.
Municipal Bonds also are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Code, and laws, if any,
that may be enacted by Congress or state legislatures extending the
time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. There is also the
possibility that, as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, the
principal of and interest on its or their Municipal Bonds may be
materially affected.
Municipal Leases. The fund may invest without limit in "municipal
leases," which generally are participations in intermediate-and
short-term debt obligations issued by municipalities consisting of
leases or installment purchase contracts for property or equipment.
Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses that provide that
the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for
such purpose yearly. In addition to the "non-appropriation" risk,
these securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with
more conventional bonds. Although "non-appropriation" lease
obligations are often secured by the underlying property,
disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the fund's
assets that may be invested in municipal lease obligations. In
evaluating municipal lease obligations, the manager will consider
such factors as it deems appropriate, which may include: (a) whether
the lease can be canceled; (b) the ability of the lease obligee to
direct the sale of the underlying assets; (c) the general
creditworthiness of the lease obligor; (d) the likelihood that the
municipality will discontinue appropriating funding for the leased
property in the event such property is no longer considered
essential by the municipality; (e) the legal recourse of the lease
obligee in the event of such a failure to appropriate funding; (f)
whether the security is backed by a credit enhancement such as
insurance; and (g) any limitations which are imposed on the lease
obligor's ability to utilize substitute property or services rather
than those covered by the lease obligation.
Private Activity Bonds. The fund may invest without limits in
private activity bonds. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance non-
governmental activities is a specific tax preference item for
purposes of the federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a
federal alternative minimum tax to the extent that the fund's
dividends are derived from interest on those bonds. Dividends
derived from interest income on New Jersey Municipal Securities are
a component of the "current earnings" adjustment item for purposes
of the federal corporate alternative minimum tax.
The fund may invest without limit in debt obligations which are
repayable out of revenue streams generated from economically-related
projects or facilities or debt obligations whose issuers are located
in the same state. Sizeable investments in such obligations could
involve an increased risk to the fund should any of the related
projects or facilities experience financial difficulties Revenue
securities may also include private activity bonds which may be
issued by or on behalf of public authorities to finance various
privately operated facilities and are not payable from the
unrestricted revenues of the issuers. Sizable investments in such
obligations could involve an increased risk to the fund should any
of the related projects or facilities experience financial
difficulties.
Zero Coupon Securities. Zero coupon securities involve special
considerations. The fund may also invest in zero coupon bonds.
Zero coupon securities are debt obligations which do not entitle the
holder to any periodic payments of interest prior to maturity of a
specified cash payment date when the securities begin paying current
interest (the "cash payment date") and therefore are issued and
traded at a discount from their face amounts or par values. The
discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer,
decreases as the final maturity or cash payment date of the security
approaches. The market prices of zero coupon securities generally
are more volatile than the market prices of other debt securities
that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do debt securities having
similar maturities and credit quality. The credit risk factors
pertaining to low-rated securities also apply to low-rated zero
coupon bonds. Such zero coupon bonds carry an additional risk in
that, unlike bonds which pay interest throughout the period to
maturity, the fund will realize no cash until the cash payment date
unless a portion of such securities is sold and, if the issuer
defaults, the fund may obtain no return at all on its investment.
Current federal income tax laws may require the holder of a zero
coupon security to accrue income with respect to that security prior
to the receipt of cash payments. To maintain its qualification as a
registered investment company and avoid liability for federal income
taxes, the fund may be required to distribute income accrued with
respect to zero coupon securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
When-Issued Securities. The fund may purchase Municipal Bonds on a
"when-issued" basis (i.e., for delivery beyond the normal settlement
date at a stated price and yield). The payment obligation and the
interest rate that will be received on the Municipal Bonds purchased
on a when-issued basis are each fixed at the time the buyer enters
into the commitment. Although the fund will purchase Municipal Bonds
on a when-issued basis only with the intention of actually acquiring
the securities, the fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment
strategy.
Municipal Bonds are subject to changes in value based upon the
public's perception of the creditworthiness of the issuers and
changes, real or anticipated, in the level of interest rates. In
general, Municipal Bonds tend to appreciate when interest rates
decline and depreciate when interest rates rise. Purchasing
Municipal Bonds on a when-issued basis, therefore, can involve the
risk that the yields available in the market when the delivery takes
place may actually be higher than those obtained in the transaction
itself. To account for this risk, a separate account of the fund
consisting of cash or liquid debt securities equal to the amount of
the when-issued commitments will be established 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 on a daily basis so the value of the account will equal
the amount of such commitments by the fund. Placing securities
rather than cash in the segregated account may have a leveraging
effect on the fund's net assets. That is, to the extent the fund
remains substantially fully invested in securities at the same time
it has committed to purchase securities on a when-issued basis,
there will be greater fluctuations in its net assets than if it had
set aside cash to satisfy its purchase commitments. Upon the
settlement date of the when-issued securities, the fund will meet
obligations from then-available cash flow, sale of securities held
in the segregated account, sale of other securities or, although it
normally would not expect to do so, from the sale of the when-issued
securities themselves (which may have a value greater or less than
the fund's payment obligations). Sales of securities to meet such
obligations may involve the realization of capital gains, which are
not exempt from federal income taxes or New Jersey state personal
income tax.
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 an advantageous price.
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 Federal Reserve Bank of New York's list of reporting
dealers. A repurchase agreement is a contract under which the buyer
of a security simultaneously commits to resell the security to the
seller at an agreed-upon price on an agreed-upon date. Under the
terms of a typical repurchase agreement, the fund would acquire an
underlying debt obligation for a relatively short period of time
(usually not more than seven days) subject to an obligation of the
seller to repurchase, and the fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during the
fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the fund's
holding period. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements could involve certain risks
in the event of default or insolvency of the other party, including
possible delays or restrictions upon the fund's ability to dispose
of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the
fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of
losing all or part of the income from the agreement. In evaluating
these potential risks, the manager, acting under the supervision 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.
Lending of Portfolio Securities. Consistent with applicable
regulatory requirements, the fund may lend its portfolio securities
to brokers, dealers and other financial organizations. Loans of
portfolio securities by the fund will be collateralized by cash,
letters of credit or obligations of the United States government or
its agencies and instrumentalities which are maintained at all times
in an amount equal to at least 100% of the current market value of
the loaned securities. By lending its portfolio securities, the
fund will seek to generate income by continuing to receive interest
on the loaned securities, by investing the cash collateral in short-
term instruments or by obtaining yield in the form of interest paid
by the borrower when U.S. government securities are used as
collateral. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower
fail financially. Loans will be made to firms deemed by the manager
to be of good standing and will not be made unless, in the judgment
of the manager, the consideration to be earned from such loans would
justify the risk.
Temporary Investments. When the fund is maintaining a defensive
position, the fund may invest in short-term investments ("Temporary
Investments") consisting of: (a) tax-exempt securities in the form
of notes of municipal issuers having, at the time of purchase, a
rating within the three highest grades of Moody's, S&P or the
equivalent rating from an NRSRO or, if not rated, having an issue of
outstanding Municipal Bonds rated within the three highest grades by
Moody's, S&P or the equivalent rating from an NRSRO; and (b) the
following taxable securities: obligations of the United States
government, its agencies or instrumentalities ("U.S. government
securities"), repurchase agreements, other debt securities rated
within the three highest grades by Moody's, S&P or the equivalent
rating from an NRSRO, commercial paper rated in the highest grade by
either of such rating services, and certificates of deposit of
domestic banks with assets of $1 billion or more. The fund may
invest in Temporary Investments for defensive reasons in
anticipation of a market decline. At no time will more than 20% of
the fund's total assets be invested in Temporary Investments unless
the fund has adopted a defensive investment policy. The fund
intends, however, to purchase tax-exempt Temporary Investments
pending the investment of the proceeds of the sale of portfolio
securities or shares of the fund's common stock, or in order to have
highly liquid securities available to meet anticipated redemptions.
For the fiscal year ended March 31, 2000, the fund did not invest
in taxable Temporary Investments.
Financial Futures and Options Transactions. The fund may enter into
financial futures contracts and invest in options on financial
futures contracts that are traded on a domestic exchange or board of
trade. Such investments, if any, by the fund will be made for the
purpose of hedging against changes in the value of portfolio
securities due to anticipated changes in interest rates and market
conditions and where the transactions are economically appropriate
to the reduction of risks inherent in the management of the fund.
The futures contracts or options on futures contracts that may be
entered into by the fund will be restricted to those that are either
based on a municipal bond index or related to debt securities, the
prices of which are anticipated by the manager to correlate with the
prices of the New Jersey Municipal Securities owned or to be
purchased by the fund.
In entering into a financial futures contract, the fund will be
required to deposit with the broker through which it undertakes the
transaction an amount of cash or cash equivalents equal to
approximately 5% of the contract amount. This amount, which is
known as "initial margin," is subject to change by the exchange or
board of trade, which may charge a higher amount. Initial margin is
in the nature of a performance bond or good faith deposit on the
contract that is returned to the fund upon termination of the
futures contract, assuming all contractual obligations have been
satisfied. In accordance with a process known as "marking-to-
market," subsequent payments, known as "variation margin," to and
from the broker will be made daily as the price of the index or
securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less
valuable. At any time prior to the expiration of a futures
contract, the fund may elect to close the position by taking an
opposite position, which will operate to terminate the fund's
existing position in the contract.
A financial futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a
specified property at a specified price, date, time and place.
Unlike the direct investment in a futures contract, an option on a
financial futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in the financial futures
contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures
contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures
contract. The potential loss related to the purchase of an option
on a financial futures contract is limited to the premium paid for
the option (plus transaction costs). The value of the option may
change daily and that change would be reflected in the net asset
value of the fund.
Regulations of the Commodity Futures Trading Commission applicable
to the fund require that its transactions in financial futures
contracts and options on financial futures contracts be engaged in
for bona fide hedging purposes, or if the fund enters into futures
contracts for speculative purposes, that the aggregate initial
margin deposits and premiums paid by the fund will not exceed 5% of
the market value of its assets. In addition, the fund will, with
respect to its purchases of financial futures contracts, establish
a segregated account consisting of cash or cash equivalents in an
amount equal to the total market value of the futures contracts,
less the amount of initial margin on a deposit for the contracts.
Municipal Bond Index Futures Contracts. A municipal bond index
futures contract is an agreement pursuant to which two parties agree
to take or make delivery of an amount of cash equal to a specific
dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the
price at which the index contract was originally written. No
physical delivery of the underlying municipal bonds in the index is
made. Municipal bond index futures contracts based on an index of 40
tax-exempt, long-term municipal bonds with an original issue size of
at least $50 million and a rating of A- or higher by S&P or A or
higher by Moody's began trading in mid-1985. The purpose of the
acquisition or sale of a municipal bond index futures contract by
the fund, as the holder of long-term municipal securities, is to
protect the fund from fluctuations in interest rates on tax-exempt
securities without actually buying or selling long-term municipal
securities.
There are several risks in connection with the use of futures
contracts as a hedging device. Successful use of futures contracts
by the fund is subject to the manager's ability to predict correctly
movements in the direction of interest rates. Such predictions
involve skills and techniques which may be different from those
involved in the management of a long-term municipal bond portfolio.
In addition, there can be no assurance that there will be a
correlation between movements in the price of the municipal bond
index and movements in the price of the Municipal Bonds that are the
subject of the hedge. The degree of imperfection of correlation
depends upon various circumstances, such as variations in
speculative market demand for futures contracts and municipal
securities, technical influences on futures trading, and differences
between the municipal securities being hedged and the municipal
securities underlying the futures contracts, in such respects as
interest rate levels, maturities and creditworthiness of issuers.
A decision of whether, when and how to hedge involves the exercise
of skill and judgment and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected
trends in interest rates.
Although the fund intends to purchase or sell futures contracts only
if there is an active market for such contracts, there is no
assurance that a liquid market will exist for the contracts at any
particular time. Most domestic futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the
maximum amount the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price
beyond that limit. The daily limit governs only price movement
during a particular trading day and, therefore, does not limit
potential losses because the limit may prevent the liquidation of
unfavorable positions. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial
losses. In such event, it will not be possible to close a futures
position and, in the event of adverse price movements, the fund
would be required to make daily cash payments of variation margin.
In such circumstances, an increase in the value of the portion of
the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. As described above, however,
there is no guarantee that the price of Municipal Bonds will, in
fact, correlate with the price movements in the municipal bond index
futures contract and thus provide an offset to losses on a futures
contract.
If the fund has hedged against the possibility of an increase in
interest rates adversely affecting the value of the Municipal Bonds
held in its portfolio and rates decrease instead, the fund will lose
part or all of the benefit of the increased value of the Municipal
Bonds it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but
will not necessarily, be at increased prices which reflect the
decline in interest rates. The fund may have to sell securities at
a time when it may be disadvantageous to do so.
When the fund purchases municipal bond index futures contracts, an
amount of cash and U.S. government securities or other high grade
debt securities equal to the market value of the futures contracts
will be deposited in a segregated account with the fund's custodian
(and/or such other persons as appropriate) to collateralize the
positions and thereby insure that the use of such futures contracts
is not leveraged.
Options on Financial Futures Contracts. The fund may purchase put
and call options on futures contracts which are traded on a domestic
exchange or board of trade as a hedge against changes in interest
rates, and may enter into closing transactions with respect to such
options to terminate existing positions. The fund will sell put and
call options on interest rate futures contracts only as part of
closing sale transactions to terminate its options positions. There
is no guarantee that such closing transactions can be effected.
Options on futures contracts, as contrasted with the direct
investment in such contracts, give the purchaser the right, in
return for the premium paid, to assume a position in futures
contracts at a specified exercise price at any time prior to the
expiration date of the options. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures contract margin account,
which represents the amount by which the market price of the futures
contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures
contract. The potential loss related to the purchase of an option on
interest rate futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option
is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be
reflected in the net asset value of the fund.
There are several risks relating to options on futures contracts.
The ability to establish and close out positions on such options
will be subject to the existence of a liquid market. In addition,
the fund's purchase of put or call options will be based upon
predictions as to anticipated interest rate trends by the manager,
which could prove to be inaccurate. Even if the manager's
expectations are correct there may be an imperfect correlation
between the change in the value of the options and of the fund's
portfolio securities.
Other Investments. The fund may invest up to 15% of its total assets
in securities with contractual or other restrictions on resale and
other instruments which are not readily marketable. Notwithstanding
the foregoing, the fund will not invest more than 10% of its assets
in securities (excluding those subject to Rule 144A under the
Securities Act of 1933, as amended (the "1933 Act")) that are
restricted. The fund does not expect to invest more than 5% of its
assets in repurchase agreements. In addition, the fund may invest up
to 5% of its assets in the securities of issuers which have been in
continuous operation for less than three years. The fund also is
authorized to borrow an amount of up to 10% of its total assets
(including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) in order to meet anticipated
redemptions and to pledge its assets to the same extent in
connection with the borrowings.
INVESTMENT RESTRICTIONS
The fund has adopted the following investment restrictions for the
protection of shareholders. Restrictions 1 through 6 below may not
be changed without the approval of the holders of a majority of the
outstanding shares of the fund, defined as the lesser of (a) 67% of
the fund's shares present at a meeting if the holders of more than
50% of the outstanding shares are present in person or by proxy or
(b) more than 50% of the fund's outstanding shares. The remaining
restrictions may be changed by the fund's Board of Directors at any
time. The fund's investment objective is fundamental and may not be
changed without the approval of the holders of a majority of the
outstanding shares of the fund.
The fund may not:
1. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders thereunder.
2. Invest more than 25% of its total assets in securities,
the issuers of which are in the same industry. For purposes of this
limitation, U.S. government securities and securities of state or
municipal governments and their political subdivisions are not
considered to be issued by members of any industry.
3. Borrow money, except that (a) the fund may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the fund
may, to the extent consistent with its investment policies, enter
into reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent that it
engages in transactions described in (a) and (b), the fund will be
limited so that no more than 33 1/3% of the value of its total
assets (including the amount borrowed), valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) is
derived from such transactions.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest consistent
with its investment objectives and policies; (b) repurchase
agreements; and (c) loans of its portfolio securities, to the
fullest extent permitted under the 1940 Act.
5. Engage in the business of underwriting securities issued
by other persons, except to the extent that the fund may technically
be deemed to be an underwriter under the 1933 Act in disposing of
portfolio securities.
6. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall not
prevent the fund from (a) investing in securities of issuers engaged
in the real estate business or the business of investing in real
estate (including interests in limited partnerships owning or
otherwise engaging in the real estate business or the business of
investing in real estate) and securities which are secured by real
estate or interests therein; (b) holding or selling real estate
received in connection with securities it holds or held; (c) trading
in futures contracts and options on futures contracts (including
options on currencies to the extent consistent with the fund's
investment objective and policies); or (d) investing in real estate
investment trust securities.
7. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction, the
deposit or payment by the fund of underlying securities and other
assets in escrow and collateral agreements with respect to initial
or maintenance margin in connection with futures contracts and
related options and options on securities, indexes or similar items
is not considered to be the purchase of a security on margin.
8. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets in
the securities of issuers having a record, including predecessors,
of less than three years of continuous operation, except U.S.
government securities. For purposes of this restriction, issuers
include predecessors, sponsors, controlling persons, general
partners, guarantors and originators of underlying assets.
11. Invest in companies for the purpose of exercising
control.
12. Invest in securities of other investment companies,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets and except to the extent permitted by Section
12 of the 1940 Act (currently, up to 5% of the total assets of the
Fund and no more than 3% of the total outstanding voting stock of
any one investment company).
13. Engage in the purchase or sale of put, call, straddle or
spread options or in the writing of such options, except that the
Fund may engage in transactions involving municipal bond index and
interest rate futures contracts and options thereon after approval
of these investment strategies by the Board of Directors and notice
thereof to the Fund's shareholders.
Certain restrictions listed above permit the fund to engage in
investment practices that the fund does not currently pursue. The
fund has no present intention of altering its current investment
practices as otherwise described in the prospectus and this SAI and
any future change in those practices would require Board approval
and appropriate notice to shareholders. If a percentage restriction
is complied with at the time of an investment, a later increase or
decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the fund's assets
will not constitute a violation of such restriction.
RISK FACTORS
The following summaries are included for the purpose of providing
certain information regarding the economic climate and financial
condition of the State of New Jersey and Puerto Rico, and are based
primarily on information from official statements made available in
connection with the issuance of certain securities and other
documents and sources and does not purport to be complete. The fund
has not undertaken to verify independently such information and the
fund assumes no responsibility for the accuracy of such information.
These summaries do not provide information regarding most
securities in which the fund is permitted to invest and in
particular do not provide specific information on the issuers or
types of municipal securities in which the fund invests or the
private business entities whose obligations support the payments on
private activity bonds ("AMT-Subject bonds"), which include
industrial development bonds and bonds issued to finance such
projects as airports, housing projects, solid waste disposal
facilities, student loan programs and water and sewage projects, in
which the fund will invest. See "Alternative Minimum Tax" below.
Therefore, the general risk factors as to the credit of the state
or its political subdivisions discussed herein may not be relevant
to the fund. Although revenue obligations of a state or its
political subdivisions may be payable from a specific project or
source, there can be no assurance that future economic difficulties
and the resulting impact on state and local government finances will
not adversely affect the market value of the fund or the ability of
the respective obligors to make timely payments of principal and
interest on such obligations. In addition, a number of factors may
adversely affect the ability of the issuers of municipal securities
to repay their borrowings that are unrelated to the financial or
economic condition of a state, and that, in some cases, are beyond
their control. Furthermore, issuers of municipal securities are
generally not required to provide ongoing information about their
finances and operations to holders of their debt obligations,
although a number of cities, counties and other issuers prepare
annual reports.
Alternative Minimum Tax
Under current federal income tax law, (1) interest on tax-exempt
municipal securities issued after August 7, 1986 which are
"specified private activity bonds," and the proportionate share of
any exempt-interest dividend paid by a regulated investment company
which receives interest from such specified private activity bonds,
will be treated as an item of tax preference for purposes of the
alternative minimum tax ("AMT") imposed on individuals and
corporations, though for regular federal income tax purposes such
interest will remain fully tax-exempt, and (2) interest on all Tax-
Exempt Obligations will be included in "adjusted current earnings"
of corporations for AMT purposes. Such AMT-subject bonds have
provided, and may continue to provide, somewhat higher yields than
other comparable municipal securities.
Investors should consider that, in most instances, no state,
municipality or other governmental unit with taxing power will be
obligated with respect to AMT-Subject bonds. AMT-Subject bonds are
in most cases revenue bonds and do not generally have the pledge of
the credit or the taxing power, if any, of the issuer of such bonds.
AMT-Subject bonds are generally limited obligations of the issuer
supported by payments from private business entities and not by the
full faith and credit of a state or any governmental subdivision.
Typically the obligation of the issuer of AMT-Subject bonds is to
make payments to bond holders only out of and to the extent of,
payments made by the private business entity for whose benefit the
AMT-Subject bonds were issued. Payment of the principal and
interest on such revenue bonds depends solely on the ability of the
user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so
financed as security for such payment. It is not possible to
provide specific detail on each of these obligations in which fund
assets may be invested.
Risk of Concentration In a Single State
The primary purpose of investing in a portfolio of a single state's
municipal securities is the special tax treatment accorded the
state's resident individual investors. However, payment of interest
and preservation of principal is dependent upon the continuing
ability of the state's issuers and/or obligors on state, municipal
and public authority debt obligations to meet their obligations
thereunder. Investors should be aware of certain factors that might
affect the financial condition of issuers of municipal securities,
consider the greater risk of the concentration of a fund versus the
safety that comes with a less concentrated investment portfolio and
compare yields available in portfolios of the relevant state's
issues with those of more diversified portfolios, including out-of-
state issues, before making an investment decision.
Municipal securities in which the fund's assets are invested may
include debt obligations of the municipalities and other
subdivisions of the relevant state issued to obtain funds for
various public purposes, including the construction of a wide range
of public facilities such as airports, bridges, highways, schools,
streets and water and sewer works. Other purposes for which
municipal securities may be issued include the obtaining of funds to
lend to public or private institutions for the construction of
facilities such as educational, hospital, housing, and solid waste
disposal facilities. The latter, including most AMT-Subject bonds,
are generally payable from private sources which, in varying
degrees, may depend on local economic conditions, but are not
necessarily affected by the ability of the state and its political
subdivisions to pay their debts. It is not possible to provide
specific details on each of these obligations in which fund assets
may be invested. However, all such securities, the payment of which
is not a general obligation of an issuer having general taxing
power, must satisfy, at the time of an acquisition by the fund, the
minimum rating(s). See "Appendix A: Bond and Commercial Paper
Ratings" for a description of ratings and rating criteria. Some
municipal securities may be rated based on a "moral obligation"
contract which allows the municipality to terminate its obligation
by deciding not to make an appropriation. Generally, no legal
remedy is available against the municipality that is a party to the
"moral obligation" contract in the event of such non-appropriation.
Municipal Market Volatility. Municipal securities can be
significantly affected by political changes as well as uncertainties
in the municipal market related to taxation, legislative changes, or
the rights of municipal security holders. Because many municipal
securities are issued to finance similar projects, especially those
relating to education, health care, transportation and utilities,
conditions in those sectors can affect the overall municipal market.
In addition, changes in the financial condition of an individual
municipal insurer can affect the overall municipal market.
Interest Rate Changes. Debt securities have varying levels of
sensitivity to changes in interest rates. In general, the price of
a debt security can fall when interest rates rise and can rise when
interest rates fall. Securities with longer maturities can be more
sensitive to interest rate changes. In other words, the longer the
maturity of a security, the greater the impact a change in interest
rates could have on the security's price. In addition, short-term
and long-term interest rates do not necessarily move in the same
amount or the same direction. Short-term securities tend to react to
changes in short-term interest rates, and long-term securities tend
to react to changes in long-term interest rates.
Issuer-Specific Changes. Changes in the financial condition of an
issuer, changes in specific economic or political conditions that
affect a particular type of security or issuer, and changes in
general economic or political conditions can affect the credit
quality or value of an issuer's securities. Lower-quality debt
securities (those of less than investment-grade quality) tend to be
more sensitive to these changes than higher-quality debt securities.
Entities providing credit support or a maturity-shortening structure
also can be affected by these types of changes. Municipal securities
backed by current or anticipated revenues from a specific project or
specific assets can be affected negatively by the discontinuance of
the taxation supporting the project or assets or the inability to
collect revenues from the project or from the assets. If the
Internal Revenue Service determines an issuer of a municipal
security has not complied with applicable tax requirements, or the
structure of a security fails to function as intended, interest from
the security could become taxable or the security could decline
significantly in value.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL SECURITIES
Prospective investors should consider the recent financial
difficulties and pressures which the State of New Jersey (the
"State") and certain of its public authorities have undergone.
Financial Condition
Pursuant to the State Constitution, no money may be drawn from the
State Treasury except for appropriations made by law. In addition,
all monies for the support of State purposes must be provided for in
one general appropriation law covering one and the same fiscal year.
In addition to the Constitutional provisions, the New Jersey
statutes contain provisions concerning the budget and appropriation
system. Under these provisions, each unit of the State requests an
appropriation from the Director of the Division of Budget and
Accounting, who reviews the budget requests and forwards them with
his recommendations to the Governor. The Governor then transmits
his recommended expenditures and sources of anticipated revenue to
the legislature, which reviews the Governor's Budget Message and
submits an appropriations bill to the Governor for his signature by
July 1 of each year. At the time of signing the bill, the Governor
may revise appropriations or anticipated revenues. That action can
be reversed by a two-thirds vote of each House. No supplemental
appropriation may be enacted after adoption of the act, except where
there are sufficient revenues on hand or anticipated, as certified
by the Governor, to meet the appropriation. Finally, the Governor
may, during the course of the year, prevent the expenditure of
various appropriations when revenues are below those anticipated or
when he determines that such expenditure is not in the best interest
of the State.
Economic Climate
During 1998 a continuation of the national business expansion, a
strong business climate in New Jersey and positive developments in
surrounding metropolitan areas were major sources of State economic
growth.
Average employment in 1998 increased by 76.5 thousand jobs compared
to 1997. Job gains were spread across a number of industries with
particularly strong growth in business services (20,900) and in
wholesale and retail trade (18,000).
For the last decade, New Jersey's job growth has been concentrated
in five clusters of economic activity--high technology, health,
financial, entertainment and logistics. One of every three of the
State's workers are in these sectors, and as a whole these sectors
accounted for a 19 percent increase in employment over the past
decade compared to a four percent employment growth for all other
State industries.
Personal income in New Jersey, spurred by strong labor markets
increased by 5.4 percent in 1998, a rate comparable to the national
rate of increase. As a result, retail sales rose by an estimated
6.2 percent. Low inflation, now less than 2 percent, continues to
benefit New Jersey consumers and businesses and low interest rates
boost housing and consumer durable expenditures. Home building had
its best year of the decade.
Joblessness fell in terms of both its absolute level and its rate,
and by the end of 1998, New Jersey's unemployment rate was at or
below that of the nation.
The outlook for 1999/2000 is for continued, although more moderate
economic growth. Job gains in the State may be constrained at times
by labor shortages in skilled technical areas, will be in the 50,000
range and personal income growth will slow to an average of 4.3%.
Major caveats and uncertainties in the economic forecast for
1999/2000 have increased. The national conditions in energy,
agriculture and manufactured exports, particularly to Asian markets,
are threats to the U.S. economy. However, these areas of economic
activity are under-represented in New Jersey and hence the State has
been able to avoid the immediate and direct effects of those
problems.
Other areas of concern include possible significant shifts in
consumer and investor confidence, unstable and potentially
deflationary international economic conditions, and the prospect of
leaner profits for U.S. corporations. In addition, the
restructuring of major industries will continue spurred by the
imperative of cost containment, globalization of competition, and
deregulation. Thus, 1999/2000 contains more risk than the recent
past, but the momentum and measures of the State's economic health
are favorable.
The New Jersey outlook is based largely on expected national
economic performance and on recent State strategic policy actions
aimed at infrastructure improvements, effective education and
training of our workforce, and those maintaining a competitive
business climate. Investments in each of these policy areas are
seen as vital to maintaining the long-term health of the State's
economy.
2000 Fiscal Year
The State's 2000 Fiscal Year budget became law on June 30, 1999.
State Aid to Local Governments is the largest portion of Fiscal Year
2000 recommendations. In fiscal year 2000, $7,904.6 million of the
State's recommendations consist of funds which are distributed to
municipalities, counties and school districts. The largest
recommended State Aid appropriation, in the amount of $6,096.5
million, is provided for local elementary and secondary education
programs. Of this amount $2,845.1 is for core curriculum standards,
$312.7 million is for early childhood aid, $254.4 million is Abbott
v. Burke Parity Remedy aid, $265.8 million is for pupil
transportation aid and $682.3 million is for special education.
Also, $88.5 million provides nonpublic school aid and $149.1 million
pays debt service on school bonds. Other significant amounts are
$143.7 million for supplemental core curriculum standards aid and
$190.5 million for demonstrably effective program aid. In addition,
$700.4 million is recommended on behalf of school districts as the
employers share of the social security and teachers' pensions and
benefits programs.
As a result of the decision on May 21, 1998 of the New Jersey
Supreme Court in Abbott v. Burke the State may be required to
undertake certain additional instructional and support programs for
children in the "Abbott" school districts. The State is unable to
estimate its exposure.
Appropriations to the State Department of Community Affairs ("DCA")
total $898.4 million in State Aid monies for Fiscal Year 2000. The
Consolidated Municipal Property Tax Relief Act is recommended in the
amount of $767.9 million. In addition there is $16.7 million
appropriated for housing programs, $33.0 million for block grant
programs, $30 million for extraordinary aid and $40.5 million as
special assistance to specific cities and $10.0 million for the
Regional Efficiency Development Incentive Grant Program.
Appropriations to the State Department of the Treasury total $422.8
million in State Aid monies for Fiscal Year 2000. The principal
programs funded by these recommended appropriations are aid to
county colleges ($174.4 million); the cost of senior citizens,
disabled and veterans property tax deductions and exemptions ($51.2
million); $20.0 million for debt service for county investments in
solid waste management facilities; and the State contributions to
the Consolidated Police and Firemen's Pension Funds ($49.4 million).
Also, $112.0 million is appropriated for school renovation and
construction funded by a portion of the increased cigarette tax
($50.0 million) and the new "Big Game" lottery ($62.0 million).
The second largest portion of appropriations in Fiscal Year 2000 is
for grants-in-aid. These represent payments to individuals or
public or private agencies for benefits to which a recipient is
entitled to by law, or for provision of services on behalf of the
State. The amount appropriated in Fiscal Year 2000 for grants-in-
aid is $5,976.4 million.
$2,296.0 million is recommended for programs administered by the
State Department of Human Services. Of that amount, $1,403.3
million is for medical services provided under the Medicaid program,
$246.5 million is for community programs for the developmentally
disabled, $208.0 million is for community programs for the mentally
ill; $258.7 million is for grant programs administered by the
Division of Youth and Family Services, and $146.6 million is for
welfare reform and homeless services.
The State Department of Health and Senior Services is appropriated
$1,127.3 million. Of that amount, $633.3 million is for medical
services provided under the Medicaid program, $242.5 million is for
pharmaceutical assistance to the aged and disabled, $99.7 million is
for hospital charity care and KidCare, $70.8 million is for the
Lifeline Program; $39.7 million is for addiction and AIDS Services,
and $10.3 million is for the proposed Elder Care Program. $1,076.5
million is recommended for the State Department of Law and Public
Safety and the Department of Corrections.
$149.2 million is recommended for the State Department of
Transportation for the various programs it administers, such as the
maintenance and improvement of the State highway system and
subsidies for railroads and bus companies.
$189.7 million is recommended for the State Department of
Environmental Protection for the protection of air, land, water,
forest, wildlife, and shellfish resources and for the provision of
outdoor recreational facilities.
$54.9 million is recommended to the Department of Labor for the
administration of programs for workers compensation, unemployment
and temporary disability insurance, manpower development and health
safety inspection.
State Related Obligations
The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State.
These bonds are backed by the full faith and credit of the State.
State tax revenues and certain other fees are pledged to meet the
principal and interest payments and provided, redemption premium
payments required to pay the debt fully. No general obligation debt
can be issued by the State without prior voter approval, except that
no voter approval is required for any law authorizing the creation
of a debt for the purpose of refinancing all or a portion of
outstanding debt of the State, so long as such law requires that the
refinancing provide a debt service savings.
In general, the credit quality and credit risk of any issuer's debt
depend on the state and local economy, the health of the issuer's
finances, the amount of the issuer's debt, the quality of
management, and the strength of legal provisions in debt documents
that protect debt holders. Credit risk is usually lower wherever
the economy is strong, growing and diversified; financial operations
are sound; and the debt burden is reasonable.
The average rating among states in the U.S. for full faith and
credit state debt is "Aa" and "AA" by Moody's Investors Service,
Inc. and Standard & Poor's Corporation, respectively. Against this
measure and the criteria listed above, the credit risk associated
with direct obligations of the State of New Jersey and state
agencies, including general obligation and revenue bonds, and lease
debt, compares very favorably. In general, New Jersey's high credit
quality over time reflects the strong growth and diversification of
its economy, a manageable debt position, wealth levels much higher
than the national average, and stable financial position. New
Jersey remains a wealthy state, and continues to be the second
wealthiest after Connecticut. Per capita state income is 28% higher
than the U.S. average.
The State's debt burden is manageable in relation to the State's
wealth and resources, but has increased significantly since 1991 as
the State has financed capital outlays previously funded out of
current revenues such as transportation improvements and pension
liabilities. Tax-supported debt as measured against income and
population is now among the highest in the U.S. However, debt
retirement is rapid even though debt service has a modest claim on
State revenues. New debt issuance is expected to be manageable.
After a decade of sound financial operations in the 1980s,
characterized by robust increases in revenues and fund balances, the
State faced several years of budgetary distress in the early 1990s.
Declining tax revenues and swelling expenditures for Medicaid,
public assistance, and corrections generated repeated budget gaps
that the State was able to close only by utilizing non-recurring
revenue sources. Most recently an improving state and national
economy has resulted in increased revenues and some moderation in
budget strain despite significant tax cuts.
A positive credit factor for local government in New Jersey is the
strong State oversight of local government operations. The State
can and has seized control of mismanaged jurisdictions. In general,
the high level of wealth and the strong economic base in the State
have resulted in credit quality for local government that is among
the highest in the U.S. In addition, the State guarantees the debt
service of many local government bond issues such as those for
school districts.
Despite the strengths of New Jersey credit quality, there are risks.
New Jersey has a number of older urban centers, including Newark
and Camden, that present a continuing vulnerability with respect to
economic and social problems. The cost and financing of solid waste
management continues to be a challenge to local government. The
State so far has successfully faced court-mandated educational
finance reforms, but the impact on State finances may yet be felt.
There is pressure for property tax reform, and this too could
adversely affect State finances in the future.
SPECIAL CONSIDERATIONS REGARDING PUERTO RICO, THE U.S VIRGIN ISLANDS
AND GUAM
Puerto Rico
The following highlights some of the more significant financial
trends and problems affecting the Commonwealth of Puerto Rico (the
"Commonwealth" or "Puerto Rico"), and is based on information drawn
from official statements and prospectuses relating to the securities
offerings of Puerto Rico, its agencies and instrumentalities, as
available on the date of this SAI. SSB Citi has not independently
verified any of the information contained in such official
statements, prospectuses, and other publicly available documents,
but is not aware of any fact that would render such information
materially inaccurate.
Puerto Rico has a diversified economy dominated by the manufacturing
and service sectors. The North American Free Trade Agreement
("NAFTA"), which became effective January 1, 1994, has led to loss
of lower wage jobs such as textiles, but economic growth in other
areas, particularly tourism, construction and the high technology
areas have compensated for that loss. Puerto Rico's economy expanded
in the 1990's in step with the U.S. economy.
The Commonwealth of Puerto Rico differs from the states in its
relationship with the federal government. Most federal taxes, except
those such as social security taxes that are imposed by mutual
consent, are not levied in Puerto Rico. Moreover, Under Section 936
of the Internal Revenue Code 1986, as amended (the "Code") U.S.
companies enjoyed an effective 100% federal tax exemption for
operating and qualifying investment income from Puerto Rico sources.
However, in conjunction with the 1993 U.S. budget plan, Section 936
was amended and provided for two alternative limitations to the
Section 936 credit. The first option limited the credit against such
income to 40% of the credit allowable under then current law, with
a five year phase-in period starting at 60% of the allowable credit.
The second option was a wage and depreciation based credit.
Additional amendments to Section 936 in 1996 imposed caps on these
credits, beginning in 1998 for the first option and beginning in
2002 for the second option. More importantly, the 1996 amendments
eliminated both options for taxable years beginning in 2006.
Also in 1996, a new Section 30A was added to the Code. Section 30A
permits a "qualifying domestic corporation" that meets certain gross
income tests to claim a credit against the federal income tax
imposed on taxable income derived from sources outside the United
States from the active conduct of a trade or business in Puerto Rico
or from the sale of substantially all the assets used in such a
business. Section 30A will be phased out by January 1, 2006. The
Governor of Puerto Rico has proposed that Congress permanently
extend Section 30A until the Puerto Rican economy achieves certain
economic improvements. Similarly, President Clinton proposed
permanent extension of the Section 30A in both his 1998 and 1999
budgets. To date, however, no action has been taken.
The eventual elimination of tax benefits to those U.S. companies
with operations in Puerto Rico may lead to slower growth in the
future. There can be no assurance that this will not lead to a
weakened economy, a lower rating on Puerto Rico's debt or lower
prices for Puerto Rican bonds that may be held by the fund in the
long-term. The government of Puerto Rico has enacted its own tax
incentive programs for both industrial and tourist activities.
Puerto Ricans have periodically considered conversion to statehood
and such a vote is likely again in the future. The statehood
proposal was defeated in December, 1998.
U.S. Virgin Islands
The United States Virgin Islands ("USVI") is heavily reliant on the
tourism industry, with roughly 43% of non-agricultural employment in
tourist-related trade and services. The tourism industry is
economically sensitive and would likely be affected adversely by a
recession in either the United States or Europe.
An important component of the USVI revenue base is the federal
excise tax on rum exports. Tax revenues rebated by the federal
government to the USVI provide the primary security of many
outstanding USVI bonds. Since more than 90% of the rum distilled in
the USVI is distilled at one plant, any interruption in its
operations (as occurred after Hurricane Hugo in 1989) would
adversely affect these revenues. The last major hurricane to impact
the USVI was Hurricane Marilyn on September 15, 1995. Consequently,
there can be no assurance that rum exports to the United States and
the rebate of tax revenues to the USVI will continue at their
present levels. The preferential tariff treatment the USVI rum
industry currently enjoys could be reduced under NAFTA. Increased
competition from Mexican rum producers could reduce USVI rum
imported to the U.S., decreasing excise tax revenues generated. The
USVI is periodically hit by hurricanes. Several hurricanes have
caused extensive damage, which has had a negative impact on revenue
collections. There is currently no rated, unenhanced Virgin Islands
debt outstanding (although there is unrated debt outstanding).
Guam
The U.S. territory of Guam derives a substantial portion of its
economic base from Japanese tourism. With a reduced U.S. military
presence on the island, Guam has relied more heavily on tourism in
the past few years. During its 1997 fiscal year, the government was
able to make noticeable progress on its traditional budgetary
problems operating with a balanced budget for that fiscal year.
However, during 1998, the Japanese recession combined with the
impact of typhoon Paka resulted in a budget deficit of $21 million.
With hotels alone accounting for 8.5% of Guam's employment and
Japanese tourists comprising 86% of total visitor arrivals, the
Japanese recession and depreciation of the yen versus the dollar in
1999 have had a negative impact on the island's economy. Based on
these factors, S&P downgraded Guam's rating to BBB- from BBB with a
negative outlook on May 26, 1999. There does seem to be some recent
improvement in the Japanese economy. However, Guam has not realized
any economic benefit as visitor arrivals are 0.8% below 1998 levels
for the second quarter ended June 30, 1999, driving General Fund
revenues down 3.1%.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from the
issuer or from an underwriter acting as principal. Other purchases
and sales usually are placed with those dealers from which it
appears that the best price or execution will be obtained; those
dealers may be acting as either agents or principals. The purchase
price paid by the fund to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter,
and purchases of after-market securities from dealers normally are
executed at a price between the bid and asked prices. For the 1998,
1999 and 2000 fiscal years, the fund has paid no brokerage
commissions.
Allocation of transactions, including their frequency, to various
dealers is determined by the manager in its best judgment and in a
manner deemed fair and reasonable to shareholders. The primary
considerations are availability of the desired security and the
prompt execution of orders in an effective manner at the most
favorable prices. Subject to these considerations, dealers that
provide supplemental investment research and statistical or other
services to the manager may receive orders for portfolio
transactions by the fund. Information so received is in addition
to, and not in lieu of, services required to be performed by the
manager, and the fees of the manager are not reduced as a
consequence of its use of such supplemental information. Such
information may be useful to the manager in serving both the fund
and other clients and, conversely, supplemental information obtained
by the placement of business of other clients may be useful to the
manager in carrying out its obligations to the fund.
The fund will not purchase Tax-Exempt Obligations during the
existence of any underwriting or selling group relating thereto of
which Salomon Smith Barney is a member, except to the extent
permitted by the SEC. Under certain circumstances, the fund may be
at a disadvantage because of this limitation in comparison with
other investment companies which have a similar investment objective
but which are not subject to such limitation. The fund also may
execute portfolio transactions through Salomon Smith Barney and its
affiliates in accordance with rules promulgated by the SEC.
While investment decisions for the fund are made independently from
those of the other accounts managed by the manager, investments of
the type the fund may make also may be made by those other accounts.
When the fund and one or more other accounts managed by the manager
are prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales will be
allocated in a manner believed by the manager to be equitable to
each. In some cases, this procedure may adversely affect the price
paid or received by the fund or the size of the position obtained or
disposed of by the fund.
PORTFOLIO TURNOVER
The fund's portfolio turnover rate (the lesser of purchases or sales
of portfolio securities during the year, excluding purchases or
sales of short-term securities, divided by the monthly average value
of portfolio securities) generally is not expected to exceed 100%,
but the portfolio turnover rate will not be a limiting factor
whenever the fund deems it desirable to sell or purchase securities.
Securities may be sold in anticipation of a rise in interest rates
(market decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In addition, a
security may be sold and another security of comparable quality may
be purchased at approximately the same time in order to take
advantage of what the fund believes to be a temporary disparity in
the normal yield relationship between the two securities. These
yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply
of various types of tax-exempt securities. For the 1999 and 2000
fiscal years, the fund's portfolio turnover rates were 52% and 21%,
respectively.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for purchase. See the
prospectus for a discussion of factors to consider in selecting
which Class of shares to purchase.
Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales
charge as follows:
Amount of
Investment
Sales Charge as
a %
Of Transaction
Sales Charge as
a %
of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
4.00%
4.17%
3.60%
$ 25,000 - 49,999
3.50
3.63
3.15
50,000 99,999
3.00
3.09
2.70
100,000 249,999
2.50
2.56
2.25
250,000 499,999
1.50
1.52
1.35
500,000 or more
*
*
*
* Purchases of Class A shares of $500,000 or more will be made at
net asset value without any initial sales charge, but will be
subject to a deferred sales charge of 1.00% on redemptions made
within 12 months of purchase. The deferred sales charge on Class
A shares is payable to Salomon Smith Barney, which compensates
Salomon Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The deferred sales
charge is waived in the same circumstances in which the deferred
sales charge applicable to Class B and Class L shares is waived.
See "Purchase of Shares-Deferred Sales Charge Alternatives" and
"Purchase of Shares-Waivers of Deferred Sales Charge."
Members of the selling group may receive up to 90% of the sales
charge and may be deemed to be underwriters of the fund as defined
in the 1933 Act. The reduced sales charges shown above apply to the
aggregate of purchases of Class A shares of the fund made at one
time by "any person," which includes an individual and his or her
immediate family, or a trustee or other fiduciary of a single trust
estate or single fiduciary account.
Class B Shares. Class B shares are sold without an initial sales
charge but are subject to a deferred sales charge payable upon
certain redemptions. See "Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales
charge of 1.00% (which is equal to 1.01% of the amount invested) and
are subject to a deferred sales charge payable upon certain
redemptions. See "Deferred Sales Charge Provisions" below. Until
June 22, 2001 purchases of Class L shares by investors who were
holders of Class C shares of the fund and/or other Smith Barney
Mutual Funds on June 12, 1998 will not be subject to the 1% initial
sales charge.
Class Y Shares. Class Y shares are sold without an initial sales
charge or deferred sales charge and are available only to investors
investing a minimum of $15,000,000 (except purchases of Class Y
shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount).
General
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a broker that clears through Salomon Smith Barney
("Dealer Representative"). In addition, certain investors,
including qualified retirement plans purchasing through certain
Dealer Representatives, may purchase shares directly from the fund.
When purchasing shares of the fund, investors must specify whether
the purchase is for Class A, Class B, Class L or Class Y shares.
Salomon Smith Barney and Dealer Representatives may charge their
customers an annual account maintenance fee in connection with a
brokerage account through which an investor purchases or holds
shares. Accounts held directly at PFPC Global Fund Services,
("PFPC" or "sub-transfer agent") are not subject to a maintenance
fee.
Investors in Class A, Class B and Class L shares may open an account
in the fund by making an initial investment of at least $1,000 for
each account, in the fund. Investors in Class Y shares may open an
account by making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
shareholders purchasing shares of the fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class L shares and subsequent
investment requirement for all Classes is $25. For shareholders
purchasing shares of the fund through the Systematic Investment Plan
on a quarterly basis, the minimum initial investment required for
Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment
requirements for Class A shares for employees of Citigroup including
Salomon Smith Barney, unitholders who invest distributions from a
Unit Investment Trust ("UIT") sponsored by Salomon Smith Barney, and
Directors/Trustees of any of the Smith Barney Mutual Funds, and
their spouses and children. The fund reserves the right to waive or
change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased
will be held in the shareholder's account by the sub-transfer agent.
Share certificates are issued only upon a shareholder's written
request to the sub-transfer agent. It is not recommended that the
Fund be used as a vehicle for Keogh, IRA or other qualified
retirement plans.
Purchase orders received by the fund or a Salomon Smith Barney
Financial Consultant prior to the close of regular trading on the
NYSE, on any day the fund calculates its net asset value, are priced
according to the net asset value determined on that day (the ''trade
date''). Orders received by a Dealer Representative prior to the
close of regular trading on the NYSE on any day the fund calculates
its net asset value, are priced according to the net asset value
determined on that day, provided the order is received by the fund
or the fund's agent prior to its close of business. For shares
purchased through Salomon Smith Barney or a Dealer Representative
purchasing through Salomon Smith Barney, payment for shares of the
fund is due on the third business day after the trade date. In all
other cases, payment must be made with the purchase order.
Systematic Investment Plan. Shareholders may make additions to
their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic
Investment Plan, Salomon Smith Barney or the sub-transfer agent is
authorized through preauthorized transfers of at least $25 on a
monthly basis or at least $50 on a quarterly basis to charge the
shareholder's account held with a bank or other financial
institution on a monthly or quarterly basis as indicated by the
shareholder, to provide for systematic additions to the
shareholder's fund account. A shareholder who has insufficient funds
to complete the transfer will be charged a fee of up to $25 by
Salomon Smith Barney or the sub-transfer agent. The Systematic
Investment Plan also authorizes Salomon Smith Barney to apply cash
held in the shareholder's Salomon Smith Barney brokerage account or
redeem the shareholder's shares of a Smith Barney money market fund
to make additions to the account. Additional information is
available from the fund or a Salomon Smith Barney Financial
Consultant or a Dealer Representative.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A shares may be
made at net asset value without a sales charge in the following
circumstances: (a) sales to (i) Board Members and employees of
Citigroup and its subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including retired Board
Members and employees); the immediate families of such persons
(including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan
for such persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such sales are
made upon the assurance of the purchaser that the purchase is made
for investment purposes and that the securities will not be resold
except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of
such company with the fund by merger, acquisition of assets or
otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up
to 90 days from the commencement of the Financial Consultant's
employment with Salomon Smith Barney), on the condition the purchase
of Class A shares is made with the proceeds of the redemption of
shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d)
purchases by shareholders who have redeemed Class A shares in the
fund (or Class A shares of another Smith Barney Mutual Fund that is
offered with a sales charge) and who wish to reinvest their
redemption proceeds in the fund, provided the reinvestment is made
within 60 calendar days of the redemption; (e) purchases by accounts
managed by registered investment advisory subsidiaries of Citigroup;
(f) investments of distributions from or proceeds from a sale of a
UIT sponsored by Salomon Smith Barney; and (g) purchases by
investors participating in a Salomon Smith Barney fee-based
arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of
the sales charge.
Right of Accumulation. Class A shares of the fund may be purchased
by ''any person'' (as defined above) at a reduced sales charge or at
net asset value determined by aggregating the dollar amount of the
new purchase and the total net asset value of all Class A shares of
the fund and of other Smith Barney Mutual Funds that are offered
with a sales charge as currently listed under ''Exchange Privilege''
then held by such person and applying the sales charge applicable to
such aggregate. In order to obtain such discount, the purchaser
must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification
or discontinuance at any time with respect to all shares purchased
thereafter.
Letter of Intent - Class A Shares. A Letter of Intent for an amount
of $50,000 or more provides an opportunity for an investor to obtain
a reduced sales charge by aggregating investments over a 13 month
period, provided that the investor refers to such Letter when
placing orders. For purposes of a Letter of Intent, the ''Amount of
Investment'' as referred to in the preceding sales charge table
includes (i) all Class A shares of the fund and other Smith Barney
Mutual Funds offered with a sales charge acquired during the term of
the letter plus (ii) the value of all Class A shares previously
purchased and still owned. Each investment made during the period
receives the reduced sales charge applicable to the total amount of
the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or
an appropriate number of escrowed shares will be redeemed. The term
of the Letter will commence upon the date the Letter is signed, or
at the options of the investor, up to 90 days before such date.
Please contact a Salomon Smith Barney Financial Consultant or Citi
Fiduciary Trust Company (the "transfer agent") to obtain a Letter of
Intent application.
Letter of Intent - Class Y Shares. A Letter of Intent may also be
used as a way for investors to meet the minimum investment
requirement for Class Y shares (except purchases of Class Y shares
by Smith Barney Concert Allocation Series Inc., for which there is
no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the fund and
agree to purchase a total of $15,000,000 of Class Y shares of the
fund within 13 months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-month period,
all Class Y shares purchased to date will be transferred to Class A
shares, where they will be subject to all fees (including a service
fee of 0.15%) and expenses applicable to the fund's Class A shares,
which may include a deferred sales charge of 1.00%. Please contact
a Salomon Smith Barney Financial Consultant or the transfer agent
for further information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are: (a) Class B shares; (b) Class
L shares; and (c) Class A shares that were purchased without an
initial sales charge but are subject to a deferred sales charge. A
deferred sales charge may be imposed on certain redemptions of these
shares.
Any applicable deferred sales charge will be assessed on an amount
equal to the lesser of the original cost of the shares being
redeemed or their net asset value at the time of redemption.
Deferred Sales Charge Shares that are redeemed will not be subject
to a deferred sales charge to the extent the value of such shares
represents: (a) capital appreciation of fund assets; (b)
reinvestment of dividends or capital gain distributions; (c) with
respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class L shares and
Class A shares that are Deferred Sales Charge Shares, shares
redeemed more than 12 months after their purchase.
Class L shares and Class A shares that are Deferred Sales Charge
Shares are subject to a 1.00% deferred sales charge if redeemed
within 12 months of purchase. In circumstances in which the deferred
sales charge is imposed on Class B shares, the amount of the charge
will depend on the number of years since the shareholder made the
purchase payment from which the amount is being redeemed. Solely
for purposes of determining the number of years since a purchase
payment, all purchase payments made during a month will be
aggregated and deemed to have been made on the last day of the
preceding Salomon Smith Barney statement month. The following table
sets forth the rates of the charge for redemptions of Class B shares
by shareholders.
Year Since Purchase Payment Was Made
Deferred sales charge
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A shares eight
years after the date on which they were purchased and thereafter
will no longer be subject to any distribution fees. There will also
be converted at that time such proportion of Class B Dividend Shares
owned by the shareholder as the total number of his or her Class B
shares converting at the time bears to the total number of
outstanding Class B shares (other than Class B Dividend Shares)
owned by the shareholder.
In determining the applicability of any deferred sales charge, it
will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing the
reinvestment of dividends and capital gains distributions and
finally of other shares held by the shareholder for the longest
period of time. The length of time Deferred Sales Charge Shares
acquired through an exchange have been held will be calculated from
the date the shares exchanged were initially acquired in one of the
other Smith Barney Mutual Funds, and fund shares being redeemed will
be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other
funds. For federal income tax purposes, the amount of the deferred
sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any
deferred sales charge will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B
shares of the fund at $10 per share for a cost of $1,000.
Subsequently, the investor acquired 5 additional shares of the fund
through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset
value had appreciated to $12 per share, the value of the investor's
shares would be $1,260 (105 shares at $12 per share). The deferred
sales charge would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4.00% (the applicable rate for
Class B shares) for a total deferred sales charge of $9.60.
Waivers of Deferred Sales Charge
The deferred sales charge will be waived on: (a) exchanges (see
''Exchange Privilege''); (b) automatic cash withdrawals in amounts
equal to or less than 1.00% per month of the value of the
shareholder's shares at the time the withdrawal plan commences (see
''Automatic Cash Withdrawal Plan'') (however, automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal
plans established prior to November 7, 1994); (c) redemptions of
shares within 12 months following the death or disability of the
shareholder; (d) involuntary redemptions; and (e) redemptions of
shares to effect a combination of the fund with any investment
company by merger, acquisition of assets or otherwise. In addition,
a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the
redemption proceeds within 60 days and receive pro rata credit for
any deferred sales charge imposed on the prior redemption.
Deferred sales charge waivers will be granted subject to
confirmation (by Salomon Smith Barney in the case of shareholders
who are also Salomon Smith Barney clients or by the transfer agent
in the case of all other shareholders) of the shareholder's status
or holdings, as the case may be.
Volume Discounts
The schedule of sales charges on Class A shares described in the
prospectus applies to purchases made by any "purchaser," which is
defined to include the following: (a) an individual; (b) an
individual's spouse and his or her children purchasing shares for
their own account; (c) a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account; and
(d) a trustee or other professional fiduciary (including a bank, or
an investment adviser registered with the SEC under the Investment
Advisers Act of 1940 purchasing shares of the fund for one or more
trust estates or fiduciary accounts. Purchasers who wish to combine
purchase orders to take advantage of volume discounts on Class A
shares should contact a Salomon Smith Barney Financial Consultant.
DETERMINATION OF NET ASSET VALUE
Each class' net asset value per share is calculated on each day,
Monday through Friday, except days on which the NYSE is closed. The
NYSE currently is scheduled to be closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and class-specific expenses, the
per share net asset value of each class may differ. The following is
a description of the procedures used by the fund in valuing its
assets.
Generally, the fund's investments are valued at market value or, in
the absence of a market value with respect to any securities, at
fair value as determined by or under the direction of the Board of
Directors. A security that is primarily traded on a domestic or
foreign exchange is valued at the last sale price on that exchange
or, if there were no sales during the day, at the mean between the
bid and asked price. Over-the-counter securities are valued at the
mean between the bid and asked price. If market quotations for
those securities are not readily available, they are valued at fair
value, as determined in good faith by the fund's Board of Directors.
An option is generally valued at the last sale price or, in the
absence of a last sale price, the last offer price.
U.S. government securities will be valued at the mean between the
closing bid and asked prices on each day, or, if market quotations
for those securities are not readily available, at fair value, as
determined in good faith by the fund's Board of Directors.
Short-term investments maturing in 60 days or less are valued at
amortized cost whenever the Board of Directors determines that
amortized cost reflects fair value of those investments. Amortized
cost valuation involves valuing an instrument at its cost initially
and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the instrument.
All other securities and other assets of the fund will be valued at
fair value as determined in good faith by the fund's Board of
Directors.
Determination of Public Offering Price
The fund offers its shares to the public on a continuous basis. The
public offering price per Class A and Class Y share of the fund is
equal to the net asset value per share at the time of purchase plus,
for Class A shares, an initial sales charge based on the aggregate
amount of the investment. The public offering price per Class B and
Class L share (and Class A share purchases, including applicable
rights of accumulation, equaling or exceeding $500,000) is equal to
the net asset value per share at the time of purchase and no sales
charge is imposed at the time of purchase. The method of computing
the public offering price is shown in the fund's financial
statements, incorporated by reference in their entirety into this
SAI.
REDEMPTION OF SHARES
The fund is required to redeem the shares of the fund tendered to
it, as described below, at a redemption price equal to their net
asset value per share next determined after receipt of a written
request in proper form at no charge other than any applicable
deferred sales charge. Redemption requests received after the close
of regular trading on the NYSE are priced at the net asset value
next determined.
If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the event
of a failure to specify which Class, or if the investor owns fewer
shares of the Class than specified, the redemption request will be
delayed until the transfer agent receives further instructions from
Salomon Smith Barney, or if the shareholder's account is not with
Salomon Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day
following receipt of proper tender, except on any days on which the
NYSE is closed or as permitted under the 1940 Act in extraordinary
circumstances. Generally, if the redemption proceeds are remitted to
a Salomon Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction
and Salomon Smith Barney will benefit from the use of temporarily
uninvested funds. Redemption proceeds for shares purchased by check,
other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to fifteen days or more.
Shares held by Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial
Consultant. Shares other than those held by Salomon Smith Barney as
custodian may be redeemed through an investor's Financial
Consultant, Dealer Representative or by submitting a written request
for redemption to:
Smith Barney New Jersey Municipals Fund Inc.
Class A, B, L or Y (please specify)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
A written redemption request must (a) state the Class and number or
dollar amount of shares to be redeemed, (b) identify the
shareholder's account number and (c) be signed by each registered
owner exactly as the shares are registered. If the shares to be
redeemed were issued in certificate form, the certificates must be
endorsed for transfer (or be accompanied by an endorsed stock power)
and must be submitted to the transfer agent together with the
redemption request. Any signature appearing on a share certificate,
stock power or written redemption request in excess of $10,000 must
be guaranteed by an eligible guarantor institution, such as a
domestic bank, savings and loan institution, domestic credit union,
member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000
or less do not require a signature guarantee unless more than one
such redemption request is made in any 10-day period. Redemption
proceeds will be mailed to an investor's address of record. The
transfer agent may require additional supporting documents for
redemptions made by corporations, executors, administrators,
Directors or guardians. A redemption request will not be deemed
properly received until the transfer agent receives all required
documents in proper form.
Telephone Redemption and Exchange Program. Shareholders who do not
have a brokerage account may be eligible to redeem and exchange
shares by telephone. To determine if a shareholder is entitled to
participate in this program, he or she should contact the transfer
agent at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization
Form, along with a signature guarantee, that will be provided by the
sub-transfer agent upon request. (Alternatively, an investor may
authorize telephone redemptions on the new account application with
the applicant's signature guarantee when making his/her initial
investment in a fund.)
Redemptions. Redemption requests of up to $10,000 of any class or
classes of shares of a fund may be made by eligible shareholders by
calling the transfer agent at 1-800-451-2010. Such requests may be
made between 9:00 a.m. and 4:00 p.m. (Eastern time) on any day the
NYSE is open. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account
predesignated by the shareholder. Generally, redemption proceeds
will be mailed or wired, as the case may be, on the next business
day following the redemption request. In order to use the wire
procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a
member bank. The fund reserves the right to charge shareholders a
nominal fee for each wire redemption. Such charges, if any, will be
assessed against the shareholder's account from which shares were
redeemed. In order to change the bank account designated to receive
redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature
guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if
the account registration of the shares of the fund being acquired is
identical to the registration of the shares of the fund exchanged.
Such exchange requests may be made by calling Citi Fiduciary Trust
Company at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m. (Eastern
time) on any day on which the NYSE is open.
Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the fund nor its agents will be liable for
following instructions communicated by telephone that are reasonably
believed to be genuine. The fund and its agents will employ
procedures designed to verify the identity of the caller and
legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded).
The fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for
this service at any time following at least seven (7) days' prior
notice to shareholders.
Redemptions in Kind. In conformity with applicable rules of the
SEC, redemptions may be paid in portfolio securities, in cash or any
combination of both, as the Board of Directors may deem advisable;
however, payments shall be made wholly in cash unless the Board of
Directors believes economic conditions exist that would make such a
practice detrimental to the best interests of the fund and its
remaining shareholders. If a redemption is paid in portfolio
securities, such securities will be valued in accordance with the
procedures described under "Determination of Net Asset Value" in the
Prospectus and a shareholder would incur brokerage expenses if these
securities were then converted to cash.
Distributions in Kind
If the fund's Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of
the fund to make a redemption payment wholly in cash, the fund may
pay, in accordance with SEC rules, any portion of a redemption in
excess of the lesser of $250,000 or 1.00% of the fund's net assets
by a distribution in kind of portfolio securities in lieu of cash.
Securities issued as a distribution in kind may incur brokerage
commissions when shareholders subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders who own shares with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly or
quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the fund as may be
necessary to cover the stipulated withdrawal payment. Any applicable
deferred sales charge will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.
(With respect to Withdrawal Plans in effect prior to November 7,
1994, any applicable deferred sales charge will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.) To
the extent withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the fund, there will
be a reduction in the value of the shareholder's investment, and
continued withdrawal payments will reduce the shareholder's
investment and may ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in the fund.
Furthermore, as it generally would not be advantageous to a
shareholder to make additional investments in the fund at the same
time he or she is participating in the Withdrawal Plan, purchases by
such shareholder in amounts of less than $5,000 ordinarily will not
be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who
hold their shares in certificate form must deposit their share
certificates with the sub-transfer agent as agent for Withdrawal
Plan members. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in
additional shares of the fund. For additional information,
shareholders should contact a Salomon Smith Barney Financial
Consultant. Withdrawal Plans should be set up with a Salomon Smith
Barney Financial Consultant. A shareholder who purchases shares
directly through the sub-transfer agent may continue to do so and
applications for participation in the Withdrawal Plan must be
received by the sub-transfer agent no later than the eighth day of
the month to be eligible for participation beginning with that
month's withdrawals. For additional information, shareholders
should contact a Salomon Smith Barney Financial Consultant.
The fund offers shareholders an automatic cash withdrawal plan,
under which shareholders who own shares with a value of at least
$10,000 may elect to receive cash payments of at least $50 monthly
or quarterly. Retirement plan accounts are eligible for automatic
cash withdrawal plans only where the shareholder is eligible to
receive qualified distributions and has an account value of at least
$5,000. The withdrawal plan will be carried over on exchanges
between Classes of a fund. Any applicable deferred sales charge
will not be waived on amounts withdrawn by a shareholder that exceed
1.00% per month of the value of the shareholder's shares subject to
the deferred sales charge at the time the withdrawal plan commences.
(With respect to withdrawal plans in effect prior to November 7,
1994, any applicable deferred sales charge will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the deferred sales charge.) For
further information regarding the automatic cash withdrawal plan,
shareholders should contact a Salomon Smith Barney Financial
Consultant.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser and Administrator - SSB CITI
SSB Citi serves as investment adviser to the fund pursuant to an
investment advisory agreement (the "Investment Advisory Agreement")
with the fund which was approved by the Board of Directors,
including a majority of Directors who are not "interested persons"
of the fund or of SSB Citi. SSB Citi is a wholly owned subsidiary
of Salomon Smith Barney Holdings Inc. ("Holdings"), which in turn,
is a wholly owned subsidiary of Citigroup. Subject to the
supervision and direction of the fund's Board of Directors, SSB Citi
manages the fund's portfolio in accordance with the fund's stated
investment objective and policies, makes investment decisions for
the fund, places orders to purchase and sell securities, and employs
professional portfolio managers and securities analysts who provide
research services to the fund. SSB Citi pays the salary of any
officer and employee who is employed by both it and the fund. SSB
Citi bears all expenses in connection with the performance of its
services. SSB Citi (through its predecessor entities) has been in
the investment counseling business since 1968 and renders investment
advice to -investment company clients that had aggregate assets
under management as of June 30, 2000 of approximately $222 billion.
As compensation for investment advisory services, the fund pays the
manager a fee computed daily and payable monthly at 0.30% of the
value of the fund's average daily net assets. For the fiscal years
ended March 31, 1998, 1999, and 2000, the fund paid the manager net
of fee waivers and expense reimbursements, $665,651, $722,522, and
$672,124, respectively, in investment advisory fees.
SSB Citi also serves as administrator to the fund pursuant to a
written agreement (the "Administration Agreement"). SSB Citi pays
the salary of all officers and employees who are employed by both it
and the fund and bears all expenses in connection with the
performance of its services. As administrator SSB Citi: (a) assists
in supervising all aspects of the fund's operations; b) supplies the
fund with office facilities (which may be in SSB Citi's own
offices), statistical and research data, data processing services,
clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of (i) the net asset value of shares of
the fund, (ii) applicable deferred sales charges and similar fees
and charges and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and
stationary and office supplies; and (c) prepares reports to
shareholders of the fund, tax returns and reports to and filings
with the SEC and state Blue Sky authorities.
As compensation for administrative services rendered to the fund,
the manager receives a fee computed daily and payable monthly at the
following annual rates of average daily net assets: 0.20% up to $500
million; and 0.18% in excess of $500 million. For the fiscal years
ended March 31, 1998, 1999 and 2000 the fund paid the manager in
administration fees $443,768, $481,681 and $448,083, respectively.
The fund bears expenses incurred in its operations including: taxes,
interest, brokerage fees and commissions, if any; fees of Directors
of the fund who are not officers, Directors, shareholders or
employees of Salomon Smith Barney or the manager; SEC fees and state
Blue Sky notice fees; charges of custodians; transfer and dividend
disbursing agent's fees; certain insurance premiums; outside
auditing and legal expenses; costs of maintaining corporate
existence; costs of investor services (including allocated telephone
and personnel expenses); costs of preparing and printing of
prospectuses for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and
shareholder meetings; and meetings of the officers or Board of
Directors of the fund.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, the fund, its investment
adviser and principal underwriter have adopted codes of ethics that
permit personnel to invest in securities for their own accounts,
including securities that may be purchased or held by the fund. All
personnel must place the interests of clients first and avoid
activities, interests and relationships that might interfere with
the duty to make decisions in the best interests of the clients.
All personal securities transactions by employees must adhere to the
requirements of the codes and must be conducted in such a manner as
to avoid any actual or potential conflict of interest, the
appearance of such a conflict, or the abuse of an employee's
position of trust and responsibility.
A copy of the fund's Code of Ethics is on file with the Securities
and Exchange Commission.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York
10019, serves as counsel to the fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York,
serves as counsel to the Directors who are not "interested persons"
of the fund.
Auditors
KPMG LLP, 757 Third Avenue, New York, New York 10017, has been
selected to serve as the fund's independent auditor and to render an
opinion on the fund's financial statements for the fiscal year
ending March 31, 2001.
Custodian, Transfer Agent and Sub-Transfer Agent
PNC Bank, National Association, located at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103, serves as the fund's
custodian. Under the custody agreement, PNC holds the fund's
portfolio securities and keeps all necessary accounts and records.
For its services, PNC receives a monthly fee based upon the month-
end market value of securities held in custody and also receives
securities transaction charges. The assets of the fund are held
under bank custodianship in compliance with the 1940 Act.
Citi Fiduciary Trust Company, located at 125 Broad Street, New York,
New York 10004, serves as the fund's transfer and dividend-paying
agent. Under the transfer agency agreement, the transfer agent
maintains the shareholder account records for the fund, handles
certain communications between shareholders and the fund,
distributes dividends and distributions payable by the fund and
produces statements with respect to account activity for the fund
and its shareholders. For these services, the transfer agent
receives fees from the fund computed on the basis of the number of
shareholder accounts that the transfer agent maintains for the fund
during the month and is reimbursed for out-of-pocket expenses.
PFPC Global Fund Services, located at P.O. Box 9699, Providence, RI
02940-9699, serves as the fund's sub-transfer agent. Under the
transfer agency agreement, PFPC 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, PFPC
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 .
Distributor
Salomon Smith Barney, located at 388 Greenwich Street, New York, New
York 10013 serves as the fund's distributor pursuant to a written
agreement dated June 5, 2000 (the "Distribution Agreement") which
was approved by the fund's Board of Directors, including a majority
of the independent Directors, on April 17, 2000. This Distribution
Agreement replaces the Distribution Agreement with CFBDS, Inc. For
the 1998 fiscal year, Salomon Smith Barney, received $236,000 in
sales charges from the sale of Class A shares and did not reallow
any portion thereof to dealers. For the period April 1, 1998
through October 7, 1998 the aggregate dollar amount of sales charges
on Class A shares was $169,000 all of which was paid to Salomon
Smith Barney. For the period October 8, 1998 through March 31, 1999
the aggregate dollar amount of sales charges on Class A shares was
$172,000, $154,800 of which was paid to Salomon Smith Barney. For
the 2000 fiscal year, the aggregate dollar amount of sales charges
on Class A shares was $144,000, of which $129,600 was paid to
Salomon Smith Barney.
For the period June 12, 1998 through October 7, 1998 the aggregate
dollar amount of sales charges on Class L shares was $11,000, all of
which was paid to Salomon Smith Barney. For the period October 8,
1998 through March 31, 1999 the aggregate dollar amount of sales
charges on Class L shares was $14,000, $12,600 of which was paid to
Salomon Smith Barney. For the 2000 fiscal year, the aggregate
dollar amount of sales charges on Class L shares was $25,000, of
which $22,500 was paid to Salomon Smith Barney.
For the fiscal years ended March 31, 1998, 1999, and 2000, Salomon
Smith Barney or its predecessor received from shareholders $97,000,
$51,000 and $93,000, respectively, in deferred sales charges on the
redemption of Class B shares. For the fiscal years ended March 31,
1998, 1999 and 2000, Salomon Smith Barney or its predecessor
received from shareholders $2,000, $2000 and $2,000, respectively,
in deferred sales charges on redemption of Class L shares.
When payment is made by the investor before the settlement date,
unless otherwise noted by the investor, the funds will be held as a
free credit balance in the investor's brokerage account and Salomon
Smith Barney may benefit from the temporary use of the funds. The
fund's Board of Directors has been advised of the benefits to
Salomon Smith Barney resulting from these settlement procedures and
will take such benefits into consideration when reviewing the
Investment Management Agreement for continuance.
Distribution Arrangements. To compensate Salomon Smith Barney for
the service it provides and for the expense it bears, the fund has
adopted a services and distribution plan (the "Plan") pursuant to
Rule 12b 1 under the 1940 Act. Under the Plan, the fund pays
Salomon Smith Barney a service fee, accrued daily and paid monthly,
calculated at the annual rate of 0.15% of the value of the fund's
average daily net assets attributable to the Class A, Class B and
Class L shares. In addition, the fund pays Salomon Smith Barney a
distribution fee with respect to Class B and Class L shares
primarily intended to compensate Salomon Smith Barney for its
initial expense of paying Financial Consultants a commission upon
sales of those shares. The Class B and Class L distribution fee is
calculated at the annual rate of 0.50% and 0.55%, respectively, of
the value of the fund's average net assets attributable to the
shares of each Class.
For the fiscal year ended March 31, 2000, Salomon Smith Barney
incurred distribution expenses totaling $852,926 consisting of
$50,177 for advertising, $5,017 for printing and mailing of
prospectuses, $338,733 for support services, $444,055 to Salomon
Smith Barney Financial Consultants, and $14,944 in accruals for
interest on the excess of Salomon Smith Barney expenses incurred in
distributing the fund's shares over the sum of the distribution fees
and deferred sales charge received by Salomon Smith Barney from the
fund.
The following service and distribution fees were incurred pursuant
to a Distribution Plan during the periods indicated:
Distribution Plan Fees
Fiscal Year
Ended 3/31/00
Fiscal Year
Ended 3/31/99
Fiscal Year
Ended 3/31/98
Class A
$ 228,500
$ 248,265
$ 228,814
Class B
$ 404,862
$ 440,192
$ 415,461
Class L*
$ 66,096
$ 53,263
$ 37,970
* Class L shares were called Class C shares until June 12,
1998.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Directors,
including a majority of the Independent Directors. The Plan may not
be amended to increase the amount of the service and distribution
fees without shareholder approval, and all material amendments of
the Plan also must be approved by the Directors and Independent
Directors in the manner described above. The Plan may be terminated
with respect to a Class of the fund at any time, without penalty, by
vote of a majority of the Independent 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, Salomon Smith
Barney will provide the fund's Board of Directors with periodic
reports of amounts expended under the Plan and the purpose for which
such expenditures were made.
VALUATION OF SHARES
The fund's net asset value per share is determined as of the close
of regular trading on the NYSE, on each day that the NYSE is open,
by dividing the value of the fund's net assets attributable to each
Class by the total number of shares of that Class outstanding.
When, in the judgement of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid
side of the market, these investments are valued at the mean between
the quoted bid and asked prices. Investments for which, in the
judgment of the pricing service, there is no readily obtainable
market quotation (which may constitute a majority of the portfolio
securities) are carried at fair value based on securities of similar
type, yield and maturity. Pricing services generally determine
value by reference to transactions in municipal obligations,
quotations from municipal bond dealers, market transactions in
comparable securities and various relationships between securities.
Short-term investments that mature in 60 days or less are valued at
amortized cost whenever the Board of Directors determines that
amortized cost is or approximates fair value. Amortized cost
valuation involves valuing an instrument at its cost initially and,
thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Securities
and other assets for which market quotations are not readily
available will be valued in good faith at fair value by or under the
direction of the fund's Board of Directors.
EXCHANGE PRIVILEGE
Shares of each Class of the fund may be exchanged for shares of the
same Class of certain Smith Barney Mutual Funds, to the extent
shares are offered for sale in the shareholder's state of residence.
Exchanges of Class A, Class B and Class L shares are subject to
minimum investment requirements and all shares are subject to the
other requirements of the fund into which exchanges are made.
Class B Exchanges. If a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a
higher deferred sales charge than that imposed by the fund, the
exchanged Class B shares will be subject to the higher applicable
deferred sales charge. Upon an exchange, the new Class B shares will
be deemed to have been purchased on the same date as the Class B
shares of the fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L shares will be
deemed to have been purchased on the same date as the Class L shares
of the fund that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of
the fund who wish to exchange all or a portion of their shares for
shares of the respective Class in any of the funds identified above
may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although
the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the fund's performance and its
shareholders. The manager may determine that a pattern of frequent
exchanges is excessive and contrary to the best interests of the
fund's other shareholders. In this event, the fund may, at its
discretion, decide to limit additional purchases and/or exchanges by
the shareholder. Upon such a determination, the fund will provide
notice in writing or by telephone to the shareholder at least 15
days prior to suspending the exchange privilege and during the 15
day period the shareholder will be required to (a) redeem his or her
shares in the fund or (b) remain invested in the fund or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to
maintain for a significant period of time. All relevant factors will
be considered in determining what constitutes an abusive pattern of
exchanges.
Certain shareholders may be able to exchange shares by telephone.
See ''Redemption of Shares Telephone Redemptions and Exchange
Program.'' Exchanges will be processed at the net asset value next
determined. Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged, no
signature guarantee is required. An exchange involves a taxable
redemption of shares, subject to the tax treatment described in
"Dividends, Distributions and Taxes" below, followed by a purchase
of shares of a different fund. Before exchanging shares, investors
should read the current prospectus describing the shares to be
acquired. The fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
PERFORMANCE DATA
From time to time, the fund may quote total return of a class in
advertisements or in reports and other communications to
shareholders. The fund may include comparative performance
information in advertising or marketing the fund's shares. Such
performance information may include data from the following industry
and financial publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Business Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal.
Yield and Equivalent Taxable Yield
A Class' 30-day yield figure described below is calculated according
to a formula prescribed by the SEC. The formula can be expressed as
follows:
YIELD =2 [(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
For the purpose of determining the interest earned (variable "a'' in
the formula) on debt obligations that were purchased by the fund at
a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of the debt
obligations.
The fund's equivalent taxable 30-day yield for a Class of shares is
computed by dividing that portion of the Class' 30-day yield which
is tax-exempt by one minus a stated income tax rate and adding the
product to that portion, if any, of the Class' yield that is not
tax-exempt.
The yields on municipal securities are dependent upon a variety of
factors, including general economic and monetary conditions,
conditions of the municipal securities market, size of a particular
offering, maturity of the obligation offered and rating of the
issue. Investors should recognize that in periods of declining
interest rates the fund's yield for each Class of shares will tend
to be somewhat higher than prevailing market rates, and in periods
of rising interest rates the fund's yield for each Class of shares
will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to the fund from the continuous
sale of its shares will likely be invested in portfolio instruments
producing lower yields than the balance of the fund's portfolio,
thereby reducing the current yield of the fund. In periods of rising
interest rates, the opposite can be expected to occur.
The fund's yield for Class A, Class B and Class L shares for the 30-
day period ended March 31, 2000 was 5.23%, 5.02% and 4.80%,
respectively. The equivalent taxable yield for Class A, Class B and
Class L shares for that same period was 9.25%, 8.88% and 8.49%,
respectively, assuming the payment of federal income taxes and New
Jersey taxes at a rate of 39.6% and 6.37%, respectively. No yield
information is present for Class Y shares because no Class Y shares
were outstanding for the 30-day period ended March 31, 2000.
Average Annual Total Return
"Average annual total return," as described below, is computed
according to a formula prescribed by the SEC. The formula can be
expressed as follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment of
$1,000.
T = average annual total return.
N = number of years.
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5-, or 10-year period at the end of a
1-, 5-, or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The fund's average annual total return for Class A shares assuming
the maximum applicable sales charge was as follows for the periods
indicated (reflecting the waiver of the fund's investment advisory
and administration fees and reimbursement of expenses):
(8.09)% for the one-year period ended March 31, 2000.
3.99% for the five-year period ended March 31, 2000.
6.10% for the ten-year period ended March 31, 2000.
6.72% per annum from April 22, 1988 (commencement of
operations) through March 31, 2000.
A Class' average annual total return assumes that the maximum
applicable sales charge or deferred sales charge assessed by the
fund has been deducted from the hypothetical investment. Had the
maximum 4.00% sales charge had not been deducted, Class A's average
annual total return would have been (4.28)%, 4.85%, 6.53% and 7.09%,
respectively, for those same periods.
The fund's average annual total return for Class B shares assuming
the maximum applicable deferred sales charge was as follows for the
periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
(8.88)% for the one-year period ended March 31, 2000.
4.13% for the five-year period ended March 31, 2000.
4.72% per annum from November 6, 1992 (commencement of
operations) through March 31, 2000.
Had the maximum applicable deferred sales charge had not been
deducted at the time of redemption, Class B's average annual total
return would have been (4.82)%, 4.29% and 4.72%, respectively, for
the same periods.
The fund's average annual total return for Class L shares assuming
the maximum applicable deferred sales charge was as follows for the
periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
(6.68)% for the one-year period ended March 31, 2000.
4.02% for the five-year period ended March 31, 2000.
5.31% per annum from December 13, 1994 (commencement of
operations) through March 31, 2000.
Had the maximum applicable deferred sales charge not been deducted
at the time of redemption, Class L's average annual total return
would have been (4.86)%, 4.23% and 5.51%, respectively, for the same
periods. No average annual total return information is present for
Class Y shares because no Class Y shares were outstanding for the
periods presented for Class A, B and L shares.
Aggregate Total Return
"Aggregate total return" represents the cumulative change in the
value of an investment in the Class for the specified period and is
computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV= Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of a 1-, 5-, or
10-year period at the end of a 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The fund's aggregate total return for Class A shares was as follows
for the periods indicated (reflecting the waiver of the fund's
investment advisory and administration fees and reimbursement of
expenses):
(8.09)% for the one-year period ended March 31, 2000.
21.61% for the five-year period ended March 31, 2000.
80.74% for the ten-year period ended March 31, 2000.
117.58% for the period from April 22, 1988 (commencement
of operations) through March 31, 2000.
Class A's aggregate total return assumes that the maximum applicable
sales charge or maximum applicable deferred sales charge has been
deducted from the investment. If the maximum sales charge had not
been deducted at the time of purchase, Class A's aggregate total
return for the same periods would have been (4.28)%, 26.72%, 88.32%
and 126.74%, respectively.
The fund's aggregate total return for Class B shares was as follows
for the periods indicated (reflecting the waiver of the fund's
investment advisory and administration fees and reimbursement of
expenses):
(8.88)% for the one-year period ended March 31, 2000.
22.45% for the five-year period ended March 31, 2000.
40.72% for the period from November 6, 1992
(commencement of operations) through March 31, 2000.
If the maximum applicable deferred sales charge had not been
deducted at the time of redemption, Class B's aggregate total return
for the same periods would have been (4.82)%, 23.40% and 40.72%,
respectively.
The fund's aggregate total return for Class L shares was as follows
for the period indicated (reflecting the waiver of the fund's
investment advisory and administration fees and reimbursement of
expenses):
(6.68)% for the one-year period ended March 31, 2000.
21.78% for the five-year perod ended March 31, 2000.
31.56% for the period from December 13, 1994
(commencement of operations) through March 31, 2000.
If the maximum applicable deferred sales charge had not been
deducted at the time of redemption, Class L's aggregate total return
for the one-year period ended March 31, 2000 would have been
(4.86)%, 23.03 and 32.89%, respectively.
No aggregate total return information is presented for Class Y
shares because no Class Y shares were outstanding for the periods
presented for Class A, B and L shares.
Performance will vary from time to time depending on market
conditions, the composition of the fund's portfolio and operating
expenses and the expenses exclusively attributable to the Class.
Consequently, any given performance quotation should not be
considered as representative of the Class' performance for any
specified period in the future. Because performance will vary, it
may not provide a basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a fixed
yield for a stated period of time. Investors comparing a Class'
performance with that of other mutual funds should give
consideration to the quality and maturity of the respective
investment companies' portfolio securities.
It is important to note that the total return figures set forth
above are based on historical earnings and are not intended to
indicate future performance. Each Class' net investment income
changes in response to fluctuations in interest rates and the
expenses of the fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. The fund's policy is to declare and
pay exempt-interest dividends monthly. Dividends from net realized
capital gains, if any, will be distributed annually. The fund may
also pay additional dividends shortly before December 31 from
certain amounts of undistributed ordinary income and capital gains
in order to avoid a federal excise tax liability. If a shareholder
does not otherwise instruct, exempt-interest dividends and capital
gain distributions will be reinvested automatically in additional
shares of the same Class at net asset value, with no additional
sales charge or deferred sales charge.
The per share amounts of the exempt-interest dividends on Class B
and Class L shares will be lower than on Class A and Class Y shares,
mainly as a result of the distribution fees applicable to Class B
and Class L shares. Similarly, the per share amounts of exempt-
interest dividends on Class A shares will be lower than on Class Y
shares, as a result of the service fee attributable to Class A
shares. Capital gain distributions, if any, will be the same across
all Classes of fund shares (A, B, L and Y).
Taxes. The following is a summary of the material federal income tax
considerations regarding the purchase, ownership and disposition of
shares of the fund. Each prospective shareholder is urged to
consult his own tax adviser with respect to the specific federal,
state and local consequences of investing in the fund. The summary
is based on the laws in effect on the date of this SAI, which are
subject to change.
The fund and its investments
As described in the fund's prospectus, the fund is designed to
provide shareholders with current income which is excluded from
gross income for federal income tax purposes and which is exempt
from 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
because such investors would not gain any additional tax benefit
from the receipt of tax-exempt income.
The fund intends to continue to qualify to be treated as a regulated
investment company each taxable year under the Code. To so qualify,
the fund must, among other things: (a) derive at least 90% of its
gross income in each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other
disposition of stock or securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures
or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify
its holdings so that, at the end of each quarter of the fund's
taxable year, (i) at least 50% of the market value of the fund's
assets is represented by cash, securities of other regulated
investment companies, United States government securities and other
securities, with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the fund's assets
and not greater than 10% of the outstanding voting securities of
such issuer and (ii) not more than 25% of the value of its assets is
invested in the securities (other than United States government
securities or securities of other regulated investment companies) of
any one issuer or any two or more issuers that the fund controls and
which are determined to be engaged in the same or similar trades or
businesses or related trades or businesses.
As a regulated investment company, the fund will not be subject to
federal income tax on its net investment company income (i.e.,
taxable income other than any excess of its net realized long-term
capital gains over its net realized short-term capital losses ("net
realized capital gains")) and its net realized capital gains, if
any, that it distributes to its shareholders, provided that an
amount equal to at least 90% of its investment company taxable
income, plus or minus certain other adjustments as specified in the
Code, and 90% of its net tax-exempt income for the taxable year is
distributed in compliance with the Code's timing and other
requirements but will be subject to tax at regular corporate rates
on any taxable income or gains that it does not distribute.
At March 31, 2000, the unused capital loss carryovers of the fund
were approximately $1,315,000. For federal income tax purposes,
these amounts are available to be applied against future realized
capital gains, if any. The carryovers expire as follows:
March 31,
2008
Carryforward Amount
$1,315,000
The Code imposes a 4% nondeductible excise tax on the fund to the
extent it does not distribute by the end of any calendar year at
least 98% of its net investment income for that year and 98% of the
net amount of its capital gains (both long-and short-term) for the
one-year period ending, as a general rule, on October 31 of that
year. For this purpose, however, any income or gain retained by the
fund that is subject to corporate income tax will be considered to
have been distributed by year-end. In addition, the minimum amounts
that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or
overdistribution, as the case may be, from the previous year. The
fund anticipates that it will pay such dividends and will make such
distributions as are necessary in order to avoid the application of
this tax.
If, in any taxable year, the fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders would not be
deductible by the fund in computing its taxable income. In
addition, in the event of a failure to qualify, the fund's
distributions, to the extent derived from the fund's current or
accumulated earnings and profits, would constitute dividends
(eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated
in the shareholders' hands as tax-exempt interest. If the fund
fails to qualify as a regulated investment company in any year, it
must pay out its earnings and profits accumulated in that year in
order to qualify again as a regulated investment company. In
addition, if the fund failed to qualify as a regulated investment
company for a period greater than one taxable year, the fund may be
required to recognize any net built-in gains with respect to certain
of its assets (the excess of the aggregate gains, including items of
income, over aggregate losses that would have been realized if it
had been liquidated) in order to qualify as a regulated investment
company in a subsequent year.
The fund's transactions in municipal bond index and interest rate
futures contracts and options on these futures contracts
(collectively, "section 1256 contracts") will be subject to special
provisions of the Code (including provisions relating to "hedging
transactions" and "straddles") that, among other things, may affect
the character of gains and losses realized by the fund (i.e., may
affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund and defer fund losses. These rules
could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will
require the fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out) and (b)
may cause the fund to recognize income without receiving cash with
which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise
taxes. The fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in
its books and records when it engages in these transactions in order
to mitigate the effect of these rules and prevent disqualification
of the fund as a regulated investment company.
All section 1256 contracts held by the fund at the end of its
taxable year are required to be marked to their market value, and
any unrealized gain or loss on those positions will be included in
the fund's income as if each position had been sold for its fair
market value at the end of the taxable year. The resulting gain or
loss will be combined with any gain or loss realized by the fund
from positions in section 1256 contracts closed during the taxable
year. Provided such positions were held as capital assets and were
not part of a "hedging transaction" nor part of a "straddle," 60% of
the resulting net gain or loss will be treated as long-term capital
gain or loss, and 40% of such net gain or loss will be treated as
short-term capital gain or loss, regardless of the period of time
the positions were actually held by the fund.
Taxation of Shareholders
Because the fund will distribute exempt-interest dividends, interest
on indebtedness incurred by a shareholder to purchase or carry fund
shares is not deductible for federal income tax purposes and New
Jersey personal income tax purposes. If a shareholder receives
exempt-interest dividends with respect to any share and if such
share is held by the shareholder for six months or less, then, for
federal income tax purposes, any loss on the sale or exchange of
such share may, to the extent of exempt-interest dividends, be
disallowed. In addition, the Code may require a shareholder, if he
or she receives exempt-interest dividends, to treat as federal
taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Furthermore, that
portion of any exempt-interest dividend paid by the fund which
represents income derived from private activity bonds held by the
fund may not retain its federal tax-exempt status in the hands of a
shareholder who is a "substantial user" of a facility financed by
such bonds or a "related person" thereof. Moreover, some or all of
the fund's dividends may be a specific preference item, or a
component of an adjustment item, for purposes of the federal
individual and corporate alternative minimum taxes. In addition,
the receipt of the fund's dividends and distributions may affect a
foreign corporate shareholder's federal "branch profits" tax
liability and federal "excess net passive income" tax liability of
a shareholder of a Subchapter S corporation. Shareholders should
consult their own tax advisors to determine whether they are (a)
substantial users with respect to a facility or related to such
users within the meaning of the Code or (b) subject to a federal
alternative minimum tax, the federal branch profits tax or the
federal "excess net passive income" tax.
The fund does not expect to realize a significant amount of capital
gains. Net realized short-term capital gains are taxable to a
United States shareholder as ordinary income, whether paid in cash
or in shares. Distributions of net-long-term capital gains, if any,
that the fund designates as capital gains dividends are taxable as
long-term capital gains, whether paid in cash or in shares and
regardless of how long a shareholder has held shares of the fund.
Upon the sale or exchange of his shares, a shareholder will realize
a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be
treated as capital gain or loss, if the shares are capital assets in
the shareholder's hands, and will be long-term capital gain or loss
if the shares are held for more than one year and short-term capital
gain or loss if the shares are held for one year or less. Any loss
realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced, including replacement through the
reinvesting of dividends and capital gains distributions in the
fund, within a 61-day period beginning 30 days before and ending 30
days after the disposition of the shares. In such a case, the basis
of the shares acquired will be increased to reflect the disallowed
loss. Any loss realized by a shareholder on the sale of a fund share
held by the shareholder for six months or less (to the extent not
disallowed pursuant to the six-month rule described above relating
to exempt-interest dividends) will be treated for federal income tax
purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains
received by the shareholder with respect to such share.
If a shareholder incurs a sales charge in acquiring shares of the
fund, disposes of those shares within 90 days and then acquires
shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (e.g.,an
exchange privilege), the original sales charge will not be taken
into account in computing gain or loss on the original shares to the
extent the subsequent sales charge is reduced. Instead, the
disregarded portion of the original sales charge will be added to
the tax basis in the newly acquired shares. Furthermore, the same
rule also applies to a disposition of the newly acquired shares made
within 90 days of the second acquisition. This provision prevents
a shareholder from immediately deducting the sales charge by
shifting his or her investment in a family of mutual funds.
Backup Withholding. The fund may be required to withhold, for
federal income tax purposes, 31% of dividends, distributions and
redemption proceeds payable to shareholders who fail to provide the
fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that
they are subject to backup withholding. Certain shareholders are
exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a
shareholder's federal income tax liabilities.
Notices. Shareholders will be notified annually by the fund as to
the federal income tax and New Jersey personal income tax status of
the dividends and distributions made by the fund to its
shareholders. These statements also will designate the amount of
exempt-interest dividends that is a preference item for purposes of
the federal individual and corporate alternative minimum taxes. The
dollar amount of dividends excluded or exempt from federal income
taxation and New Jersey personal income taxation and the dollar
amount of dividends subject to federal income taxation and New
Jersey personal income taxation, if any, will vary for each
shareholder depending upon the size and duration of such
shareholder's investment in the fund. To the extent the fund earns
taxable net investment income, it intends to designate as taxable
dividends the same percentage of each day's dividend as its taxable
net investment income bears to its total net investment income
earned on that day.
The foregoing is only a summary of certain material tax consequences
affecting the fund and its shareholders. Shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the fund.
ADDITIONAL INFORMATION
The fund was incorporated under the laws of the State of Maryland on
November 12, 1987 and is registered with the SEC as a non-
diversified, open-end management investment company. The fund
commenced operations on April 22, 1988 under the name Shearson
Lehman New Jersey Municipals Inc. On October 14, 1994, the fund
changed its name to Smith Barney New Jersey Municipals Fund Inc.
Each Class of the fund represents an identical interest in the
fund's investment portfolio. As a result, the Classes have the same
rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the effect of the respective sales
charges for each Class; (c) the distribution and/or service fees
borne by each Class; (d) the expenses allocable exclusively to each
Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Board of Directors
does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Directors, on
an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
The fund does not hold annual shareholder meetings. There normally
will be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the
Directors holding office have been elected by shareholders. The
Directors will call a meeting for any purpose upon written request
of shareholders holding at least 10% of the fund's outstanding
shares, and the fund will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for
shareholder vote, shareholders of each Class will have on vote for
each full share owned and proportionate, fractional vote for any
fractional share held of that Class. Generally, shares of the fund
will be voted on a fund-wide basis on all matters except matters
affecting only the interests of one Class.
The fund sends to each of its shareholders a semi-annual report and
an audited annual report, which include listings of the investment
securities held by the fund at the end of the reporting period. In
an effort to reduce the fund's printing and mailing costs, the fund
plans to consolidate the mailing of its semi-annual and annual
reports by household. This consolidation means that a household
having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want
this consolidation to apply to their account should contact their
Financial Consultants or the transfer agent.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended March 31, 2000
was filed on May 26, 2000 and is incorporated by reference in its
entirety, Accession Number 00000950130-00-003194.
OTHER INFORMATION
In an industry where the average portfolio manager has seven years
of experience (source: ICI, 1998), the portfolio managers of Smith
Barney Mutual Funds average 21 years in the industry and 15 years
with the firm.
Smith Barney Mutual Funds offers more than 60 mutual funds. We
understand that many investors prefer an active role in allocating
the mix of funds in their portfolio, while others want the asset
allocation decisions to be made by experienced managers.
That's why we offer four "styles" of fund management that can be
tailored to suit each investor's unique financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested within their
asset class and investment style, enabling investors to make
asset allocation decisions in conjunction with their Salomon
Smith Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range of equity and
fixed income strategies that seek to capture opportunities
across asset classes and investment styles using disciplined
investment approaches.
The Concert Allocation Series
As a fund of funds, investors can select a Concert Portfolio
that may help their investment needs. As needs change,
investors can easily choose another long-term, diversified
investment from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed for investors
who are looking beyond more traditional market categories:
from natural resources to a roster of state-specific municipal
funds.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and
political subdivisions. Ratings are assigned to general obligation
and revenue bonds. General obligation bonds are usually secured by
all resources available to the municipality and the factors outlined
in the rating definitions below are weighed in determining the
rating. Because revenue bonds in general are payable from
specifically pledged revenues, the essential element in the security
for a revenue bond is the quantity and quality of the pledged
revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the
quality of general obligation bond credit is usually appropriate in
the rating analysis of a revenue bond, other factors are important,
including particularly the competitive position of the municipal
enterprise under review and the basic security covenants. Although
a rating reflects S&P's judgment as to the issuer's capacity for the
timely payment of debt service, in certain instances it may also
reflect a mechanism or procedure for an assured and prompt cure of
a default, should one occur, i.e., an insurance program, federal or
state guarantee or the automatic withholding and use of state aid to
pay the defaulted debt service.
AAA
Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds - In a period of economic stress, the
issuers will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate.
A strong revenue structure appears more than adequate to meet future
expenditure requirements. Quality of management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to
remain, substantial. Stability of the pledged revenues is also
exceptionally strong, due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic
security provisions (including rate covenant, earnings test for
issuance of additional bonds, and debt service reserve requirements)
are rigorous. There is evidence of superior management.
AA
High Grade - The investment characteristics of general obligation
and revenue bonds in this group are only slightly less marked than
those of the prime quality issues. Bonds rated "AA'' have the
second strongest capacity for payment of debt service.
A
Good Grade - Principal and interest payments on bonds in this
category are regarded as safe. This rating describes the third
strongest capacity for payment of debt service. It differs from the
two higher ratings because:
General Obligation Bonds - There is some weakness, either in the
local economic base, in debt burden, in the balance between revenues
and expenditures, or in quality of management. Under certain
adverse circumstances, any one such weakness might impair the
ability of the issuer to meet debt obligations at some future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations
because of increased competition or economic influences on revenues.
Basic security provisions, while satisfactory, are less stringent.
Management performance appears adequate.
BBB
Medium Grade - Of the investment grade ratings, this is the lowest.
General Obligation Bonds - Under certain adverse conditions, several
of the above factors could contribute to a lesser capacity for
payment of debt service. The difference between "A'' and "BBB"
ratings is that the latter shows more than one fundamental weakness,
or one very substantial fundamental weakness, whereas the former
shows only one deficiency among the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the
pledged revenues could show substantial variations, with the revenue
flow possibly being subject to erosion over time. Basic security
provisions are no more than adequate. Management performance could
be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is
being paid.
D
Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major
rating categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually
given note ratings (designated SP-1, -2 or -3) by S&P to distinguish
more clearly the credit quality of notes as compared to bonds.
Notes rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of SP-
1+. Notes rated SP-2 have a satisfactory capacity to pay principal
and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to
as "gilt edge.'' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured; interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B
Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be
in default or present elements of danger may exist with respect to
principal or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative
in a high degree. These issues are often in default or have other
marked short-comings.
C
Bonds that are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG) and for variable
rate demand obligations are designated Variable Moody's Investment
Grade (VMIG). This distinction is in recognition of the differences
between short- and long-term credit risk. Loans bearing the
designation MIG 1 or VMIG 1 are of the best quality, enjoying strong
protection by established cash flows of funds for their servicing,
from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2 or VMIG
2 are of high quality, with margins of protection ample although not
as large as the preceding group. Loans bearing the designation MIG
3 or VMIG 3 are of favorable quality, with all security elements
accounted for but lacking the undeniable strength of the preceding
grades. Liquidity and cash flow may be narrow and market access for
refinancing is likely to be less well established.
SMITH BARNEY NEW JERSEY MUNICIPALS FUND INC.
Statement of
Additional
Information
July 28, 2000
Smith Barney New Jersey Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
SALOMON SMITH BARNEY
A Member of
Citigroup [Symbol]
Language taken from CAMU SAI
9
FUNDACCOUNTING\LEGAL\FUNDS\NJMU\NJMU SAI 2000
