<PAGE>
PROSPECTUS
SMITH BARNEY
New Jersey
Municipals
Fund Inc.
JULY 29, 1997
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus July 29, 1997
- --------------------------------------------------------------------------------
Smith Barney
New Jersey Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney New Jersey Municipals Fund Inc. (the "Fund") is a
non-diversified municipal fund that seeks to provide New Jersey investors with
as high a level of dividend income exempt from Federal income taxes and New
Jersey state personal income tax as is consistent with prudent investment
management and the preservation of capital.
This Prospectus concisely sets forth certain information about the Fund,
including sales charges, distribution and service fees and expenses, that
investors will find helpful in making an investment decision. Investors are
encouraged to read this Prospectus carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of Additional
Information dated July 29, 1997, as amended or supplemented from time to time,
that is available upon request and without charge by calling or writing the Fund
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant. The Statement of Additional Information has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 14
- --------------------------------------------------------------------------------
New Jersey Municipal Securities 21
- --------------------------------------------------------------------------------
Valuation of Shares 22
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 22
- --------------------------------------------------------------------------------
Purchase of Shares 24
- --------------------------------------------------------------------------------
Exchange Privilege 31
- --------------------------------------------------------------------------------
Redemption of Shares 34
- --------------------------------------------------------------------------------
Minimum Account Size 37
- --------------------------------------------------------------------------------
Performance 37
- --------------------------------------------------------------------------------
Management of The Fund 38
- --------------------------------------------------------------------------------
Distributor 39
- --------------------------------------------------------------------------------
Additional Information 40
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, non-diversified, management
investment company that seeks to provide New Jersey investors with as high a
level of dividend income exempt from Federal income taxes and New Jersey state
personal income tax as is consistent with prudent investment management and the
preservation of capital. Its investments consist primarily of intermediate- and
long-term investment grade municipal securities issued by or on behalf of the
State of New Jersey or any of its instrumentalities, and its political
subdivisions, agencies and public authorities and certain other municipal
issuers such as the Commonwealth of Puerto Rico, the Virgin Islands and Guam
("New Jersey Municipal Securities") that pay interest which is excluded from
gross income for Federal income tax purposes and exempt from New Jersey state
personal income taxes. Intermediate- and long-term municipal securities have
remaining maturities at the time of purchase of three to in excess of twenty
years. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of this Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of the Class C shares,
and investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. This CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares, which when
combined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. Class Y shares are not subject to
any service or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the Fund. Any investment return on
these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature and, therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Other Class A share purchases may also be eligible for a reduced
initial sales charge. See "Purchase of Shares." Because the ongoing expenses of
Class A shares may be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value or at a
reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum initial investment requirement for Class A, Class B and Class C
shares and the subsequent investment requirement for all Classes through the
Systematic Investment Plan are described below. There is no minimum investment
requirement in Class A for unitholders who invest distributions from a unit
investment trust ("UIT") sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirements
for all classes for shareholders purchasing shares through the Systematic
Investment Plan on a monthly basis is $25 and on a quarterly basis is $50. See
"Purchase of Shares."
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM"),
serves as the Fund's investment adviser and administrator. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. See "Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
class of certain other Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly . Distributions of net realized long- and short-term
capital gains, if any, are declared and paid annually after the end of the
fiscal year in which they were earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. Assets of the Fund also may be invested
in the municipal securities of non-New Jersey municipal issuers ("Other
Municipal Securities" and, together with New Jersey Municipal Securities,
"Municipal Securities"). Dividends paid by the Fund that are derived from
interest attributable to New Jersey Municipal Securities will be excluded from
gross income for Federal income tax purposes and exempt from New Jersey state
personal income taxes (but not from New Jersey state franchise tax or New Jersey
state corporate income tax), provided, however, the Fund is a qualified
investment fund under New Jersey law. Dividends derived from interest on Other
Municipal Securities will be exempt from Federal income taxes, but may be
subject to New
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Jersey state personal income taxes. Dividends derived from certain Municipal
Securities (including New Jersey Municipal Securities), however, may be a
specific tax preference item for Federal alternative minimum tax purposes. The
Fund may invest without limit in securities subject to the Federal alternative
minimum tax. See "Investment Objective and Management Policies" and "Dividends,
Distributions and Taxes."
The Fund is more susceptible to factors adversely affecting issuers of New
Jersey Municipal Securities than is a municipal bond fund that does not
emphasize these issuers. See "New Jersey Municipal Securities" in the Prospectus
and "Special Considerations Relating to New Jersey Municipal Securities" in the
Statement of Additional Information for further details about the risks of
investing in New Jersey obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that it
may invest in the obligations of a single issuer. The Fund's assumption of large
positions in the obligations of a small number of issuers may cause the Fund's
share price to fluctuate to a greater extent than that of a diversified company
as a result of changes in the financial conditions or in the market's assessment
of the issuers.
The Fund generally will invest at least 75% of its assets in securities
rated investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Ratings Group ("S&P"), or in unrated obligations of comparable
quality. 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.
There are several risks in connection with the use of when-issued
securities, municipal bond index and interest rate futures contracts and put and
call options thereon as hedging devices, and municipal leases. See "Investment
Objective and Management Policies -- Certain Portfolio Strategies."
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and, unless otherwise noted, the Fund's operating
expenses for its most recent fiscal year:
New Jersey Municipals Fund Inc.
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
=======================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) ............ 4.00% None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) ....... None* 4.50% 1.00% None
=======================================================================================
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees ............................... 0.50% 0.50% 0.50% 0.50%
12b-1 fees** .................................. 0.15 0.65 0.70 None
Other expenses*** ............................. 0.11 0.13 0.12 0.11
=======================================================================================
TOTAL FUND OPERATING EXPENSES .................... 0.76% 1.28% 1.32% 0.61%
=======================================================================================
</TABLE>
* Purchase of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares had been purchased as
of March 31, 1997.
Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives, with respect to
Class B shares, an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution and a 0.15% service
fee. With respect to Class C shares, Smith Barney receives an annual 12b-1 fee
of 0.70% of the value of average
8
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
daily net assets of the Class, consisting of a 0.55% distribution fee and a
0.15% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table on the preceding page. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Fund."
New Jersey Municipals Fund Inc.
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each
time period:
Class A.................................. $47 $63 $81 $130
Class B.................................. 58 71 80 140
Class C.................................. 23 42 72 159
Class Y.................................. 6 20 34 76
- --------------------------------------------------------------------------------
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A.................................. $47 $63 $81 $130
Class B.................................. 13 41 70 140
Class C.................................. 13 42 72 159
Class Y.................................. 6 20 34 76
- --------------------------------------------------------------------------------
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for each of the two years ended March 31, 1997
has been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated March 31, 1997. The
information for the fiscal years ended March 31, 1989 through March 31, 1995 has
been audited by other auditors. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report, which is incorporated by reference into the Statement
of Additional Information. As of March 31, 1997, no Class Y shares were
outstanding and, accordingly, no comparable information is available at this
time for that Class.
For a share of each class of capital stock outstanding throughout each year:
New Jersey Municipals Fund Inc.
<TABLE>
<CAPTION>
Class A Shares 1997 1996 1995 1994 1993 1992
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.88 $12.62 $12.55 $13.16 $12.44 $12.17
- -----------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(1) 0.70 0.70 0.70 0.70 0.75 0.77
Net realized and unrealized gain/(loss) 0.02 0.26 0.07 (0.46) 0.87 0.44
- -----------------------------------------------------------------------------------------------------
Total Income From Operations 0.72 0.96 0.77 0.24 1.62 1.21
=====================================================================================================
Less Distributions From:
Net investment income (0.68) (0.70) (0.70) (0.70) (0.75) (0.77)
Net realized gains -- -- -- (0.15) (0.14) (0.13)
Capital -- -- -- -- (0.01) (0.04)
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.70) (0.70) (0.85) (0.90) (0.94)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.92 $12.88 $12.62 $12.55 $13.16 $12.44
- -----------------------------------------------------------------------------------------------------
Total Return 5.74% 7.77% 6.37% 1.66% 13.49% 10.22%
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 148 $ 154 $ 107 $ 120 $ 116 $ 93
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1)(2) 0.76% 0.84% 0.88% 0.83% 0.74% 0.67%
Net investment income 5.44 5.41 5.61 5.17 5.76 6.18
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 22% 32% 32% 58% 98%
=====================================================================================================
</TABLE>
(1) The investment adviser has waived all or part of its fees for the fiscal
years ended March 31, 1992, 1993 and 1994. If such fees had not been
waived, the per share effects on net investment income and expense ratios
would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
Class A $0.01 $0.02 $0.02 0.88% 0.90% 0.83%
(2) Expense ratios exclude interest expense. Expense ratios including interest
expense would have been 0.89% and 0.68% for the years ended March 31, 1995
and March 31, 1992, respectively.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
New Jersey Municipals Fund Inc.
Class A Shares 1991 1990 1989*
=========================================================================
Net Asset Value, Beginning of Year $11.92 $11.67 $11.40
- -------------------------------------------------------------------------
Income From Operations:
Net investment income*** 0.82 0.83 0.82
Net realized and unrealized gain/(loss) 0.32 0.27 0.28
- -------------------------------------------------------------------------
Total From Operations 1.14 1.10 1.10
=========================================================================
Less Distributions From:
Net investment income (0.83) (0.82) (0.82)
Net realized gains (0.05) (0.03) (0.01)
Capital (0.01) -- --
- -------------------------------------------------------------------------
Total Distributions (0.89) (0.85) (0.83)
- -------------------------------------------------------------------------
Net Asset Value, End of Year $12.17 $11.92 $11.67
- -------------------------------------------------------------------------
Total Return 9.89% 9.62% 9.84%++
- -------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 65 $ 39 $ 29
- -------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.57% 0.55% 0.52%**
Net investment income 6.74 6.89 7.23**
- -------------------------------------------------------------------------
Portfolio Turnover Rate 44% 42% 25%
=========================================================================
* The Fund commenced operations on April 22, 1988. Those shares in existence
prior to November 6, 1992 were designated as Class A shares.
** Annualized.
*** Net investment income before waiver of fees and/or reimbursement of
expenses by the investment adviser, sub-investment adviser and/or
administrator for the years ended March 31, 1991, 1990, and 1989 would have
been $.78, $.77, and $.74, respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
New Jersey Municipals Fund Inc.
<TABLE>
<CAPTION>
Class B Shares 1997 1996 1995 1994 1993(1)
====================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.88 $12.62 $12.55 $13.16 $12.75
- ----------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.64 0.63 0.63 0.64 0.28
Net realized and unrealized gain/(loss) 0.02 0.26 0.06 (0.47) 0.55
- ----------------------------------------------------------------------------------------------------
Total Income From Operations 0.66 0.89 0.69 0.17 0.83
====================================================================================================
Less Distributions From:
Net investment income (0.62) (0.63) (0.62) (0.63) (0.27)
Net realized gains -- -- -- (0.15) (0.14)
Capital -- -- -- -- (0.01)
- ----------------------------------------------------------------------------------------------------
Total Distributions (0.62) (0.63) (0.62) (0.78) (0.42)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.92 $12.88 $12.62 $12.55 $13.16
- ----------------------------------------------------------------------------------------------------
Total Return 5.23% 7.20% 5.76% 1.15% 6.60%++
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 62 $ 63 $ 55 $ 48 $ 16
- ----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2)(3) 1.28% 1.36% 1.39% 1.36% 1.33%+
Net investment income 4.92 4.90 5.09 4.64 5.17+
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 22% 32% 32% 58%
====================================================================================================
</TABLE>
(1) For the period from November 6, 1992 (inception date) to March 31, 1993.
(2) The investment adviser has waived all or part of its fees for each of the
years ended March 31, 1993 and 1994. If such fees had not been waived, the
per share effects on net investment income and expense ratios would have
been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1994 1993 1994 1993
---- ---- ---- ----
Class B $0.01 $0.01 1.41% 1.49%+
(3) Expense ratios exclude interest expense. The expense ratio including
interest expense would have been 1.40% for the years ended March 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
New Jersey Municipals Fund Inc.
Class C Shares 1997 1996 1995(1)
==============================================================================
Net Asset Value, Beginning of Year $12.88 $12.62 $11.86
- ------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.63 0.62 0.20
Net realized and unrealized gain 0.02 0.27 0.74
- ------------------------------------------------------------------------------
Total Income From Operations 0.65 0.89 0.94
==============================================================================
Less Distributions From:
Net investment income (0.61) (0.63) (0.18)
- ------------------------------------------------------------------------------
Total Distributions (0.61) (0.63) (0.18)
- ------------------------------------------------------------------------------
Net Asset Value, End of Year $12.92 $12.88 $12.62
- ------------------------------------------------------------------------------
Total Return 5.17% 7.17% 8.01%++
- ------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,861 $3,812 $ 248
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.32% 1.41% 1.44%+
Net investment income 4.88 4.82 5.05+
- ------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 22% 32%
==============================================================================
(1) For the period from December 13, 1994 (inception date) to March 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide New Jersey investors
with as high a level of income exempt from Federal and New Jersey personal
income taxes as is consistent with prudent investment management and the
preservation of capital. This investment objective may not be changed without
the approval of the holders of a majority of the Fund's outstanding shares.
There can be no assurance that the Fund's investment objective will be achieved.
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 the
Fund's 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 SBMFM 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.
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 in unrated obligations of comparable
quality. Unrated securities will be considered to be of investment grade if
deemed by SBMFM to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers of the unrated securities 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
comparable unrated securities. (These securities 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. A description of the rating systems of
Moody's and S&P is contained in the Statement of Additional Information.
The Fund's average weighted maturity will vary from time to time based on
the judgment of SBMFM. The Fund intends to focus on intermediate- and long-term
obligations, that is, obligations with remaining maturities at the time of
purchase of
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
three to in excess of twenty years. Obligations which are rated Baa by Moody's
or BBB by S&P and those which are rated lower than investment grade are subject
to greater market fluctuation and more uncertainty as to payment of principal
and interest, and therefore generate higher yields, than obligations rated above
Baa or BBB.
The value of debt securities varies inversely to changes in the direction
of interest rates. When interest rates rise, the value of debt securities
generally falls, and when interest rates fall, the value of debt securities
generally rises.
Low and Unrated Securities. While the market values of lower-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 lower-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, lower-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 lower-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 lower-rated and
comparable unrated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. The Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings.
While the market for municipal bonds is considered to be generally
adequate, the existence of limited markets for particular lower-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. A severe economic recession would likely disrupt the market
for such securities and adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Fixed-income securities, including lower-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
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 SBMFM's judgment, analysis
and experience than would be the case if the Fund invested only in rated
obligations.
Municipal Lease Obligations. The Fund may invest without limit in
participations in municipal lease obligations or installment purchase contract
obligations (collectively, "municipal lease obligations") of state and local
governments or authorities to finance the acquisition of equipment or
facilities. The interest on such obligations is, in the opinion of counsel to
the issuers, excluded from gross income for Federal and New Jersey state
personal income tax purposes provided the liability for payments of principal
and interest is solely that of a New Jersey governmental entity. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. 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, SBMFM 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.
Zero Coupon Securities. The Fund may also invest in zero coupon securities.
Such 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.
Private Activity Bonds. The Fund may invest without limit 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
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Fund's dividends are derived from interest on
those bonds. Dividends derived from interest income on Municipal Securities are
a component of the "current earnings" adjustment item for purposes of the
Federal corporate alternative minimum tax.
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in the obligations of a single
issuer. The Fund intends to conduct its operations 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 to the extent its earnings are distributed to shareholders.
The Fund must qualify as a regulated investment company to be a qualified
investment fund under New Jersey law. To so qualify, among other requirements,
the Fund will 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. The Fund's assumption of large positions in the
obligations of a small number of issuers may cause the Fund's share price to
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the issuers.
The Fund may invest without limit in debt obligations that are repayable
out of revenue streams generated from economically related projects or
facilities. 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
issuer. Sizable investments in such obligations could involve an increased risk
to the Fund should any of the related projects or facilities experience
financial difficulties. The Fund also 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) 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 in 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.
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Further information about the Fund's investment policies, including a list
of those restrictions on the Fund's investment activities that cannot be changed
without shareholder approval, appears in the Statement of Additional
Information.
CERTAIN PORTFOLIO STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, the following strategies:
When-Issued Securities. New issues of Municipal Securities frequently are
offered on a when-issued basis, which means that delivery and payment for the
securities normally take place 15 to 45 days after the date of the commitment to
purchase. The payment obligation and interest rate that will be received on
when-issued securities are fixed at the time that the buyer enters into the
commitment. As a result, the yields obtained on the securities may be higher or
lower than the yields available in the market on the dates when the instruments
are actually delivered to the buyers. In addition, during the period before
delivery and payment, there is no accrual of interest and there may be
fluctuations in the price of the securities so that there may be an unrealized
loss at the time of delivery. The Fund will establish a segregated account with
the Fund's custodian consisting of cash, debt securities of any grade or equity
securities, having a value equal to or greater than the Fund's purchase
commitments, provided such securities have been determined by the SBMFM to be
liquid and unencumbered, and are marked to market daily, pursuant to guidelines
established by the Directors. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets. The
Fund generally will make commitments to purchase Municipal Securities and other
tax-exempt obligations on a when-issued basis with the intention of actually
acquiring the securities, but the Fund may sell the securities before the
delivery date if it is deemed advisable.
Temporary Investments. Under normal market conditions, the Fund may hold up
to 20% of its total assets in cash or money market instruments, including
taxable money market instruments ("Temporary Investments"). In addition, when
SBMFM believes that market conditions warrant, including when acceptable New
Jersey Municipal Securities are unavailable, the Fund may take a temporary
defensive posture and invest without limitation in Temporary Investments. To the
extent the Fund holds Temporary Investments, it will not achieve its investment
objective. Tax-exempt securities eligible for short-term investment by the Fund
under such circumstances are municipal notes rated at the time of purchase
within the three highest grades by Moody's or S&P or, if not rated, issued by
issuers with outstanding debt securities rated within the three highest grades
by Moody's or S&P. Any Temporary Investments made for defensive purposes will be
made in conformity with the requirements of a qualified investment fund under
New Jersey law. Since the commencement of its operations, the Fund has not found
it necessary to invest in taxable Temporary Investments.
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Securities it owns or an increase in the price of
Municipal Securities it proposes to purchase, 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. 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 an index of Municipal Securities or
relate to debt securities the prices of which are anticipated by SBMFM to
correlate with the prices of the 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 on which the contract is traded, and members of the exchange
or board of trade 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 financial futures contracts 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
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 deposit for the
contracts. The Fund's ability to trade in financial futures contracts and
options on financial futures contracts may be limited to some extent by the
requirements of the Code applicable to a regulated investment company, in
addition to the requirements of a qualified investment fund under New Jersey
law, that are described below under "Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange or
board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any
particular time. If closing a futures position in anticipation of adverse price
movements is not possible, the Fund would be required to make daily cash
payments of variation margin. In those circumstances, an increase in the value
of the portion of the Fund's investments being hedged, if any, may offset
partially or completely , losses on the futures contract. No assurance
can begiven, however, that the price of the securities being hedged will
correlate
with the price movements in a futures contract and, thus, provide an offset to
losses on the futures contract or option on the futures contract. In addition,
in light of the risk of an imperfect correlation between securities held by the
Fund that are the subject of a hedging transaction and the futures or options
used as a hedging device, the hedge may not be fully effective because, for
example, losses on the securities held by the Fund may be in excess of gains on
the futures contract or losses on the futures contract may be in excess of gains
on the securities held by the Fund that were the subject of the hedge. In an
effort to compensate for the imperfect correlation of movement in the price of
the securities being hedged and movements in the price of futures contracts, the
Fund may enter into financial futures contracts or options on financial futures
contracts in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the futures contract has
been less or greater than that of the securities. This "over hedging" or "under
hedging" may adversely affect the Fund's net investment results if market
movements are not as anticipated when the hedge is established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures or options position. In addition, in those situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements on the futures contracts at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
20
<PAGE>
- --------------------------------------------------------------------------------
New Jersey Municipal Securities
- --------------------------------------------------------------------------------
As used in this Prospectus, the term "New Jersey Municipal Securities"
generally refers to intermediate- and long-term investment grade municipal
securities issued by the State of New Jersey and its political subdivisions,
agencies and public authorities (together with certain other governmental
issuers such as the Commonwealth of Puerto Rico, the Virgin Islands and Guam) to
obtain funds for various public purposes. The interest on such obligations is,
in the opinion of bond counsel to the issuers, excluded from gross income for
Federal income tax purposes and exempt under the New Jersey Gross Income Tax
Act. For that reason, interest on these obligations is generally fixed at a
lower rate than it would be if it were subject to such taxes. Interest income on
certain New Jersey Municipal Securities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes. See
"Dividends, Distributions and Taxes."
CLASSIFICATIONS
The two principal classifications of New Jersey Municipal Securities are
"general obligation bonds" and "revenue bonds." General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power. In addition, certain types of
"private activity bonds" issued by or on behalf of public authorities to obtain
funds for privately operated facilities are included in the term New Jersey
Municipal Securities, so long as the interest paid on the bonds qualifies as
excluded from gross income for Federal income tax purposes and exempt under the
New Jersey Gross Income Tax Act. Private activity bonds are in most cases
revenue bonds and generally do not carry the pledge of the full faith, credit
and taxing power of the issuing entity.
SPECIAL CONSIDERATIONS
Economic, financial and other conditions relating to the State of New
Jersey have an obvious impact upon the state's general obligation bonds. These
conditions, to varying degrees, also will affect the bonds issued by the state's
political subdivisions, agencies and public authorities, including special
obligation bonds. In general, the State of New Jersey has a diversified economic
base consisting of, among others, commerce, construction and service industries,
selective commercial, agriculture, insurance, tourism, petroleum refining and
manufacturing, although New Jersey's manufacturing industry has shown a downward
trend in the last few years. While New Jersey's economic base has
become more diversified over time and thus its economy appears to be less
vulnerable during recessionary periods, a recurrence
21
<PAGE>
- --------------------------------------------------------------------------------
New Jersey Municipal Securities (continued)
- --------------------------------------------------------------------------------
of high levels of unemployment could adversely affect New Jersey's overall
economy and its ability to meet its financial obligations.
New Jersey maintains a balanced budget, which generally restricts total
appropriation increases to only 5% annually to any municipality or county or an
index rate determined annually by the Director of the Division of Local
Government Services, whichever is less. New Jersey law provides for those
situations where the index percentage rate exceeds 5%. As a result, the balanced
budget plan may adversely affect a municipality's or county's ability to repay
its obligations. Of course, each municipality, county or other political
subdivision will be subject to different economic, financial and other
conditions, which will affect its ability to pay the principal and interest on
its bonds. Similarly, special obligation or revenue bonds payable from revenues
generated by particular projects or other specific revenue sources also will be
subject to unique economic, financial and other conditions. If New Jersey or any
of its political subdivisions, agencies or public authorities is unable to meet
its financial obligations, the income derived by the Fund, the ability to
preserve or realize appreciation of the Fund's capital and the Fund's liquidity
could be adversely affected.
- --------------------------------------------------------------------------------
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.
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 Fund's Board of Directors.
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 fair
value. Further information regarding the Fund's valuation policies is contained
in the Statement of Additional Information.
- --------------------------------------------------------------------------------
Dividends, Distributions And Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income (that is, income
other than net realized long- and short-term capital gains) monthly; dividends
ordinarily will be paid on the last Friday of each calendar month to
shareholders of
22
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
record as of three business days prior thereto. Distributions of net realized
long- and short-term capital gains, if any, are declared and paid annually after
the end of the fiscal year in which they have been earned.
If a shareholder does not otherwise instruct, dividends or capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In addition, in
order to avoid the application of a 4.00% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make a
distribution shortly before December 31 in each year of any undistributed
ordinary income or capital gains and expects to make any other distributions as
are necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the 1940 Act and other applicable
laws, a notice will accompany any distribution paid from sources other than net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
The per share dividends on Class B shares and Class C shares may be lower
than the per share dividends on Class A and Class Y shares principally as a
result of the distribution fee applicable with respect to Class B and Class C
shares. The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, B, C and Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code, and will designate and pay exempt
interest dividends derived from interest earned on qualifying tax-exempt
obligations. Such exempt-interest dividends may be excluded by shareholders from
their gross income for regular Federal income tax purposes although (a) all or a
portion of such exempt-interest dividends will be a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes to
the extent that they are derived from certain types of private activity bonds
issued after August 7, 1986 and (b) all exempt-interest dividends will be a
component of the "current earnings" adjustment item for purposes of the Federal
corporate alternative minimum tax. In addition, corporate shareholders may incur
a greater Federal
23
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
"environmental" tax liability through the receipt of Fund dividends and
distributions. Distributions paid by the Fund, provided it is a "qualified
investment fund" under New Jersey law, attributable to interest on or gains from
New Jersey Municipal Securities and Tax-Exempt Obligations will be exempt from
the New Jersey personal income tax (but not the New Jersey Corporation Business
Tax).
Dividends paid from taxable net investment income, if any, and
distributions of net realized short-term capital gains are taxable to
shareholders at ordinary income rates, regardless of how long shareholders have
held their Fund shares and whether such dividends or distributions are received
in cash or reinvested in additional shares. Distributions of net realized
long-term capital gains are taxable to shareholders as long-term capital gains,
regardless of how long they have held their Fund shares and whether such
distributions are received in cash or reinvested in Fund shares. Furthermore, as
a general rule, a shareholder's gain or loss on a sale or redemption of his or
her shares will be a long-term capital gain or loss if the shareholder has held
the shares for more than one year and will be a short-term capital gain or loss
if the shareholder has held the shares for one year or less. Gains resulting
from the redemption or sales of shares of the Fund, provided it is a qualified
investment fund under New Jersey law, would be exempt from the New Jersey
personal income tax. The Fund's dividends and distributions do not qualify for
the dividends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder will also receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. These statements may set forth the dollar amount of income excluded or
exempt from regular Federal income or New Jersey state personal income taxes and
the dollar amount, if any, subject to such taxes. Moreover, these statements
will designate the amount of exempt-interest dividends that is a specific
preference item for purposes of the Federal individual and corporate alternative
minimum taxes. Shareholders should consult their tax advisors with specific
reference to their own tax situations.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Fund currently offers four Classes of shares. Class A shares are sold
to investors with an initial sales charge and Class B and Class C shares are
sold without an initial sales charge but are subject to a CDSC payable upon
certain redemptions. Class Y shares are sold without an initial sales charge or
CDSC and are available
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
only to investors investing a minimum of $5,000,000 (except purchases of Class Y
shares by Smith Barney Concert Allocation Series Inc., for which there is no
minimum purchase amount). See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must by made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class Y shares. Smith
Barney and other broker/dealers may charge their custsomers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at the Fund's transfer agent,
First Data Investor Services Group, Inc. (the "Transfer Agent") are not subject
to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account in the
Fund by making an initial investment of at least $1,000. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000.
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 mimimum initial investment
requirement for Class A, Class B and Class C shares and subsequent investments
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 C shares and the subsequent investment requirement for all
Classes is $50. There are no minimum investment requirements for Class A shares
for employees of Travelers and its subsidiaries, including Smith Barney,
unitholders who invest distributions from a UIT sponsored by Smith Barney, and
Directors of the Fund 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 Transfer Agent. Share certificates
are issued only upon a shareholder's written request to the Transfer Agent.
The minimum intial and subsequent investment requirements in a Fund for an
account established under the Uniform Gift to Minors Act is $250 and the
subsequent investment requirement is $50.
Purchase orders received by the Fund or Smith Barney 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 dealers or Introducing Brokers 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 Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or Introducing Brokers
purchasing
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
through Smith Barney, payment for Fund shares is due on the third business day
after the trade date (the "settlement 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, Smith Barney or the 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 Smith Barney or the Transfer Agent. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's 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 Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
Sales Charge Sales Charge Dealer's
as a % of as a % of Reallowance as % of
Amount of Investment Transaction Amount Invested Offering Price
================================================================================
Less than - $25,000 4.00% 4.17% 3.60%
$ 25,000 - $49,999 3.50 3.63 3.15
$ 50,000 - $99,999 3.00 3.09 2.70
$100,000 - $249,999 2.50 2.56 2.25
$250,000 - $499,999 1.50 1.52 1.35
$500,000 and over * * *
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
The reduced sales charges shown on the preceding page 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.
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 Travelers and its subsidiaries and any of 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
person 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 Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with 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 are offered
with a sales charge
) and who wish to reinvest their redemption proceeds
in the Fund, providedthe reinvestment is made within 60 calendar days
of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith Barney
and (g) purchases by investors participating in a 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 funds sponsored by Smith Barney which are offered
with a sales charge 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
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares" and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employee or partnership sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
of the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount and (c) satisfies uniform
criteria which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund and
the members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
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
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 option of the investor, up to 90 days before such
date. Please contact a Smith Barney Financial Consultant or the Transfer Agent
to obtain a Letter of Intent application.
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 $1,000,000 in Class Y shares of the Fund and agree to
purchase a total of $5,000,000 of Class Y shares of the Fund within six months
from the date of the Letter. If a total investment of $5,000,000 is not made
within the six 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 CDSC of 1.00%. Please contact a Smith Barney Financial
Consultant or the Transfer Agent for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but are subject to a CDSC.
Any applicable CDSC 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. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC 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
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 CDSC
================================================================================
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. They will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholders as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary--Alternative Purchase
Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares 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 CDSC 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
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) 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 CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also 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.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following 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
C shares are subject to minimum investment requirements and all shares are
subject to other requirements of the fund into which exchanges are made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Disciplined Small Cap Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
31
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
* Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
32
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
++ Smith Barney Municipal Money Market Fund, Inc.
++ Smith Barney Muni Funds -- California Money Market Portfolio
++ Smith Barney Muni Funds -- New York Money Market Portfolio
================================================================================
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. 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 C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C 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. SBMFM may
determine that a pattern of frequent exchanges is excessive and contrary to the
best
33
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 a
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 of the Fund or (b) remain invested in the Fund
or exchange into any 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 Redemption 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. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. 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.
- --------------------------------------------------------------------------------
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 CDSC. 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 Smith Barney, or if the shareholder's account
is not with Smith Barney, from the shareholder directly. 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 Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares
34
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
purchased by check, other than a certified or official bank check, will be
remitted upon clearance of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney New Jersey Municipals Fund Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to the Transfer Agent together with the redemption request.
Any signature appearing on a share certificate, stock power or a written request
in excess of $2,000, 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. The Transfer Agent may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until the Transfer Agent receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM FOR SHAREHOLDERS WHO DO NOT HAVE
A SMITH BARNEY BROKERAGE ACCOUNT
Certain shareholders may be eligible to redeem and exchange Fund shares by
telephone. To determine if a shareholder is entitled to participate in this
program, he or she should contact the Transfer Agent at (800) 451-2010. Once
eligibility is confirmed, the shareholder must complete and return a
Telephone/Wire Authorization form, including a signature guarantee, that will be
provided by the Transfer Agent upon request. (Alternatively, an investor may
authorize telephone redemptions on the new account application with a signature
guarantee when making his/her initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling the
Transfer Agent at (800) 451-2010. Such requests may be made between 9:00 a.m.
and 4:00
35
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
p.m. (New York City time) on any day the NYSE is open. Redemptions of shares 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 fund being acquired is identical to the registration
of the shares of the fund exchanged. Such exchange requests may be made by
calling the Transfer Agent at (800) 451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City 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.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 many elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Fund. Any
applicable CDSC 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
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the shareholder's shares
subject to the CDSC.) For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Smith Barney Financial
Consultant.
36
<PAGE>
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
YIELD
From time to time, the Fund may advertises the 30-day "yield" and
"equivalent taxable yield" of each Class of shares. The yield refers to the
income generated by an investment in those shares of the Fund over the 30-day
period identified in the advertisement and is computed by dividing the net
investment income per share earned by the Class during the period by the maximum
public offering price per share on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month over
a one-year period and is compounded semi-annually. The annualized income is then
shown as a percentage of the net asset value.
The equivalent taxable yield demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield for
each Class. It is calculated by increasing the yield shown for the Class to the
extent necessary to reflect the payment of taxes at specified tax rates. Thus,
the equivalent taxable yield always will exceed the Fund's yield. For more
information on equivalent taxable yields, please refer to the table under
"Dividends, Distributions and Taxes."
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total
37
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
return, which provides the ending redeemable value. Such standard total return
information may also be accompanied with nonstandard total return information
for differing periods computed in the same manner but without annualizing the
total return or taking sales charges into account. The Fund calculates current
dividend return for each Class by annualizing the most recent monthly
distribution and then dividing by the net asset value or the maximum public
offering price (including sales charge) on the last day of the period for which
current dividend return is presented. The current dividend return for each Class
may vary from time to time depending on market conditions, the composition of
the Fund's investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current dividend return
should be considered when comparing a Class' current return to yields published
for other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. or similar independent services that monitor the performance of
mutual funds, or other industry publications.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with the Fund's distributor, investment adviser and
administrator, custodian and Transfer Agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser and administrator. The
Statement of Additional Information contains general background information
regarding each Director and executive officer of the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement,
effective November 7, 1994, from its affiliate, Mutual Management Corp. ("MMC").
The agreement was most recently approved by the Fund's Board of Directors on
July 16, 1997. MMC and SBMFM are both wholly owned subsidiaries of Holdings.
SBMFM (through predecessor entities) has been in the investment counseling
business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to a wide variety of individual, institutional and investment
company clients that had aggregate assets under management as of May 31, 1997 in
excess of $87 billion.
38
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's 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. For investment
advisory services rendered, the Fund pays SBMFM an investment advisory fee at
the annual rate of 0.30% of the Fund's average daily net assets. Prior to
November 17, 1995, the Fund paid SBMFM investment advisory fees at the following
annual rates: 0.35% of average daily net assets up to $500 million and 0.32% of
average daily net assets in excess of $500 million. For the fiscal year ended
March 31, 1997, SBMFM was paid investment advisory fees equal to 0.30% of the
value of the average daily net assets of the Fund.
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the following annual rates of average daily net assets: 0.20% to
$500 million; and 0.18% in excess of $500 million. For the fiscal year ended
March 31, 1997, the Fund paid administration fees equal to 0.20% of its average
daily net assets.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, an Investment Officer of SBMFM, has served as Vice
President and Investment Officer of the Fund since it commenced operations, and
manages the day-to-day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended March 31, 1997, are
included in the Annual Report dated March 31, 1997. A copy of the Annual Report
may be obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or telephone number
listed on page one of this Prospectus.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.15% of the
39
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
average daily net assets of the respective Class. Smith Barney is also paid a
distribution fee with respect to Class B and Class C shares at the annual rate
of 0.50% and 0.55%, respectively, of the average daily net assets attributable
to those Classes. Class B shares which automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to a
distribution fee. The fees are used by Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and, in the case of Class B and
Class C shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of Smith Barney associated with the
sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------------------
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 offers shares of common stock currently classified into four
Classes--A, B, C and Y. Each Class of the Fund's shares has a par value of $.001
per share and 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, if any, for each Class; (c) the
distribution and/or service fees, if any, borne by each Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights
40
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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, will 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 one vote for each full share owned
and a 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.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as custodian of the Fund's investments.
The Transfer Agent, located at Exchange Place, Boston, Massachusetts 02109,
serves as the Fund's transfer agent.
The Fund sends to each of its shareholders a semi-annual report and an
audited annual report, which include listings of investment securities held by
the Fund at the end of each 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 Smith Barney
Financial Consultant or the Transfer Agent.
41
<PAGE>
Smith Barney
A Member of TravelersGroup[LOGO]
Smith Barney
New Jersey
Municipals
Funds Inc.
388 Greenwich Street
New York, New York 10013
FD0231 7/97
Smith Barney
New Jersey Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
800-451-2010
Statement of Additional
Information May 29, 1996
July 29, 1997
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectus of
Smith Barney New Jersey Municipals Fund Inc. (the "Fund''), dated
July 29, 1997, as amended or supplemented from time to time, and
should be read in conjunction with the Fund's Prospectus. The
Fund's Prospectus may be obtained from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or
telephone number set forth above. This Statement of Additional
Information, although not in itself a prospectus, is incorporated
by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference the same section headings are used in
both the Prospectus and the Statement of Additional Information,
except where shown below:
Management of the Fund 1
Investment Objective and Management Policies 5
Municipal Bonds (See in the Prospectus "New Jersey Municipal
Securities'') 9
Purchase of Shares 15
Redemption of Shares 16
Distributor 17
Valuation of Shares 18
Exchange Privilege 19
Performance Data (See in the Prospectus "Performance'') 20
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes'') 22
Additional Information 25
Financial Statements 25
Appendix A1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These
organizations are as follows:
Name Service
Smith Barney Inc.
("Smith Barney'')
Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM'')
Investment
Adviser and
Administrato
r
PNC Bank, National Association
("PNC")
Custodian
First Data Investor Services Group, Inc. (the "Transfer Agent"),
a subsidiary of First Data Corporation
Transfer
Agent
These organizations and the functions they perform for the Fund
are discussed in the Prospectus and in this Statement of
Additional Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund,
together with information as to their principal business
occupations during the past five years, are shown below. Each
Director who is an ''interested person'' of the Fund, as defined
in the Investment Company Act of 1940, as amended (the "1940
Act''), is indicated by an asterisk.
Herbert Barg, Director (Age 74). Private Investor. His address
is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director (Age 74). Retired; formerly
Senior Consultant to Dean Witter Reynolds Inc. His address is 19
Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody, Director (Age 75). Vice Chairman of the Board of
Restaurant Associates Industries Corp.; Inc. His address is HMK
Associates, Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (Age 59). Professor, Graduate School
of Business Administration, Harvard University; Business
Consultant. His address is Graduate School of Business
Administration, Harvard University, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 66). Managing Partner of
Dorsett, McCabe Capital Management, Inc., an investment counseling
firm; Director of Research Corporation Technologies, Inc., a non-
profit patent-clearing and licensing firm. His address is 540
Madison Avenue, New York, New York 10021.
Elliot S. Jaffe, Director (Age 71). Chairman of the Board and
President of The Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 65). Attorney. His address is
277 Park Avenue, New York, New York 10017.
Joseph J. McCann, Director (Age 66). Financial Consultant. His
address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment
Officer (Age 64). Managing Director of Smith Barney, Chairman of
the Board of Smith Barney Strategy Advisers Inc. and President of
SBMFM; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers''), Vice
Chairman of Asset Management Division of Shearson Lehman Brothers;
a Director of PanAgora Asset Management, Inc. and PanAgora Asset
Management Limited. Mr. McLendon is Chairman of 41 Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New
York 10013.
Cornelius C. Rose, Jr., Director (Age 63). President, Cornelius
C. Rose Associates, Inc., financial consultants, and Chairman and
Director of Performance Learning Systems, an educational
consultant. His address is P.O. Box 355, Fair Oaks, Enfield, New
Hampshire 03748.
James J. Crisona, Director emeritus (Age 89). Attorney;
formerly Justice of the Supreme Court of the State of New York.
His address is 118 East 60th Street, New York, New York 10022.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39).
Managing Director of Smith Barney; Director and Senior Vice
President of SBMFM. Mr. Daidone serves as Senior Vice President
and Treasurer of 41 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer
(Age 48). Investment Officer of SBMFM; prior to July 1993,
Managing Director of Shearson Lehman Advisors, the predecessor to
Greenwich Street Advisors. Mr. McDermott serves as Investment
Officer of 11 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of
Smith Barney; General Counsel and Secretary of SBMFM. Ms. Sydor
also serves as Secretary of 41 Smith Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, New York 10013.
As of July 14, 1997, the Directors and officers of the Fund as
a group owned less than 1.00% of the outstanding common stock of
the Fund. To the best knowledge of the Directors, as of July 14,
1997 no shareholder or "group" (as such term is defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) owned
beneficially or of record more than 5% of the shares of the Funds.
No Director, officer or employee of Smith Barney or of any of
its affiliates receives any compensation from the Fund for serving
as an officer or Director of the Fund. The Fund pays each Director
who is not an officer, director or employee of Smith Barney or any
of its affiliates a fee of $1,000 per annum plus $100 per in-
person meeting. Each Director emeritus who is not an officer,
director or employee of Smith Barney or any of its affiliates
receives a fee of $500 per annum plus $50 per in-person meeting.
The Fund reimburses all Directors for travel and out-of-pocket
expenses incurred to attend meetings. For the fiscal year ended
March 31, 1997, such fees and expenses totaled $14,207.
For the fiscal year ended March 31, 1997, the Directors of the
Fund were paid the following compensation:
Aggregate
Compensation
Aggregate
Compensation
from the Smith
Barney
Director(*)
from the Fund
Mutual Funds**
Herbert Barg (18)
$1,700
$105,175
Alfred J. Bianchetti
(13)
1,600
51,500
Martin Brody (21)
1,500
124,286
Dwight B. Crane (24)
1,600
140,375
Burt N. Dorsett (13)
+
1,600
47,400
Elliot S. Jaffe (13)
1,600
51,100
Stephen E. Kaufman
(15)
1,700
92,336
Joseph J. McCann
(13)
1,700
52,700
Heath B. McLendon
(41)
--
--
Cornelius C. Rose
(13)
1,700
51,400
James J. Crisona***
800
20,575
_____________________
* Number of directorships/trusteeships held with Smith
Barney Mutual Funds.
** Aggregate compensation for all Smith Barney Mutual
Funds is for calendar year ended December 31, 1996.
***
Director emeritus. A Director emeritus may attend
meetings of the Fund's Board of Directors but has no
voting rights at such meetings. Mr. Crisona became a
Director emeritus as of July 20, 1994.
+ Pursuant to the Fund's deferred compensation plan the
indicated Director had elected to defer the following
payment of some or all of their compensation: Burt N.
Dorsett - $1,150. As of January 1, 1997, Mr. Dorsett
has elected not to defer his future compensation.
Upon attainment of age 80 Directors are required to change
to emeritus status. Directors Emeritus are entitled to
serve in emeritus status for a maximum of ten years during
which time they are paid 50% of the annual retainer fee
and meeting fees otherwise applicable to the Fund
Directors together with reasonable out-of-pocket expenses
for each meeting attended. During the Fund's last fiscal
year aggregate compensation paid by the Fund to Directors
achieving emeritus status totaled $800.
Investment Adviser and Administrator -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a
transfer of the investment advisory agreement effective November
7, 1994, which was most recently approved by the Board of
Directors, including a majority of those Directors who are not
"interested persons" of the Fund or Smith Barney ("Independent
Directors"), on July 16, 1997. The advisory agreement was
transferred from Mutual Management Corp. Both Mutual Management
Corp. and SBMFM are wholly owned subsidiaries of Smith Barney
Holdings Inc. ("Holdings''). Holdings is a wholly owned subsidiary
of Travelers Group Inc. ("Travelers''). The advisory agreement is
dated July 30, 1993 (the "Advisory Agreement'') and was first
approved by the Board of Directors, including a majority of the
Independent Directors , on April 7, 1993. The services provided
by SBMFM under the Advisory Agreement are described in the
Prospectus under "Management of the Fund.'' SBMFM pays the salary
of any officer or employee who is employed by both it and the
Fund.
As compensation for investment advisory services, the Fund pays
SBMFM a fee computed daily and paid monthly at the annual rate of
0.30% of the Fund's average daily net assets. Prior to November
17, 1995, the Fund paid SBMFM investment advisory fees computed at
the following annual rates of the Fund's average daily net assets:
0.35% up to $500 million; and 0.32% in excess of $500 million. For
the 1995, 1996 and 1997 fiscal years, the investment advisory fees
paid to SBMFM and its predecessors amounted to $579,652, $612,606
and $651,616, respectively.
SBMFM also serves as administrator to the Fund pursuant to a
written agreement dated April 20, 1994 (the "Administration
Agreement'') which was most recently approved by the Fund's Board
of Directors, including a majority of the Independent Directors,
on July 16, 1997. The services provided by SBMFM under the
Administration Agreement are described in the Prospectus under
"Management of the Fund.'' SBMFM pays the salary of any officer
and employee who is employed by both it and the Fund and bears all
expenses in connection with the performance of its services.
As compensation for administration services rendered to the
Fund, SBMFM receives a fee paid at the following annual rates:
0.20% of average daily net assets up to $500 million; and 0.18% of
average daily net assets in excess of $500 million. For the fiscal
year ended March 31, 1997, administration fees paid to SBMFM
equaled $434,410.
Prior to June 12, 1995, The Boston Company Advisors, Inc.
("Boston Advisors"), an indirect wholly-owned subsidiary of Mellon
Bank Corporation, served as the Fund's sub-administrator. For the
fiscal years ended March 31, 1995 and 1996 the Fund paid Boston
Advisors $331,230 and $65,523 respectively, in sub-investment
advisory and/or administration fees.
SBMFM maintains office facilities for the Fund, furnishes the
Fund with statistical and research data, clerical help and
accounting, data processing, bookkeeping, internal auditing and
legal services and certain other services required by the Fund,
prepares reports to the Fund's shareholders, and prepares tax
returns, reports to and filings with the Securities and Exchange
Commission (the "SEC'') and state Blue Sky authorities.
The Fund bears expenses incurred in its operations, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Directors who are not officers, directors, shareholders or
employees of Smith Barney or SBMFM; SEC fees and state Blue Sky
qualification fees; charges of custodian; transfer and dividend
disbursing agent's fees; certain insurance premiums; outside
auditing and legal expenses; costs of any independent pricing
service; costs of maintaining corporate existence; costs
attributable to investor services (including allocated telephone
and personnel expenses); costs of preparation and printing of
prospectuses for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and
shareholder meetings and meetings of the officers or Board of
Directors of the Fund.
SBMFM has agreed that if in any fiscal year the aggregate
expenses of the Fund (including fees payable pursuant to the
Advisory Agreement and Administration Agreement, but excluding
interest, taxes, brokerage fees paid pursuant to the Fund's
services and distribution plan, and, with the prior written
consent of the necessary state securities commissions,
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, SBMFM will, to the extent
required by state law, reduce its management fees by the amount of
such excess expenses. Such fee reductions, if any, will be
reconciled on a monthly basis. For the fiscal year ended March 31,
1997 no such fee reduction was required.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Fund.
The Independent Directors of the Fund have selected Stroock &
Stroock & Lavan LLP as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, has been selected as the Fund's independent auditors to
examine and report on the Fund's financial statements for the
fiscal year ending March 31, 1998.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and
the policies it employs to achieve that objective. The following
discussion supplements the description of the Fund's investment
policies in the Prospectus. For purposes of this Statement of
Additional Information, obligations of non-New Jersey municipal
issuers, the interest on which is at least exempt from Federal
income taxation ("Other Municipal Securities''), and 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.''
As noted in the Prospectus, the Fund is classified as a non-
diversified investment company under the 1940 Act, which means
that the Fund is not limited by the 1940 Act in the proportion of
its assets that may be invested in the obligations of a single
issuer. The identification of the issuer of Municipal Bonds
generally depends upon the terms and conditions of the security.
When the assets and revenues of an agency, authority,
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'') and Standard & Poor's Ratings Group ("S&P'')
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 SBMFM to evaluate potential investments. Among the
factors that will be considered are the long-term ability of the
issuer to pay principal and interest and general economic trends.
To the extent the Fund invests in lower-rated and comparable
unrated securities, the Fund's achievement of its investment
objective may be more dependent on SBMFM's credit analysis of such
securities than would be the case for a portfolio consisting
entirely of higher-rated securities.
Subsequent to its purchase by the Fund, an issue of Municipal
Bonds may cease to be rated or its rating may be reduced below the
rating given at the time the securities were acquired by the Fund.
Neither event will require the sale of such Municipal Bonds by the
Fund, but SBMFM will consider such event in its determination of
whether the Fund should continue to hold the Municipal Bonds. In
addition, to the extent the ratings change as a result of changes
in such organizations or their rating systems or due to a
corporate restructuring of Moody's or S&P, the Fund will attempt
to use comparable ratings as standards for its investments in
accordance with its investment objective and policies. The
Appendix contains information concerning the ratings of Moody's
and S&P and their significance.
Temporary Investments
The Fund may invest in short-term investments ("Temporary
Investments'') consisting of (a) the following tax-exempt
securities: notes of municipal issuers having, at the time of
purchase, a rating within the three highest grades of Moody's or
S&P or, if not rated, having an issue of outstanding Municipal
Bonds rated within the three highest grades by Moody's or S&P; and
(b) the following taxable securities: obligations of the United
States government, its agencies or instrumentalities ("U.S.
government securities''), repurchase agreements, other debt
securities rated within the three highest grades by Moody's and
S&P, commercial paper rated in the highest grade by either of such
rating services, and certificates of deposit of domestic banks
with assets of $1 billion or more. The Fund intends 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. At no time will more
than 20% of the Fund's total assets be invested in Temporary
Investments unless the Fund has adopted a defensive investment
policy; provided, however, that the Fund will seek, to the extent
that it makes Temporary Investments for defensive purposes, to
make such investments in conformity with the requirements of a
qualified investment fund under New Jersey law.
Repurchase Agreements. As a defensive position only, the Fund
may enter into repurchase agreements with banks which are the
issuers of instruments acceptable for purchase by the Fund and
with certain dealers on the 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 (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. SBMFM, 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 to evaluate potential risks.
Investment Restrictions
The Fund has adopted the following investment restrictions for
the protection of shareholders. Restrictions 1 through 7 below
cannot be changed without the approval of the holders of a
majority of the outstanding shares of the Fund, defined as the
lesser of (a) 67% of the Fund's shares present at a meeting, if
the holders of more than 50% of the outstanding shares are present
in person or by proxy, or (b) more than 50% of the Fund's
outstanding shares. The remaining restrictions may be changed by
the Board of Directors at any time. The Fund may not:
1. Issue senior securities as defined in the 1940 Act and any
rules and orders thereunder, except insofar as the Fund may be
deemed to have issued senior securities by reason of: (a)
borrowing money or purchasing securities on a when-issued or
delayed-delivery basis; (b) purchasing or selling futures
contracts and options on futures contracts and other similar
instruments; and (c) issuing separate classes of shares.
2. Invest more than 25% of its total assets in securities, the
issuers of which are in the same industry. For purposes of this
limitation, U.S. 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 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, in an amount not
exceeding 10% of the value of the Fund's total assets
(including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the
borrowing is made. Whenever borrowings exceed 5% of the value
of the Fund's total assets, the Fund will not make additional
investments.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Fund may invest
consistent with its investment objective and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities.
5. Engage in the business of underwriting securities issued by
other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
6. Purchase or sell real estate, real estate mortgages, real
estate investment trust securities, commodities or commodity
contracts, but this shall not prevent the Fund from: (a)
investing in securities of issuers engaged in the real estate
business and securities which are secured by real estate or
interests therein; (b) holding or selling real estate received
in connection with securities it holds; or (c) trading in
futures contracts and options on futures contracts.
7. Purchase any securities on margin (except for such short-
term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except against the box). For purposes of this restriction, the
deposit or payment by the Fund of initial or maintenance margin
in connection with futures contracts and related options and
options on securities is not considered to be the purchase of a
security on margin.
8. Purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in securities
that are illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets in the
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
Statement of Additional Information and any future change in those
practices would require Board of Directors' approval and
appropriate disclosure to investors.
If a percentage restriction is complied with at the time of an
investment, a later increase or decrease in the percentage of
assets resulting from a change in the values of portfolio
securities or in the amount of the Fund's assets will not
constitute a violation of such restriction. In order to permit the
sale of the Fund's shares in certain states, the Fund may make
commitments more restrictive than the restrictions described
above. Should the Fund determine that any such commitment is no
longer in the best interests of the Fund and its shareholders, it
will revoke the commitment by terminating sales of its shares in
the state involved.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are made by
SBMFM subject to the overall supervision and review of the Fund's
Board of Directors. Portfolio securities transactions are
effected by or under the supervision of SBMFM.
Newly issued securities normally are purchased directly from
the issuer or from an underwriter acting as principal. Other
purchases and sales usually are placed with those dealers from
which it appears that the best price or execution will be
obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters of
newly issued securities usually includes a concession paid by the
issuer to the underwriter, and purchases of after-market
securities from dealers normally are executed at a price between
the bid and asked prices. The Fund has paid no brokerage
commissions since its commencement of operations.
Allocation of transactions, including their frequency, to
various dealers is determined by SBMFM in its best judgment and in
a manner deemed fair and reasonable to shareholders. The primary
considerations are the availability of the desired security and
prompt execution of orders in an effective manner at the most
favorable prices. Subject to these considerations, dealers which
provide supplemental investment research and statistical or other
services to SBMFM may receive orders for portfolio transactions by
the Fund. Information so received enables SBMFM to supplement its
own research and analysis with the views and information of other
securities firms. Such information may be useful to SBMFM in
serving both the Fund and its other clients, and, conversely,
supplemental information obtained by the placement of business of
other clients may be useful to SBMFM in carrying out its
obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence
of any underwriting or selling group relating thereto of which
SBMFM is a member, except to the extent permitted by the SEC.
Under certain circumstances, the Fund may be at a disadvantage
because of this limitation in comparison with other investment
companies which have a similar investment objective but which are
not subject to such limitation. The Fund also may execute
portfolio transactions through Smith Barney and its affiliates in
accordance with rules promulgated by the SEC.
While investment decisions for the Fund are made independently
from those of the other accounts managed by SBMFM, investments of
the type that the Fund may make also may be made by such other
accounts. When the Fund and one or more other accounts managed by
SBMFM are prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales will be
allocated in a manner believed by SBMFM 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 or supply of various types of tax-exempt
securities. For the fiscal years ended March 31, 1996 and 1997,
the Fund's portfolio turnover rate was 22% and 36%, respectively.
MUNICIPAL BONDS
General Information
Municipal Bonds generally are understood to include debt
obligations issued to obtain funds for various public purposes,
including the 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 privately operated facilities are
included within the term Municipal Bonds if the interest paid
thereon qualifies as excludable from gross income (but not
necessarily from alternative minimum taxable income) for Federal
income tax purposes in the opinion of bond counsel to the issuer.
The yields on Municipal Bonds are dependent upon a variety of
factors, including general economic and monetary conditions,
general money market factors, the financial condition of the
issuer, the general conditions of the Municipal Bond market, the
size of a particular offering, the maturity of the obligation
offered and the rating of the issue. Municipal Bonds are subject
to the provisions of bankruptcy, insolvency and other laws
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 the obligations or upon the ability of
municipalities to levy taxes. The possibility also exists that as
a result of litigation or other conditions, the power or ability
of any one or more issuers to pay, when due, principal of and
interest on its, or their, Municipal Bonds may be materially and
adversely affected.
Zero Coupon Securities
Zero coupon securities involve special considerations. 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 portfolio 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 segregated account
of the Fund consisting of cash or liquid debt securities equal to
the amount of the when-issued commitments will be established at
the Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market
or fair value of such securities declines, additional cash or
securities will be placed in the account daily so that the value
of the account will equal the amount of such commitments by the
Fund. Placing 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 its 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 may not be exempt from New Jersey personal income
taxes, and from Federal income taxes.
When the Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Special Considerations Relating to New Jersey Municipal Securities
Some of the significant financial considerations relating to
the investments of the Fund are summarized below. The following
information constitutes only a brief summary, does not purport to
be a complete description and is largely based on information
drawn from official statements relating to securities offerings of
New Jersey municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness
of the information contained in such offering statements has not
been independently verified.
Risk Factors: 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.
The State's 1997 fiscal year budget became law on
June 27, 1997 .
Effective January 1, 1994, New Jersey personal income tax rates
were cut by 5% for all taxpayers. Effective January 1, 1995, the
personal income tax rates were cut by an additional 10% for most
taxpayers. By a bill signed into law on July 4, 1995, New Jersey
personal income tax rates have been further reduced so that
coupled with the prior rate reductions, beginning with tax year
1996, personal income tax rates will be , depending on a
taxpayer's level of income and filing status, 30%, 15% or 9% lower
than 1993 rates. At this time, the effect of the tax reductions
cannot be evaluated.
Reflecting the downturn, the rate of unemployment in the State
rose from a low of 3.6% during the first quarter of 1989 to a
recessionary peak of 8.5 % during 1992. Since then, the
unemployment rate fell to an average of 6.4% in 1995 and 6.1%
for the four month period from May 1996 through August 1996.
For the recovery period as a whole, May 1992 to August 1996,
service-producing employment in New Jersey has expanded by 228,500
jobs. Hiring has been reported by food stores, auto dealers,
wholesale distributors, trucking and warehousing firms, utilities,
business and engineering/management service firms, hotels/hotel
casinos, service agencies and health care providers other than
hospitals. Employment growth was particularly strong in business
services and its personnel supply component with increases of
17,500 and 8,100, respectively, in the 12 month period ending
August 1996.
In the manufacturing sector, the employment losses slowed
between 1992 and 1994. After an average annual job loss of 33,500
from 1989 through 1992, New Jersey's factory job losses fell to
13,300 during 1993 and 7,300 during 1994. During 1995, however,
manufacturing job losses increased slightly to 9,100, reflecting a
slowdown in national manufacturing production activity. While
experiencing growth in the number of production workers in 1994,
the number declined in 1995 at the same time that managerial and
office staff were also reduced as a part of nationwide downsizing.
Through August 1996 layoffs of white collar workers and corporate
downsizing appears to be abating.
Conditions have slowly improved in the construction industry,
where employment has risen by 15,600 since its low in May 1992.
Between 1992 and 1995, this sector's hiring rebound was driven
primarily by increased homebuilding and nonresidential projects.
During 1996, public works projects and homebuilding became the
growth segment while nonresidential construction lessened.
Nonresidential construction activity, as measured by contract
awards, grew by 9.7% in 1993, 19.6% in 1994 and 3.0% in 1995.
More recently, nonresidential building construction contracts fell
by 20.5% in the first eight months of 1996. This decline is
largely attributable to an abundance of large, one-time contract
awards during 1995, including a $202.9 million contract for the
construction of a state prison.
Residential construction contracts through August 1996, despite
monthly fluctuations, increased by 1.4% for the first eight months
of 1996 as compared to the first eight months of 1995($1,502
million and $1,481 million respectively). Nonbuilding or
infrastructure construction rose by 17.8% during this period.
Despite these increases, total construction contracts declined by
3.9% when comparing the first eight months of 1995 and 1996.
Improvements in overall employment opportunities and the
economy in general have led to an increased consumer spending
during the recovery. While overall retail sales in New Jersey
grew by only 1.6% during 1993, they performed much better in 1994,
advancing by 7.8% which exceeded the 7.5% growth registered
nationwide. During 1995, especially the winter months, consumer
confidence and actual consumer spending moderated both nationally
and in the State. For all of 1995, retail sales in New Jersey
grew by 2.3%. Retail sales regained momentum in 1996 and have
been on a moderate upward trend, rising to an annual rate of $76.5
billion through June. The State's pickup in growth after a
blizzard-related January decline resulted in sales growth of 4.2%
when comparing the first six months of 1995 with those of 1996.
The rising trend in retail sales has translated into steady
increases in retail trade jobs (both full- and part-time) with a
rise in retail employment from December 1995 to August 1996 of
6,900 jobs.
Total new vehicle registrations (new passenger cars and light
trucks and vans) rose robustly in 1993 by more than 18% and in
1994 by 5.8%, but declined by 4.4% in 1995. Through July 1996
however, total new vehicle registration rose by 3.5% compared to
the same time period in 1995.
Unemployment in the State through August 1996 has been
receding. According to the U.S. Bureau of Labor Statistics, the
jobless rate dropped from 7.5% in 1993 to 6.8% in 1994 and to 6.4%
in 1995. Subsequently it has dropped to 6.1% for the four-month
period from May 1996 through August 1996.
The insured unemployment rate, i.e., the number of individuals
claming benefits as a percentage of the number of workers covered
by unemployment insurance, declined from 3.9% during calendar
years 1991 and 1992 to 3.3% during 1993 and then averaged 3.2%
throughout 1994, 1995 and the first six months of 1996. As of
August 1, 1996 the State's unemployment insurance trust fund
balance stood at $2.1 billion.
State Aid to Local Governments is the largest portion of fiscal
year 1997 appropriations. In fiscal year 1997,
$6,419.0 million of the State's appropriations consisted of
funds which are distributed to municipalities, counties and school
districts. The largest State Aid appropriation, in the amount of
$4,877.4 million, was provided for local elementary and
secondary education programs. Of this amount, $2,721.7
million is provided as foundation aid to school districts by
formula based upon the number of students and the ability of a
school district to raise taxes from its own base. In addition,
the State provided $601.1 million for special education
programs for children with disabilities. A $292.9 million program
was also funded for pupils at risk of educational failure,
including basic skills improvement. The State appropriated
$667.4 million on behalf of school districts as the
employer share of the teachers' pension and benefits programs,
$247.2 million to pay for the cost of pupil transportation.
Appropriations to the Department of Community Affairs ("DCA")
total $840.4 million in State Aid monies for fiscal year
1997. Many of the DCA State Aid programs and many
Treasury State Aid appropriations to the State Department of the
Treasury total $212.4 million in State Aid monies for
fiscal year 1997 . The principal programs funded by these
appropriations are: aid to county colleges ($128.8 million),
the cost of senior citizens, disabled and veterans property
tax deductions and exemptions ( $55.8 million); the State
contribution to the Consolidated Police and Firemen's Pension fund
($9.7 million) and aid to densely populated municipalities
( $9.0 million).
The second largest portion of appropriations in fiscal
1997 is applied to Direct State Services: the operation of
State government's 16 departments, the Executive Office, several
commissions, the State Legislature and the Judiciary. In fiscal
1997, appropriations for Direct State Services aggregate
$5,175.7 million. Some of the major appropriations for
Direct State Services during fiscal 1997 are detailed
below.
$602.1 million was appropriated for programs
administered by the Department of Human Services of that
amount, $439.2 million is appropriated for mental health and
developmentally disabled programs, including the operation of
seven psychiatric institutions and eight development centers.
The Department of Health and Senior Services was
appropriated $45.1 million for the prevention and treatment
of diseases, alcohol and drug abuse programs, regulation of health
care facilities, and the uncompensated care program, and senior
services programs.
$732.9 million is appropriated for the support of nine State
colleges, Rutgers University, the New Jersey Institute of
Technology and the University of Medicine and Dentistry of New
Jersey.
$908.4 million was appropriated to the Department of Law
and Public Safety and the Department of Corrections.
$159.4 million was appropriated to the Department of
Transportation for the various programs it administers, such as
the maintenance and improvement of the State highway systems and
the registration and regulation of motor vehicles and licensed
drivers.
$179.9 million was appropriated to the Department of
Environmental Protection for the protection of air, land, water,
forest, wildlife and shellfish resources and for the provision of
outdoor recreational facilities.
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 if provided, redemption
premium payments, if any required to fully pay the bonds. The
appropriation for debt servicing obligation on outstanding
indebtedness is $446.9 million for fiscal 1997 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.
Taxes: By the end of June 1997, Governor Christine Todd
Whitman claims that tax cut savings will total $2.8 billion. By
the end of the next fiscal year, those savings will rise to $4.4
Billion. Even though she has cut taxes 10 times, total revenues
have gone up by $1.2 billion.
In Fact, between school funding, county court takeover,
transportation aid, and other forms of assistance, the State will
provide nearly $750 million more property tax relief this year
than when she took office. The 1997-1998 budget preserves the 30%
income tax cut, the property tax deduction, and all other tax
cuts, as well as maintaining a $550mm surplus.
Revenues: The budget reflects an estimated bottom line loss
for fiscal year ended June 30, 1997 of $419million with total
tate revenues equaled
to $15.7 billion and total state expenditures equaled to $16.2
billion. The largest decrease in sources of revenues are in the
Miscellaneous Taxes, Fees and Revenue category, primarily the 1)
Executive Branch, a (80.31%) decrease; 2) Department of Health and
Senior Services, a (40.26%) decrease; Department of Human
Services, a (20.50%) decrease; 4) Department of Labor, a (42.96%)
decrease; 5) the Judicial Branch, a (27.31%) decrease. The
Revenue Fund also decreased (8.22%) to $313million.
Major Tax revenues
decreased (0.47%) from fiscal year 1996 to fiscal year 1997.
Expenditures: On the expenditure side, total state
expenditures have decreased(0.80%) from fiscal year 1996 to fiscal
year 1997. The largest decrease in expenditures are in the
Executive Branch, primarily the 1) Department of Agriculture, a
(15.99%) decrease; 2) Department of Labor, a (15.99%) decrease; 2)
Department of Labor, a (14.59%) decrease; 3) Department of
Military and VA, a (23.27%) decrease; and 4) Department of
Personnel, a (15.25%) decrease.
Increased spending occurred in the following categories: the
Department of Commerce and Economic Development, a 10.61%
increase; 2) the Department of Education, a 17.06% increase; and
3) Department of Transportation, 11.34% increase.
Litigation. At any given time, there are various numbers of
claims and cases pending against New Jersey, New Jersey agencies
and employees, seeking recovery of monetary damages that are
primarily paid out of the fund created pursuant to the Tort Claims
Act, N.J.S.A. 59:1-1 et seq. (the "Tort Claims Act''). At any
given time there are various contract and other claims against New
Jersey and New Jersey agencies, including environmental claims
arising from the alleged disposal of hazardous waste, seeking
recovery of monetary damages or other relief which would require
the expenditure of funds. In addition, at any given time there are
various numbers of claims and cases pending against the University
of Medicine and Dentistry of New Jersey and its employees, seeking
recovery of monetary damages or other relief which would require
the expenditure of funds. New Jersey is unable to estimate its
exposure for these claims.
As of August, 1994, the following cases are presently pending
or threatened in which New Jersey has the potential for either a
significant loss of revenue or significant unanticipated
expenditures: Abbot v. Burke, challenging the constitutionality of
the Quality Education Act of 1990, which was found to be
unconstitutional by the Trial Court and was recently affirmed by
the New Jersey Supreme Court and requires that a funding formula
be adopted by September, 1996 which will achieve by the 1997-98
school year the mandated parity in spending and will address the
special educational needs of children in poor and urban school
districts; County of Essex v. Waldman, et al. and similar cases
involving eleven other counties, challenging the methods by which
the New Jersey Department of Human Services shares with county
governments and maintenance recoveries and costs for residents in
New Jersey psychiatric hospitals and residential facilities for
the developmentally disabled, all of which are on appeal in the
New Jersey courts; County of Essex v. Commissioner of Human
Services, et al. and similar cases involving ten other counties,
in which the Appellate Division ruled that all counties were
entitled to 100% of Social Security benefits and other maintenance
recoveries received by New Jersey and were entitled to credits for
payments made to New Jersey for the maintenance of Medicare and
Medicaid-eligible county residents of certain New Jersey
facilities, which is on petition for review by the New Jersey
Supreme Court; New Jersey Association of Health Care Facilities,
Inc., et al. v. Gibbs, et al., a class action on behalf of all New
Jersey long-term care facilities providing services to Medicaid
patients, seeking a declaration that the New Jersey Department of
Human Services has violated Federal law in the setting and paying
of 1990 long-term care facility Medicaid payment rates, where the
Third Circuit affirmed the District Court's denial of plaintiff's
motion for preliminary injunction, and the parties are currently
negotiating the form of an order to dismiss the action with
prejudice; Exxon v. Hunt and related cases, where taxpayers sought
refund of taxes paid to the Spill Compensation Fund and the New
Jersey Supreme Court, on remand from the U.S. Supreme Court, ruled
that plaintiffs would receive refunds only in the event the New
Jersey Legislature refused to reimburse the Spill Compensation
Fund for expenditures for preempted purposes and, after exhaustion
of appeals and other legal avenues, a motion by the State for
dismissal of all such claims is pending before the Tax Court; Fair
Automobile Insurance Reform Act ("FAIR Act'') litigation
challenging various portions of FAIR Act, including surtax and
assessment provisions, is still pending; County of Passaic v.
State of New Jersey alleging tort and contractual claims against
New Jersey and the New Jersey Department of Environmental
Protection in connection with a resource recovery facility
plaintiffs had planned to build in Passaic County, seeking
approximately $30 million in damages; Pelletier, et al., v.
Waldman, et al., a challenge by State Medicaid-eligible children
to the adequacy of Medicaid reimbursement for services rendered by
doctors and dentists, is currently in mediation; Barnett Memorial
Hospital v. Commissioner of Health, an appeal by several hospitals
of the Commissioner's calculation of the hospital assessment
required by the Health Care Cost Reduction Act of 1991, was
decided against the Commission and successful claimants were
refunded the amount of their overpayment in April, 1994, which
amount totaled $4,636,576; New Jersey Hospital Association, et al.
v. Leonard Fishman, seeking the same relief as in Barnett; Robert
E. Brennan v. Richard Barry, et al., a suit filed against two
members of the New Jersey Bureau of Securities alleging causes of
action for defamation, injury to reputation, abuse of process and
improper disclosure, based on the Bureau's investigation of
certain publicly-traded securities to which the state has filed a
motion to dismiss and/or for summary judgment; Camden Co. v.
Waldman, et al., now consolidated with similar suits filed by
Middlesex, Monmouth and Atlantic Counties, seeking reimbursement
of federal funds received by New Jersey for disproportionate share
hospital payments made to county psychiatric facilities from July
1, 1988 through July 1, 1991 has been transferred to the Appellate
Division; Interfaith Community Organization v. Fox, et al., a suit
filed by a coalition of churches and church leaders in Hudson
County against the Governor, the Commissioners of the Department
of Environmental Protection and Energy and the Department of
Health, concerning chromium contamination in Liberty State Park in
Jersey City; American Trucking Associations, Inc. and Tri-State
Motor Transit v. State of New Jersey, challenging the
constitutionality of annual hazardous and solid waste licensure
fees collected by the Department of Environmental Protection,
seeking a permanent injunction enjoining future collection of fees
and refund of all renewal fees, fines and penalties collected; and
Waste Management of Pennsylvania, et al. v. Shinn, et al., an
action filed in federal district court seeking declaratory and
injunctive relief and compensatory damages from Department of
Environmental Protection Commissioner Shinn and Acting
Commissioner Fox, alleging violations of the Commerce Clause and
the Contracts Clause of the United States Constitution based on
emergency redirection orders and a draft permit.
In addition to litigation against New Jersey, at any given time
there are various numbers of claims and cases pending or
threatened against the political subdivisions of New Jersey,
including but not limited to New Jersey authorities, counties,
municipalities and school districts, which have potential for
either a significant loss of revenue or significant unanticipated
expenditures.
Ratings. In July 1991, S&P downgraded its rating of New Jersey
General Obligation Bonds from AAA to AA+. Subsequently on June 4,
1992, S&P moved New Jersey's General Obligation Bonds from Credit
Watch and affirmed its AA+ ratings of New Jersey's general
obligation and various lease and appropriation backed debt, but
its ratings outlook was revised to negative for the longer term
horizon (beyond four months) for resolution of two items cited in
the Credit Watch listing: (a) the Federal Health Care Facilities
Administration ruling concerning retroactive Medicaid hospital
reimbursements and (b) New Jersey's uncompensated health care
funding system, which is pending review by the United States
Supreme Court. Citing a developing pattern of reliance on non-
recurring measures to achieve budgetary balance, four years of
financial operations marked by revenue shortfalls and operating
deficits, and the likelihood that financial pressures will
persist, on August 24, 1992 Moody's lowered its rating of New
Jersey General Obligation Bonds from Aaa to Aa1. There is no
assurance that the ratings of New Jersey General Obligation Bonds
will continue for any given period of time or that they will not
be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market
prices of the New Jersey's general obligation bonds.
The various political subdivisions of New Jersey are rated
independently by S&P and/or Moody's. These ratings are based upon
information supplied to the rating agency by the political
subdivision. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised
downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of
bonds issued by the political subdivision.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in
the Prospectus applies to purchases made by any "purchaser,''
which is defined to include the following: (a) an individual; (b)
an individual and his or her immediate family purchasing shares
for his or her own account; (c) a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit-sharing or other employee benefit
plan qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code''), and qualified employee benefit
plans of employers who are "affiliated persons'' of each other
within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; and (f) a
trustee or other professional fiduciary (including a bank, or an
investment adviser registered with the SEC under the Investment
Advisers Act of 1940, as amended) purchasing shares of the Fund
for one or more trust estates or fiduciary accounts. Purchasers
who wish to combine purchase orders to take advantage of volume
discounts should contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the
Prospectus, apply to any purchase of Class A shares if the
aggregate investment in Class A shares of the Fund and in Class A
shares of other Smith Barney Mutual Funds that are offered with a
sales charge, including the purchase being made, of any purchaser
is $25,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of
appropriate records. The Fund reserves the right to terminate or
amend the combined right of accumulation at any time after written
notice to shareholders. For further information regarding the
right of accumulation, shareholders should contact a Smith Barney
Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis.
The public offering price for a Class A and Class Y share of the
Fund is equal to the net asset value per share at the time of
purchase, plus for Class A shares an initial sales charge based on
the aggregate amount of the investment. The public offering price
for a Class B and Class C share (and Class A share purchases,
including applicable rights of accumulation, equaling or exceeding
$500,000), is equal to the net asset value per share at the time
of purchase and no sales charge is imposed at the time of
purchase. A contingent deferred sales charge ("CDSC''), however,
is imposed on certain redemptions of Class B and Class C shares,
and Class A shares when purchased in amounts exceeding $500,000.
The method of computation of the public offering price is shown in
the Fund's financial statements, incorporated by reference in
their entirety into this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the New York Stock
Exchange, Inc. ("NYSE'') is closed (other than for customary
weekend and holiday closings), (b) when trading in markets the
Fund normally utilizes is restricted, or an emergency exists, as
determined by the SEC, so that disposal of the Fund's investments
or determination of net asset value is not reasonably practicable
or (c) for such other periods as the SEC by order may permit for
protection of the Fund's shareholders.
Distribution in Kind
If the Board of Directors of the Fund determines that it would
be detrimental to the best interests of the remaining shareholders
of the Fund to make a redemption payment wholly in cash, the Fund
may pay, in accordance with SEC rules, any portion of a redemption
in excess of the lesser of $250,000 or 1% of the Fund's net assets
by a distribution in kind of portfolio securities in lieu of cash.
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 $100 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.
(With respect to Withdrawal Plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan 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
shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and
who hold their shares in certificate form must deposit their share
certificates with the Transfer Agent as agent for Withdrawal Plan
members. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in
additional shares of the Fund. Withdrawal Plans should be set up
with a Smith Barney Financial Consultant. A shareholder who
purchases shares directly through the Transfer Agent may continue
to do so and applications for participation in the Withdrawal Plan
must be received by the Transfer Agent no later than the eighth
day of the month to be eligible for participation beginning with
that month's withdrawal. For additional information, shareholders
should contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts
basis pursuant to a written agreement dated July 30, 1993 (the
"Distribution Agreement'') which was most recently approved by the
Fund's Board of Directors on July 16, 1997. For the fiscal years
ended March 31, 1995, 1996 and 1997, Smith Barney received
$199,930, $154,000 and 139,000, respectively, in sales charges
from the sale of the Fund's Class A shares, and did not reallow
any portion thereof to dealers. For the fiscal years ended March
31, 1995, 1996 and 1997 Smith Barney received $178,656, $117,000
and $160,000 respectively, representing CDSC on redemptions of the
Fund's Class B and Class C shares.
For the fiscal year ended March 31, 1997, Smith Barney incurred
distribution expenses totaling approximately $749,783, consisting
of approximately $50,800 for advertising, $6,834 for printing and
mailing of Prospectuses, $332,025 for support services, $349,544
to Smith Barney Financial Consultants, and $10,579 in accruals for
interest on the excess of Smith Barney expenses incurred in
distributing the Fund's shares over the sum of the distribution
fees and CDSC received by Smith Barney from the Fund.
When payment is made by the investor before settlement date,
unless otherwise requested in writing by the investor, the funds
will be held as a free credit balance in the investor's brokerage
account and Smith Barney may benefit from the temporary use of the
funds. The investor may designate another use for the funds prior
to settlement date, such as an investment in a money market fund
(other than Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to
invest the funds in a Smith Barney money market fund, the amount
of the investment will be included as part of the average daily
net assets of both the Fund and the money market fund, and
affiliates of Smith Barney that serve the funds in an investment
advisory or administrative capacity will benefit from receiving
fees from both such investment companies for managing these
assets, computed on the basis of their average daily net assets.
The Fund's Board of Directors has been advised of the benefits to
Smith Barney resulting from these settlement procedures and will
take such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements for continuance.
Distribution Arrangements
To compensate Smith Barney for the services it provides and for
the expense it bears under the Distribution Agreement, the Fund
has adopted a services and distribution plan (the "Plan'')
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the
Fund pays Smith Barney a service fee, accrued daily and paid
monthly, calculated at the annual rate of 0.15% of the value of
the Fund's average daily net assets attributable to the Class A,
Class B and Class C shares. In addition, the Fund pays Smith
Barney a distribution fee primarily intended to compensate Smith
Barney for its initial expense of paying Financial Consultants a
commission upon sales of the respective shares. The Class B
distribution fee is calculated at the annual rate of 0.50% of the
value of the Fund's average net assets attributable to the shares
of the Class. The Class C distribution fee is calculated at the
annual rate of 0.55% of the value of the Fund's average net assets
attributable to the shares of the Class.
The following service and distribution fees were incurred
during the fiscal years ended as indicated:
Service Fees
3/31/97
3/31/96
3/31/95
Class A
$224,109
$185,007
$170,371
Class B
95,133
89,476
77,993
Class C
6,565
2,101
58
Distribution Fees
3/31/97
3/31/96
3/31/95
Class B
$317,111
$298,253
$259,976
Class C
24,073
7,704
214
For the 1995, 1996 and 1997 fiscal years, Smith Barney received
$508,612, $582,541 and $666,991, respectively, in the aggregate
from the Plan.
Under its terms, the Plan continues from year to year, provided
such continuance is approved annually by vote of the Fund's Board
of Directors, including a majority of the Independent Directors
who have no direct or indirect financial interest in the operation
of the Plan or in the Distribution Agreement. 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 the
Independent Directors in the manner described above. The Plan may
be terminated with respect to a Class at any time, without
penalty, by vote of a majority of the Independent Directors or by
a vote of a majority of the outstanding voting securities of the
Class (as defined in the 1940 Act). Pursuant to the Plan, Smith
Barney will provide the Board of Directors with periodic reports
of amounts expended under the Plan and the purpose for which such
expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each
day, Monday through Friday, except days on which the NYSE is
closed. The NYSE currently is scheduled to be closed on New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas, and on the preceding Friday
or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Because of the differences in
distribution fees and Class-specific expenses, the per share net
asset value of each Class may differ. The following is a
description of the procedures used by the Fund in valuing its
assets.
The valuation of the Fund's assets is made by SBMFM after
consultation with an independent pricing service (the "Service'')
approved by the Board of Directors. When, in the judgment of the
Service, quoted bid prices for investments are readily available
and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the
Service, there is no readily obtainable market quotation (which
may constitute a majority of the portfolio securities) are carried
at fair value as determined by the Service. For the most part,
such investments are liquid and may be readily sold. The Service
may employ electronic data processing techniques and/or a matrix
system to determine valuations. The procedures of the Service are
reviewed periodically by the officers of the Fund under the
general supervision and responsibility of the Board of Directors,
which may replace any such Service at any time if it determines it
to be in the best interests of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any Smith Barney Mutual
Fund may exchange all or part of their shares for shares of the
same Class of other Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the shareholder's state of
residence, as listed in the Prospectus, on the basis of relative
net asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may
be exchanged for Class A shares of any of the other funds.
Class A shares of any fund may be exchanged without a sales
charge for shares of the funds that are offered without a sales
charge. Class A shares of any fund purchased without a sales
charge may be exchanged for shares sold with a sales charge.
B. Class A shares of any fund acquired by a previous exchange
of shares purchased with a sales charge may be exchanged for
Class A shares of any of the other funds.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B shares
of another fund will be subject to the higher applicable CDSC
of the two funds and, for purposes of calculating CDSC rates
and conversion periods, will be deemed to have been held since
the date the shares being exchanged were deemed to be
purchased.
Dealers other than Smith Barney must notify the Transfer Agent
of the investor's prior ownership of Class A shares of Smith
Barney High Income Fund and the account number in order to
accomplish an exchange of shares of Smith Barney High Income
Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares
of the same Class in a fund with different investment objectives
when they believe that a shift between funds is an appropriate
investment decision. This privilege is available to shareholders
residing in any state in which the fund shares being acquired may
legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund
into which an exchange is being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and subject to any applicable
CDSC, the proceeds are immediately invested, at a price as
described above, in shares of the fund being acquired. Smith
Barney reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of
a Class in advertisements or in reports and other communications
to shareholders. The Fund may include comparative performance
information in advertising or marketing the Fund's shares. Such
performance information may include the following industry and
financial publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of the Fund describes
the expenses or performance of any Class, it will also disclose
such information for the other Classes.
Average Annual Total Return
"Average annual total return'' figures described below are
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 the 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The following total return figures for Class A shares assume
that the maximum 4.00% sales charge has been deducted from the
investment at the time of purchase and have been restated to show
the change in the maximum sales charge. The average annual total
return for Class A shares was as follows for the period indicated:
1.49% for the one-year period beginning April 1, 1996 through
March 31, 1997.
6.07% per annum during the five-year period beginning on April 1,
1992 through March 31, 1997.
7.80% per annum during the period from the Fund's commencement of
operations on April 22, 1988 through March 31, 1997.
These total return figures assume that the maximum 4.00% sales
charge assessed by the Fund on purchases of Class A shares has
been deducted from the investment at the time of purchase. Had the
investment advisory, sub-investment advisory and/or administration
fees not been partially waived (and assuming that the maximum
4.00% sales charge had not been deducted), the Class A's average
annual total return would have been 5.74%, 6.94% and 8.29%,
respectively, for those same periods.
The Fund's average annual total return for Class B shares was
as follows for the periods indicated:
0.73% for the one-year period from April 1, 1996 through March 31,
1997.
5.70% per annum for the period from November 6, 1992 (commencement
of operations) through March 31, 1997.
These average annual total return figures assume that the
applicable maximum CDSC has been deducted from the investment. Had
the investment advisory and sub-investment advisory and/or
administration fees not been partially waived and the CDSC had not
been deducted, the average annual total return on the Fund's Class
B shares would have been 5.23% and 5.89%, respectively, for those
same periods.
The Fund's average annual total return for Class C shares was
as follows for the periods indicated:
4.17% for the one year period from April 1, 1996 through March 31,
1997; and
8.94% per annum for the period from December 13, 1994
(commencement of operations) through March 31, 1997.
These average annual total return figures assume that the
applicable CDSC has been deducted from the investment. Had the
CDSC not been deducted, the average annual total return on the
Fund's Class C shares would have been 5.17% and 8.94%,
respectively, for those same periods.
Aggregate Total Return
Aggregate total return figures described below represent the
cumulative change in the value of an investment in the Class for
the specified period and are computed by the following formula:
ERV-P
P
Where: P= A hypothetical initial payment of $10,000.
ERV= Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5- or
10-year period at the end of the 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The aggregate total return for Class A shares was as follows
for the periods indicated (reflecting the partial waiver of the
investment advisory and sub-investment advisory and/or
administration fees):
1.49% for the one-year period beginning April 1, 1995 through
March 31, 1997.
34.24% for the five-year period from April 1, 1992 through March
31, 1997; and
95.84% for the period from the Fund's commencement of operations
on April 22, 1988 through March 31, 1997.
These aggregate total return figures assume that the maximum
4.00% sales charge assessed by the Fund on purchases of Class A
shares has been deducted from the investment at the time of
purchase. If the maximum sales charge had not been deducted at the
time of purchase, the Fund's aggregate total return reflecting the
partial waiver of the investment advisory and sub-investment
advisory and/or administration fees for those same periods would
have been 5.74%, 39.85% and 103.92%, respectively.
The Fund's aggregate total return for Class B shares was as
follows for the periods indicated:
0.73% for the one-year period from April 1, 1996 through March 31,
1997; and
27.63% for the period beginning on November 6, 1992 (commencement
of operations) through March 31, 1997.
These figures assume that the applicable maximum 4.50% CDSC has
been deducted from the investment at the time of purchase. If the
investment advisory and sub-investment advisory and/or
administration fees had not been partially waived and the maximum
CDSC had not been deducted at the time of purchase, the Fund's
aggregate total returns for the same period would have been 5.23%
and 28.64%, respectively, for those same periods.
The Fund's aggregate total return for Class C shares was as
follows for the periods indicated:
4.17% for the one year period from April 1, 1996 through March 31,
1997; and
21.75% per annum for the period from December 13, 1994
(commencement of operations) through March 31, 1997.
These aggregate total return figures assume that the applicable
CDSC has been deducted from the investment. Had the CDSC not been
deducted, the average annual total return on the Fund's Class C
shares would have been 5.17% and 21.75%, respectively, for those
same periods.
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 fluctuation in interest rates and the
expenses of the Fund. Performance will vary from time to time
depending upon market conditions, the composition of the Fund's
portfolio and its operating expenses and the expenses exclusively
attributable to the Class. Consequently, any given performance
quotation should not be considered representative of the Class'
performance for any specified period in the future. In addition,
because the 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.
TAXES
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders. The
summary is not intended as a substitute for individual tax advice
and investors are urged to consult their own tax advisors as to
the tax consequences of an investment in the Fund.
As described above and in the Prospectus, the Fund is designed
to provide investors with current income which is excluded from
gross income for regular Federal income tax purposes and exempt
from New Jersey personal income taxes. The Fund is not intended to
constitute a balanced investment program and is not designed for
investors seeking capital gains or maximum tax-exempt income
irrespective of fluctuations in principal. Investment in the Fund
would not be suitable for tax-exempt institutions, qualified
retirement plans, H.R. 10 plans and individual retirement accounts
since such investors would not gain any additional tax benefit
from the receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each
succeeding year as a "regulated investment company'' under the
Code. Provided the Fund (a) qualifies as a regulated investment
company and (b) distributes at least 90% of the sum of its taxable
net investment income and 90% of its tax-exempt interest income
(reduced by certain expenses), the Fund will not be liable for
Federal income taxes to the extent of all of its taxable net
investment income and net realized long-term and short-term
capital gains, if any, are distributed to its shareholders.
Although the Fund expects to be relieved of substantially all
Federal and state income or franchise taxes, depending upon the
extent of its activities in states and localities in which its
offices are maintained, in which its agents or independent
contractors are located or in which it is otherwise deemed to be
conducting business, that portion of the Fund's income which is
treated as earned in any such state or locality could be subject
to state and local tax. Any such taxes paid by the Fund would
reduce the amount of income and gains available for distribution
to shareholders. All net investment income and net capital gains
earned by the Fund will be reinvested automatically in additional
shares of the same Class of the Fund at net asset value, unless
the shareholder elects to receive dividends and distributions in
cash.
Because the Fund will distribute exempt-interest dividends,
interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for Federal income and New
Jersey personal income tax purposes. If a shareholder receives an
exempt-interest dividend with respect to any share and if the
share is held by the shareholder for six months or less, then, for
Federal income tax purposes, any loss on the sale or exchange of
such share may, to the extent of the exempt-interest dividend, be
disallowed. In addition, the Code may require a shareholder, if he
or she receives exempt-interest dividends, to treat as Federal
taxable income, a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Furthermore,
that portion of any 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, as noted in
the Fund's Prospectus, (a) some or all of the Fund's dividends and
distributions may be a specific tax preference item, or a
component of an adjustment item, for purposes of the Federal
individual and corporate alternative minimum taxes, and (b) the
receipt of Fund dividends and distributions may affect a corporate
shareholder's Federal "environmental'' tax liability. In addition,
the receipt of Fund dividends and distributions may affect a
foreign corporate shareholder's Federal "branch profits'' tax
liability and a Subchapter S corporation shareholder's Federal
"excess net passive income'' tax liability. Shareholders should
consult their own tax advisors to determine whether they are (a)
"substantial users'' with respect to a facility or related to such
users within the meaning of the Code and (b) subject to a Federal
alternative minimum tax, the Federal environmental tax, the
Federal "branch profits'' tax and the Federal "excess net passive
income'' tax.
As described above and in the Prospectus, the Fund may invest
in municipal bond index and interest rate futures contracts and
options on these futures contracts. The Fund anticipates that
these investment activities would not prevent the Fund from
qualifying as a regulated investment company. As a general rule,
these investment activities would increase or decrease the amount
of long-term and short-term capital gains or losses realized by
the Fund and, accordingly, would affect the amount of capital
gains distributed to the Fund's shareholders.
For Federal income tax purposes, gain or loss on municipal bond
index and interest rate futures contracts and options on these
futures contracts (collectively referred to as "section 1256
contracts'') is taxed pursuant to a special "mark-to-market''
system. These instruments are treated as if sold at the Fund's
fiscal year end for their fair market value. As a result, the Fund
will be recognizing gains or losses before they are actually
realized. Gain or loss on section 1256 contracts generally is
treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, and, accordingly, the mark-to-market system
will generally affect the amount of net capital gains or losses
recognized by the Fund and the amount of distributions to a
shareholder. Moreover, if the Fund invests in both section 1256
contracts and offsetting positions in those contracts, which
together constitute a straddle, then the Fund may be required to
defer receiving the benefit of certain recognized losses. The Fund
expects that its activities with respect to section 1256 contracts
and offsetting positions in those contracts will not cause it to
be treated as recognizing a materially greater amount of capital
gains than actually realized and will permit it to use
substantially all of the losses of the Fund for the fiscal years
in which the losses actually occur.
While the Fund does not expect to realize a significant amount
of net long-term capital gains, any such gains will be distributed
annually as described in the Prospectus. Such distributions
("capital gain dividends''), if any, may be taxable to
shareholders as long-term capital gains, regardless of how long
they have held Fund shares, and will be designated as capital gain
dividends in a written notice mailed by the Fund to shareholders
within 60 days after the close of the Fund's prior taxable year.
If a shareholder receives a capital gain dividend with respect to
any share and if such share has been held by the shareholder for
six months or less, then any loss (to the extent not disallowed
pursuant to the other six month rule described above) on the sale
or exchange of such share will be treated as a long-term capital
loss to the extent of the capital gain dividend.
No loss will be allowed on the sale, exchange or redemption of
shares in the Fund to the extent that the shareholder acquired
other shares in the Fund within a period beginning 30 days before
the sale or disposition of the loss shares and ending 30 days
after such date (Fund shareholders should note that such
acquisitions may occur through the automatic dividend reinvestment
plan or the Systematic Investment Plan described in the
Prospectus).
When a shareholder incurs a sales charge when acquiring shares
of the Fund, disposes of those shares within 90 days and acquires
shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (that is,
exchange privilege), the original sales charge increases the
shareholder's tax basis in the original shares only to the extent
the otherwise applicable sales charge for the second acquisition
is not reduced. The portion of the original sales charge that does
not increase the shareholder's tax basis in the original shares
would be treated as incurred with respect to the second
acquisition and, as a general rule, would increase the
shareholder's tax basis in the newly 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 or CDSC by shifting his or her investment in a family
of mutual funds.
Each shareholder will receive after the close of the calendar
year an annual statement as to the Federal income tax and New
Jersey personal income tax status of his or her dividends and
distributions from the Fund for the prior calendar year. These
statements also will designate the amount of exempt-interest
dividends that is a preference item for purposes of the Federal
individual and corporate alternative minimum taxes. Each
shareholder also will receive, if appropriate, various written
notices after the close of the Fund's prior taxable year as to the
Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's
prior taxable year. Shareholders should consult their tax advisors
as to any other state and local taxes that may apply to these
dividends and distributions. The dollar amounts of dividends
excluded or exempt from regular Federal income taxation or New
Jersey personal income taxation and the dollar amount of dividends
subject to regular Federal income taxation or New Jersey personal
income taxation, if any, will vary for each shareholder depending
upon the size and duration of each shareholder's investment in the
Fund.
Investors considering buying shares of the Fund just prior to a
record date for a capital gain distribution should be aware that,
regardless of whether the price of the Fund shares to be purchased
reflects the amount of the forthcoming distribution payment, any
such payment will be a taxable distribution payment.
If a shareholder fails to furnish the Fund with a correct
taxpayer identification number, fails to report fully dividend or
interest income, or fails to certify that he or she has provided a
correct taxpayer identification number and that he or she is not
subject to "backup withholding,'' then the shareholder may be
subject to a 31% "backup withholding'' tax with respect to (a)
taxable dividends and distributions, if any, and (b) proceeds of
any redemption of Fund shares. An individual's taxpayer
identification number is his or her social security number. The
"backup withholding'' tax is not an additional tax and may be
credited against a shareholder's Federal income tax liability.
Income distributions, including interest income and gains
realized by the Fund upon disposition of investments paid from a
"qualified investment fund'' should be exempt from the New Jersey
personal income tax to the extent attributable to New Jersey
Municipal Securities or to obligations that are free from state or
local taxation under New Jersey or Federal laws ("Tax-Exempt
Obligations''). A "qualified investment fund'' is any investment
or trust company, or series of such investment company or trust
registered with the SEC, which for the calendar year in which a
distribution is paid, has no investments other than interest-
bearing obligations, obligations issued at a discount, financial
options, futures, forward contracts or other similar financial
instruments related to interest-bearing obligations, obligations
issued at a discount or related bond indexes and cash and cash
items, including receivables, and which has, at the close of each
quarter of the taxable year, at least 80% of the aggregate
principal amount of all of its investments, excluding financial
options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations
issued at a discount or bond indexes related thereto as authorized
under the Code, cash and cash items, such as receivables, invested
in New Jersey Municipal Securities or in Tax-Exempt Obligations.
Furthermore, gains resulting from the redemption or sale of shares
of the Fund to the extent attributable to interest or gain from
obligations issued by New Jersey or its local government entities
or obligations which are free from state or local taxes under New
Jersey or Federal law, are exempt from the New Jersey personal
income tax.
The New Jersey personal income tax is not applicable to
corporations. For all corporations subject to the New Jersey
Corporation Business Tax, dividends and distributions from a
"qualified investment fund'' are included in the net income tax
base for purposes of computing the Corporation Business Tax.
Furthermore, any gain upon the redemption or sale of Fund shares
by a corporate shareholder is also included in the net income tax
base for purposes of computing the Corporation Business Tax.
The foregoing is only a summary of certain Federal and New
Jersey tax considerations generally affecting the Fund and its
shareholders, and is not intended as a substitute for careful tax
planning. Shareholders are urged to consult their tax advisors
with specific reference to their own tax situations.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of
Maryland on November 12, 1987. The Fund commenced operations on
April 22, 1988 under the name Shearson Lehman New Jersey
Municipals Inc. On December 15, 1988, March 31, 1992, July 30,
1993 and October 14, 1994, the Fund changed its name to SLH New
Jersey Municipals Fund Inc., Shearson Lehman Brothers New Jersey
Municipals Fund Inc., Smith Barney Shearson New Jersey Municipals
Fund Inc. and Smith Barney New Jersey Municipals Fund Inc.,
respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19101, serves as the Fund's custodian pursuant to a
custody agreement. Under the custody agreement, PNC holds the
Fund's portfolio securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon
the month-end market value of securities held in custody and also
receives securities transaction charges. The assets of the Fund
are held under bank custodianship in compliance with the 1940 Act.
First Data Investor Services Group, Inc., located at Exchange
Place, Boston, Massachusetts 02109, serves as the Fund's transfer
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 and
distributes dividends and distributions payable by the Fund. For
these services, the Transfer Agent receives a monthly fee computed
on the basis of the number of shareholder accounts it maintains
for the Fund during the month and is reimbursed for out-of-pocket
expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended March 31,
1997, accompanies this Statement of Additional Information and is
incorporated herein by reference in its entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue bonds.
General obligation bonds are usually secured by all resources available to the
municipality and the factors outlined in the rating 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.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in
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-term credit
risk 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 or 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 ample margins of protection although not as large as
the preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of
favorable quality, with all security elements accounted for, but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may be
tight and market access for refinancing, in particular, is likely to be less
well established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the direct
credit support of an issuer or guarantor that possesses excellent long-term
operating and financial strengths combined with strong liquidity
characteristics (typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating of "AA-'' or
higher), or the direct credit support of an issuer or guarantor that possesses
above average long-term fundamental operating and financing capabilities
combined with ongoing excellent liquidity characteristics. Paper rated A-1 by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A'' or better; the issuer
has access to at least two additional channels of borrowing; basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and the reliability and
quality of management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (a) evaluation of the management of the issuer; (b) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (c) evaluation
of the issuer's products in relation to competition and customer acceptance;
(d) liquidity; (e) amount and quality of long-term debt; (f) trend of earnings
over a period of ten years; (g) financial strength of a parent company and the
relationships which exist with the issuer; and (h) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
Smith Barney
New Jersey
Municipals
Fund Inc.
Statement of
Additional
Information
July 29, 1997
Smith Barney
New Jersey Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
29
A-4
