Registration No. 33
12792
811-5066
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _X_
Pre-Effective Amendment No.
___
Post-Effective Amendment No. 17
_X_
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 _X_
Amendment No. 19
_X_
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
(Exact name of Registrant as specified in
Charter)
388 Greenwich Street, New York, New York
10013 (Address of Principal
Executive Offices) (Zip Code)
(212) 720-9218
Registrant's Telephone Number,
including area code
Christina T. Sydor
Secretary
Smith Barney Arizona Municipals
Fund Inc. 388 Greenwich Street,
New York, NewYork 10013
(Name and Address of Agent for
Service)
Approximate Date of Proposed Public
Offering: As soon as possible after
this Post-Effective Amendment becomes
effective.
It is proposed that this filing
becomes effective:
____ immediately upon filing pursuant to Rule
485(b) _X__ on July 30, 1995, pursuant to Rule
485(b) ____ 60 days after filing pursuant to
Rule 485(a) The Registrant has previously
filed a declaration of indefinite registration
of its shares pursuant to Rule 24f2 under the
Investment Company Act of 1940, as amended.
Registrant's Rule 24f-2 Notice for the fiscal
year ended May 31, 1995 was filed on July 17,
1995.
CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933x
Title of SecuritiesBeing Registered Proposed
Maximum Offering Amount Being Registered2
Proposed
Maximum Aggregate Price Per Unit2 Proposed
Maximum Aggregate Offering Price8
Registration Fee Shares of CommonStock par
value$.001 per shareof Smith BarneyArizona
Municipals FundInc. 1,607,290 $9.94 $15,976,462
$100.00
x The shares being registered as set forth in
this table are in addition to the indefinite
number of shares of common stock which the
Registrant has registered under the Securities
Act of 1933, as amended (the "1933 Act"),
pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended (the "1940 Act").
The Registrant's Rule 24f2 Notice for the fiscal
year ended May 31, 1995 was filed on July 17,
1995.
2 Based on the Registrant's Class A closing price
of $9.94 on July 24, 1995 pursuant to Rule 457(d)
under the 1933 Act and Rule 24(e)-2 under the
1940 Act. 8In response to Rule 24(e)-2 (b) under
the 1940 Act: (1) the calculation of the maximum
aggregate offering price is made pursuant to Rule
24e-2; (2) 1,462,729 shares of common stock
were redeemed by the Registrant during the fiscal
year ended May 31, 1995; (3) 145,439 of such
shares are being used for reductions pursuant to
Rule 24f-2 during the current fiscal year; and
(4)1,317,290 shares are being used for reduction
in this amendment pursuant to Rule 24e2(a).
SMITH BARNEY ARIZONA MUNICIPALS FUND
INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A.Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information
Financial Highlights 4. General
Description of Registrant Cover Page;
Prospectus Summary;
Investment Objectives and Management
Policies; Additional Information
5. Management of the Fund Management of the Fund; Distributor;
Additional Information
6. Capital Stock and Other Securities Investment Objective and
Management Policies; Dividends, Distributions and Taxes; Additional
Information 7. Purchase of Securities Being Offered Purchase of
Shares; Valuation of Shares; Redemption of Shares; Exchange
Privilege ; Minimum Account Size; Distributor; Additional
Information 8. Redemption or Repurchase Purchase of Shares;
Redemption of Shares; Exchange Privilege 9. Legal Proceedings
Not Applicable
Part BItem No. Statement of Additional Information Caption 10.
Cover Page Cover Page
11. Table of Contents Table of Contents 12. General Information
Distributor; Additional Information 13. Investment Objective and
Policies Investment Objective and Management Policies
14. Management of the Fund
Management of the Fund; Distributor
15. Control Persons and Principal
Holders of
Securities Management of the Fund
16. Investment Advisory and other
Services Management of the Fund;
Distributor 17. Brokerage Allocation
Investment Objective and Management
Policies 18. Capital Stock and Other
Securities Investment
Objectives and Management
Policies ; Purchase of Shares; Redemption of Shares;
Taxes 19. Purchase, Redemption and Pricing
of Securities being Offered
Purchase of Shares; Redemption of
Shares; Distributor; Valuation of
Shares; Exchange Privilege 20.
Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Data Performance Data 23. Financial
Statements Financial Statements
<PAGE>
P R O S P E C T U S
SMITH
BA
RN
EY
Ar
iz
on
a
Municip
a
l
s
F
u
n
d
I
n
c
.
JULY
30, 1995
PROSPECTUS BEGINS ON
PAGE ONE
[LOGO APPEARS HERE]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS JULY 30, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Arizona Municipals Fund Inc. (the "Fund") is a
diversified municipal fund that seeks to provide Arizona investors with
the maximum amount of income exempt from Federal and Arizona state
income taxes as is consistent with the preservation of capital.
This Prospectus concisely sets forth certain information about the
Fund, including sales charges, distribution and service fees and
expenses, that pro spective investors will find helpful in making an
investment decision. Invest ors are encouraged to read this Prospectus
carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of
Addi tional Information dated July 30, 1995, 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
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
- -------------------------------------------------
VALUATION OF SHARES 25
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 25
- -------------------------------------------------
PURCHASE OF SHARES 27
- -------------------------------------------------
EXCHANGE PRIVILEGE 35
- -------------------------------------------------
REDEMPTION OF SHARES 39
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 41
- -------------------------------------------------
PERFORMANCE 41
- -------------------------------------------------
MANAGEMENT OF THE FUND 43
- -------------------------------------------------
DISTRIBUTOR 44
- -------------------------------------------------
ADDITIONAL INFORMATION 45
- -------------------------------------------------
</TABLE>
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 or 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 an offer or
solicitation
in
such jurisdiction
2
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
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 Prospec tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management
investment company that seeks to provide Arizona investors with the
maximum amount of income exempt from Federal and Arizona state income
taxes as is consistent with the preservation of capital. Its investments
consist primarily of intermediateand long-term investment-grade
municipal securities
issued by the State of Arizona and its political subdivisions, agencies,
authorities and instumentalities, and certain other municipal issuers
such as the Commonwealth of Puerto Rico, the Virgin Islands and Guam
("Arizona Municipal Securities")
that pay interest which is excluded from gross income for Federal income
tax purposes and exempt from Arizona state personal income taxes.
Intermediate and long-term 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% of the purchase price 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
which,
when
combined with current holdings of Class A shares offered
with a sales charge, equal or exceed $500,000 in the aggregate, 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."
3 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
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 the Class. The Class B shares' distribution
fee may cause that Class to have higher expenses and pay lower dividends
than
Class A
shares.
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
dis-
tributions ("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, 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 and Class B
shares. Purchases of Class C 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. They 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 length
of his or her investment. Shareholders who are planning to establish a
program of regu-
4
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
lar investment may wish to consider Class A shares; as the investment
accumu lates 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.
Investors investing a minimum of $5,000,000 must purchase Class Y shares
which are not subject to an initial sales charge, CDSC or service or
distribu tion fees. The maximum purchase amount for Class A shares is
$4,999,999,
Class B
shares is $249,999
and Class C shares is $499,999. There is no maximum pur-
chase amount for Class Y shares.
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 which, when combined with current holdings of Class A
shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, 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 aggregate 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 certain other funds sponsored by
Smith Barney Inc. ("Smith Barney") listed under "Exchange Privilege."
Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares."
Smith Barney Financial Consultants may receive different compensation
for selling each Class of shares. See "Purchase of Shares" and
"Management of the Fund" for a complete description of the sales
charges and service and
5
<PAGE> SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
distribution fees for each Class of shares and "Valuation of Shares,"
"Divi dends, 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.
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 investment for Class A, Class B and Class C shares
and the subsequent investment for all Classes through the Systematic
Investment Plan described below is $50. 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 in an amount of at
least $50. See "Purchase of Shares."
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."
6
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
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 value next determined, plus any applicable sales charge
differential. See "Ex change 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 on the last Friday of each calendar month to shareholders of
record as of the preceding Tuesday. 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
any Class will be reinvested automatically in additional shares of the
same Class
at current net asset value unless otherwise specified by an investor.
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 may
be invested in the municipal securities of non-Arizona municipal
issuers. Dividends paid by the Fund which are derived from interest
attributable to Arizona Municipal Securities will be excluded from
gross income for Federal income tax purposes and exempt from Arizona
state personal income taxes (but not from Arizona state franchise tax
or Arizona state corporate income tax). Dividends derived from interest
on obligations of non-Arizona municipal issuers will be exempt from
Federal income taxes, but may be subject to Arizona state personal
income taxes. Dividends derived from certain municipal securities
(including Arizona Municipal Securities), however, may be a specific
tax 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."
7 <PAGE>
SMITH
BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
The Fund is more susceptible to factors adversely affecting issuers of
Ari zona municipal securities than is a municipal bond fund that does
not emphasize these issuers. See "Arizona Municipal Securities" in the
Prospectus and "Special Considerations Relating to Arizona Municipal
Securities" in the Statement of Additional Information for further
details about the risks of investing in Arizona obligations.
There are several risks in connection with the use of certain
portfolio strategies by the Fund, such as the use of when-issued
securities, puts, stand by commitments, municipal leases, financial
futures contracts and
related put and call options and options on debt securities and
securities indices. See "Investment Objective and Management Policies--
Certain Portfolio Strategies."
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:
<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 (net of fee waivers) 0.37% 0.37% 0.37%
0.37%
12b-1 fees** 0.15% 0.65% 0.70%
None
Other expenses*** 0.30% 0.31% 0.31%
0.30% ------------------------------------------------------------------
- ---------TOTAL FUND OPERATING EXPENSES 0.82% 1.33% 1.38%
0.67% ------------------------------------------------------------------
- ---------</TABLE>
* Purchases of Class A shares which, when combined with current holdings
of Class A shares offered with a sales charge, equal or exceed
$500,000 in the aggregate, 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.
** 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 con version 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
frontend 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 sold as of May 31, 1995.
8
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
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 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 assets of that Class, consisting of a
0.50% distribution fee and a 0.15% service fee. For Class C shares,
Smith Barney receives an annual 12b-1 fee of 0.70% of the value of
average 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.
During the fiscal year ended May 31, 1995, SBMFM waived investment
advisory fees and administrative fees in an amount equal to 0.12% and
0.07%, respectively, of the Fund's average daily net assets. This had
the effect of lowering the Fund's overall expenses and increasing the
returns otherwise available to investors. If the fees had not been
waived, the Fund's total operating expenses for the fiscal year ended
May 31, 1995, as a percentage of its average daily net
assets, would have been 1.01% for
Class A shares, 1.52% for Class B shares and 1.56% for Class C shares.
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 above. See
"Purchase of Shares," "Redemption of Shares" and "Management of the
Fund."
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10
YEARS* ----------------------------------------------------------------
- ----------<S> <C> <C>
<C>
<C>
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 $48 $65 $84
$137
Class B 59 72 83
160
Class C 24 44 76
166
Class Y 7 21 37
83 ------------------------------------------
- ---------------------------------</TABLE>
9
<PAGE> SMITH BARNEY
Arizona Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10
YEARS*
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A $48 $65 $84 $137
Class B 14 42 73 160
Class C 14 44 76
166
Class Y 7 21 37
83 -------------------------------------------------------------------------
- -</TABLE>
* 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 REPRESENTA TION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following information for fiscal year ended May 31, 1995 has been
audited by KPMG Peat Marwick LLP, independent accountants, whose report
thereon appears in the Fund's Annual Report dated May 31, 1995. The
following information for the fiscal years ending May 31, 1990 through
May 31, 1994 has been audited by Coopers & Lybrand L.L.P. The following
information for the fiscal years ended May 31, 1988 and May 31, 1989 has
been audited by Arthur Andersen & Co. This information 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.
10
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED
ENDED ENDED 5/31/95 5/31/94#
5/31/93 5/31/92
- ------------------------------------------------------------------------
- ----
<S> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF YEAR $ 9.82 $ 10.40 $ 9.84 $
9.63 -------------------------------------------------------------------
- --------INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income+ 0.54 0.54 0.58
0.59
Net Realized and Unrealized Gain/(Loss)
on Investments 0.33 (0.38) 0.65
0.32 ------------------------------------------------------------------
- ---------TOTAL FROM INVESTMENT OPERATIONS 0.87 0.16 1.23
0.91 ------------------------------------------------------------------
- ---------LESS DISTRIBUTIONS:
Dividends from Net Investment Income (0.52) (0.52) (0.57)
(0.60)
Distributions in Excess of Net Invest-
ment Income (0.02) (0.01) --
- -
- -
Distributions from Net Realized Capital
Gains (0.06) (0.21) (0.08)
(0.06)
Distributions in Excess of Net Realized
Capital Gains (0.00)** -- --
- -
- -
Distributions from Capital -- -- (0.02)
(0.04) ----------------------------------------------------------------
- -----------TOTAL DISTRIBUTIONS (0.60) (0.74) (0.67)
(0.70) ----------------------------------------------------------------
- -----------NET ASSET VALUE, END OF YEAR $10.09 $9.82
$10.40
$9.84 -----------------------------------------------------------------
- ----------TOTAL RETURN++ 9.38% 1.33% 12.92%
9.86% -----------------------------------------------------------------
- ----------RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net Assets End of Year (in 000's) $43,222 $44,552 $44,055
$38,759
Ratio of Operating Expenses to Average
Net Assets+++ 0.82% 0.83% 0.77%
0.68%
Ratio of Net Investment Income to Aver-
age Net Assets 5.37% 5.24% 5.66%
6.02% -----------------------------------------------------------------
- ----------PORTFOLIO TURNOVER RATE 21% 49%
44%
44% -------------------------------------------------------------------
- --------</TABLE>
* The Fund commenced operations on June 1, 1987. Any shares outstanding
prior
to November 6, 1992 were designated as Class A shares.
** Amount represents less than $0.01 per share.
+ Net investment income before voluntary waiver of fees and/or
reimbursement
of expenses by affiliates for the years ended May 31, 1995, 1994,
1993, 1992, 1991, 1990, 1989 and 1988 were $0.50, $0.52, $0.54,
$0.57, $0.58, $0.51, $0.16 and $0.27, respectively.
++ Total return represents aggregate total return for the years
indicated and does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees and/or
reimbursement of expenses by affiliates for the years ended May 31,
1995,
1994, 1993, 1992, 1991, 1990, 1989 and 1988 were 1.01%, 1.05%, 1.10%,
0.90%, 1.13%, 2.13%, 6.20% and 2.58%, respectively.
# The per share amounts have been calculated using the monthly average
shares
method, which more appropriately presents per share data for this
period since use of the undistributed net investment income method
did not accord with results of operations.
11 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR ENDED ENDED
ENDED ENDED
5/31/91 5/31/90 5/31/89
5/31/88* --------------------------------------------------------------
- -------------<S> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF YEAR $ 9.49 $ 9.66 $ 9.22
$
9.60 ------------------------------------------------------------------
- ---
- -------INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income+ 0.68 0.71
0.82
0.40
Net Realized and Unrealized Gain/(Loss) on
Investments 0.14 (0.12)
0.31
(0.19) ----------------------------------------------------------------
- -----------TOTAL FROM INVESTMENT OPERATIONS 0.82 0.59 1.13
0.21 ------------------------------------------------------------------
- ---------LESS DISTRIBUTIONS:
Dividends from Net Investment Income (0.68) (0.71) (0.69)
(0.40)
Distributions in Excess of Net Investment
Income -- -- --
(0.19)
Distributions from Net Realized Capital
Gains -- (0.05) --
- -
- -
Distributions in Excess of Net Realized
Capital Gains -- -- --
- -
- -
Distributions from Capital -- -- --
-
- -----------------------------------------------------------------------
- ----TOTAL DISTRIBUTIONS (0.68) (0.76) (0.69)
(0.59) ----------------------------------------------------------------
- -----------NET ASSET VALUE, END OF YEAR $9.63 $9.49 $9.66
$9.22 -----------------------------------------------------------------
- ----------TOTAL RETURN++ 8.92% 6.31% 12.70%
2.32% -----------------------------------------------------------------
- ----------RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA:
Net Assets End of Year (in 000's) $28,373 $18,167 $4,903
$1,626
Ratio of Operating Expenses to Average Net
Assets+++ 0.14% 0.03% 0.34%
0.16%
Ratio of Net Investment Income to Average
Net Assets 7.06% 7.34% 7.23%
3.95% -----------------------------------------------------------------
- ----------PORTFOLIO TURNOVER RATE 49% 86%
63%
53% -------------------------------------------------------------------
- --------</TABLE>
* The Fund commenced operations on June 1, 1987. Any shares outstanding
prior
to November 6, 1992 were designated as Class A shares.
** Amount represents less than $0.01 per share.
+ Net investment income before voluntary waiver of fees and/or
reimbursement
of expenses by affiliates for the years ended May 31, 1995, 1994,
1993, 1992, 1991, 1990, 1989 and 1988 were $0.50, $0.52, $0.54,
$0.57, $0.58, $0.51, $0.16 and $0.27, respectively.
++ Total return represents aggregate total return for the years
indicated and does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees and/or
reimbursement of expenses by affiliates for the years ended May 31,
1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988 were 1.01%,
1.05%,
1.10%, 0.90%, 1.13%,
2.13%, 6.20% and 2.58%, respectively.
# The per share amounts have been calculated using the monthly average
shares
method, which more appropriately presents per share data for this
period
since use of the undistributed net investment income method did not
accord with results of operations.
12
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD ENDED ENDED
ENDED
5/31/95 5/31/94#
5/31/93* --------------------------------------------------------------
- ------------<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $ 9.82 $ 10.40 $
9.97 ------------------------------------------------------------------
- --------INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income+ 0.49 0.49
0.31
Net Realized and Unrealized Gain/(Loss) on
Investments 0.33 (0.37)
0.50 ------------------------------------------------------------------
- --------TOTAL FROM INVESTMENT OPERATIONS 0.82 0.12
0.81 ------------------------------------------------------------------
- --------LESS DISTRIBUTIONS:
Dividends from Net Investment Income (0.47) (0.48)
(0.29)
Distributions in Excess of Net Investment
Income (0.02) (0.01)
- --
Distributions from Net Realized Capital Gains (0.06) (0.21)
(0.08)
Distributions in Excess of Net Realized Capi-
tal Gains (0.00)## --
- --
Distributions from Capital -- -(0.01)
- -----------------------------------------------------------------------
- ---TOTAL DISTRIBUTIONS (0.55) (0.70) (0.38) ---
- -----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.09 $9.82 $10.40 ------
- --------------------------------------------------------------------
TOTAL RETURN++ 8.78%
0.84%
8.31% -----------------------------------------------------------------
- ---------RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA:
Net Assets, End of Year (in 000's) $22,838 $19,306
$8,149
Ratio of Operating Expenses to Average Net
Assets+++ 1.33% 1.35%
1.33%**
Ratio of Net Investment Income to Average Net
Assets 4.85% 4.73%
5.10%** ---------------------------------------------------------------
- -----------PORTFOLIO TURNOVER RATE 21%
49%
44% -------------------------------------------------------------------
- -------</TABLE>
* The Fund commenced selling Class B shares on November 6, 1992.
** Annualized.
+ Net investment income before voluntary waiver of fees and/or
reimbursement of expenses by affiliates for the years ended May 31,
1995, 1994, and the period ended May 31, 1993 were $0.46, $0.47 and
$0.29, respectively.
++ Total return represents aggregate total return for the periods
indicated and does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees and/or
reimbursement of expenses by affiliates for the years ended May
31, 1995, 1994, and for the period ended May 31, 1993 were 1.52%,
1.57% and 1.66%, respectively.
# Per share amounts have been calculated using the monthly average
shares method, which more appropriately presents per share data
for this period since use of the undistributed net investment
income method did not accord with results of operations.
## Amount represents less than $0.01 per share.
13 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
PERIOD
ENDED
5/31/95* --------
- ------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.28
- -----------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income+ 0.24
Net realized and unrealized gain on
investments
0.86
- ----------------------------------------------------------
- ---TOTAL FROM INVESTMENT OPERATIONS
1.10 -----------------------------------------------------
- --------LESS DISTRIBUTIONS:
Distributions from net investment income
(0.22)
Distributions in excess of net investment income
(0.01)
Distributions from net realized capital gains
(0.06)
Distributions in excess of net realized capital gains
(0.00)#
Distributions from capital
- ----------------------------------------------------------
- ----TOTAL DISTRIBUTIONS
(0.29) ---------------------------------------------------
- ----------NET ASSET VALUE, END OF PERIOD
$10.09 ---------------------------------------------------
- ----------TOTAL RETURN++
12.10% ---------------------------------------------------
- ----------RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)
$386
Ratio of operating expenses to average net assets+++
1.38%**
Ratio of net investment income to average net assets
4.81%** --------------------------------------------------
- -----------PORTFOLIO TURNOVER RATE
21% ------------------------------------------------------
- -------
- -</TABLE>
* The Fund commenced selling Class C shares on December 8,
1994.
** Annualized.
+ Net investment income before voluntary waiver of fees by affiliates
for
the
period ended May 31, 1995 was $0.23.
++ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees by
affiliates for the period ended May 31, 1995 was 1.56%.
# Amount represents less than $0.01 per share.
As of May 31, 1995, no Class Y shares had been sold.
14
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to provide Arizona investors
the maximum amount of income exempt from Federal and Arizona state
income taxes as is consistent with the preservation of capital. The Fund
attempts to achieve its objective by investing primarily in debt
securities, the interest on which is excluded from gross income for
Federal income tax purposes and which is exempt from Arizona state
income taxes. The Fund may purchase and sell financial futures
contracts, and options thereon, and may purchase and sell options on
debt securities and securities indices. 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 will operate subject to an investment policy providing that,
under normal market conditions, the Fund will invest at least 80% of its
net assets in Arizona Municipal Securities. The Fund may invest up to
20% of its net assets in municipal securities of non-Arizona municipal
issuers, the interest on which is excluded from gross income for Federal
income tax purposes (not including the possible applicability of a
Federal alternative minimum tax). For temporary defensive purposes, the
Fund may invest without limit in nonArizona municipal issuers and in
"Temporary Investments" as described below. The Fund's investments in
Arizona Municipal Securities are limited to securities of "investment
grade" quality, that is, securities rated within the four highest
categories of Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A,
Baa) or Standard & Poor's Corporation ("S&P") (AAA, AA, A, BBB), except
that the Fund may purchase unrated Arizona Municipal Securities (a)
where the
securities are guaranteed as to principal and interest by the full faith
and credit of the United States government or are short-term municipal
securities (those having a maturity of less than one year) of issuers
having outstanding at the time of purchase an issue of municipal bonds
having one of the four highest ratings or (b) where, in the opinion of
SBMFM, the unrated municipal securities are comparable in quality to
those within the four highest ratings. However, the Fund will not
purchase an unrated municipal security (other than a security described
in (a) above) if, after such purchase, more than 20% of the Fund's total
assets would be invested in unrated municipal securities. Securities in
the fourth highest rating category, though considered to be investment
grade, have speculative characteristics. A description of the rating
systems of S&P and Moody's is contained in the Appendix to the Statement
of Additional Information.
15 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 pur chase of from 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 pay ment of principal and interest, and
therefore generate higher yields than obli gations rated above Baa or
BBB.
Municipal bonds are debt obligations which generally have a maturity at
the time of issue in excess of one year and are issued to obtain funds
for various public purposes. The two principal classifications of
municipal bonds are "general obligation" 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 specific revenue source but not from the general
taxing power. Private activity bonds issued by or on behalf of public
authorities to obtain funds for privately operated facilities are in
most cases revenue bonds which do not generally carry the pledge of the
full faith and credit of the issuer of such bonds, but depend for
payment on the ability of the industrial user to meet its obligations
(or any property pledged as security).
The Fund may invest without limit in private activity bonds which can be
classified as Arizona Municipal Securities. Interest income on certain
types of private activity bonds issued after August 7, 1986 to finance
non governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a Federal
alternative minimum tax to the extent the Fund's dividends are derived
from interest on these bonds. Dividends derived from interest income on
Arizona Municipal Securities are a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative
minimum tax.
The Fund may invest without limit in debt obligations that are repayable
out of revenue streams generated from economically related projects or
facilities. Sizeable investments in such obligations could involve an
increased risk to the Fund should any of the related projects or
facilities experience financial difficulties.
16
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may invest without limit in "municipal leases," which are
obliga tions issued by state and local governments or authorities to
finance the acquisition of equipment or facilities. Although lease
obligations do not con stitute general obligations of the municipality
for which the municipality's taxing power is pledged, a lease obligation
is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In addition to the
"nonappropriation" risk, these
securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
bonds. Although "non-appropriation" lease obligations are often secured
by the underlying property, disposition of the property in the event of
foreclosure might prove difficult. 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.
The value of the Fund's portfolio securities, and therefore its net
asset value per share, may fluctuate due to various factors, including
fluctuations in interest rates generally, as well as changes in the
ability of issuers of municipal securities to pay interest and
principal. The Fund's portfolio will be actively managed in pursuit of
its objective, and therefore may have higher portfolio turnover than
that of other funds with similar objectives. A high portfolio turnover
rate may cause the Fund to incur additional expenses. Portfolio turnover
may result in the realization of net gains, which are not taxexempt when
distributed to shareholders. There are no percentage limitations on the
Fund's investments in municipal bonds within particular rating
classifications. Therefore, the Fund may invest its entire portfolio in
securities rated as "medium grade" obligations. According to
17 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Moody's, medium grade bonds "lack outstanding investment characteristics
and in fact have speculative characteristics as well." Also, the Fund
may invest without limit in municipal bonds with similar risk
characteristics (e.g., obligors located in the same geographic region or
engaged in similar businesses).
From time to time, proposed legislation restricting or eliminating the
Fed eral tax-exempt status of issues of municipal securities has been
introduced before Congress. Legislative developments may affect the
value of the
portfolio securities of the Fund and therefore the value of the Fund's
shares, as well as the tax-exempt status of dividends. The Fund will
monitor the progress of any such proposals to determine what, if any,
defensive action may be taken, if any legislation which would have a
material adverse effect on the
ability of the Fund to pursue its objective were adopted, the investment
objective and policies of the Fund would be reconsidered by the Board of
Directors.
A more detailed explanation of the Fund's investments, together with
certain
investment restrictions which the Fund has adopted and which cannot be
changed without the majority vote of the outstanding shares of the Fund,
is discussed below and in the Statement of Additional Information.
Special Considerations Relating to Arizona Municipal Securities.
Because the Fund concentrates its investments in Arizona Municipal
Securities, the Fund is more susceptible to factors adversely affecting
Arizona issuers than
is a municipal bond fund that is not concentrated in these issuers to
this degree. Investors should realize the risks associated with an
investment in such secu rities.
Arizona local governmental entities are subject to certain limitations
on their ability to assess taxes and levies which could affect their
ability to meet their financial obligations. If either Arizona or any of
its local govern mental entities 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.
Additional financial considerations relating to the risks associated
with investing in Arizona Municipal Securities are summarized in the
Statement of Additional Information.
18
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CERTAIN PORTFOLIO STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, the following investment techniques:
When-Issued Securities: New issues of Arizona Municipal Securities
(and other tax-exempt obligations) frequently are offered on a when-
issued basis, which means that delivery and payment for such 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 the buyer enters into
the commitment. Arizona Municipal Securities, like other investments
made by the Fund, may decline or appreciate in value before their actual
delivery to the Fund. Due to the fluctuations in the value of securities
purchased and sold on a whenissued basis, the yields obtained on these
securities may be higher or lower than the yields available in the
market on the date when the instruments actually are delivered to the
buyers. The Fund will not accrue income with respect to a
when-issued security prior to its stated delivery date. The Fund will
establish a segregated account with the Fund's custodian consisting of
cash, obligations issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities") or
other high grade debt obligations in an amount equal to the purchase
price of the when issued securities. 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 Arizona
Municipal Securities (and other tax-exempt obligations) on a when-issued
basis only with the intention of actually acquiring the securities, but
the Fund may sell the securities before the delivery date if it is
deemed advisable.
Puts or Stand-by Commitments. The Fund may purchase municipal securities
together with the right (a "put" or "stand-by commitment") to resell the
secu rities to the seller at an agreed-upon price or yield within a
specified period prior to the maturity date of the securities. The Fund
uses puts for liquidity purposes (i.e., to provide a ready market for
its municipal securities to meet cash needs).
Temporary Investments. Under normal market conditions, the Fund may hold
up to 20% of its total assets in cash or money market instruments,
including tax able money market instruments ("Temporary Investments").
In addition, when SBMFM believes that market conditions warrant,
including when acceptable Ari zona Municipal Securities are unavailable,
the Fund may take
a tempo-
19 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
rary defensive posture and invest without limitation in Temporary
Investments. 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 two highest grades by Moody's or S&P or, if not
rated, issued by issuers with outstanding debt securities rated within
the two highest grades by Moody's or S&P. To the extent the Fund holds
Temporary Investments, it may not achieve its investment objective.
The Fund also may invest for the same purpose in taxable fixed-income
obliga tions. Temporary taxable investments of the Fund may consist of
U.S. government securities, commercial paper rated A-1 by S&P or Prime-1
by Moody's, corporate obligations rated AAA or AA by S&P or Aaa or Aa by
Moody's, certificates of
deposit or bankers' acceptances of domestic banks or thrift institutions
with at least $1 billion in assets, or repurchase agreements with
certain
banks and dealers. SBMFM considers the value of the collateral and the
creditworthiness of banks and broker-dealers with which the Fund enters
into repurchase agreements. Repurchase agreements may be entered into
with respect to any securities eligible for investment by the Fund,
including Arizona Municipal Securities. The income from a repurchase
agreement with respect to a municipal security
would not be tax exempt. Since the commencement of its
operations, the Fund has not found it necessary to make taxable
Temporary Investments.
See the Statement of Additional Information for a further description of
short-term municipal and taxable investments and the Moody's and S&P
ratings.
Financial Futures Contracts and Related Options. The Fund may purchase
and sell financial futures contracts and related options. Financial
futures con tracts are commodities contracts which obligate the long or
short holder to take or make delivery at a future date of a specified
quantity of a financial instrument such as Treasury bonds or bills
(although they generally are settled in cash) or the cash value of a
securities index. A "sale" of a futures contract means the undertaking
of a contractual obligation to deliver the securities or the
index value
called for by the contract at a specified price on a specified date. A
"purchase" of a futures contract means the acquisition of a contractual
obligation to acquire the securities or cash value of an index at a
specified price on a specified date. Currently, futures contracts are
available on several types of fixedincome securities including Treasury
bonds, notes and bills, commercial paper and certificates of deposit, as
well as municipal bond indices.
20
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund will engage in financial futures transactions as a hedge
against the effects of fluctuating interest rates and other market
conditions. For example, if the Fund owned long-term bonds, and interest
rates were
expected to rise, it could sell futures contracts ("short hedge") which
would have much the same effect as selling some of the long-term bonds
that it owned. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's
futures contracts should increase, thus keeping the net asset value of
the Fund from declining as much as it otherwise would have.
If the Fund anticipated a decline in long-term interest rates, the Fund
could hold short-term municipal securities and benefit from the income
earned by holding such securities while purchasing futures contracts
("long hedge") in an attempt to gain the benefit of rising long-term
bond prices, because the value of the futures contracts should rise with
the long-term bonds. In so doing, the Fund could take advantage of the
anticipated rise in the value of long-term bonds without actually buying
them.
The Fund could accomplish similar results by selling bonds with long
maturi ties and investing in bonds with short maturities when interest
rates are expected to rise or by buying bonds with long maturities and
selling bonds with short maturities when interest rates are expected to
decline. However, by using futures contracts, the Fund could accomplish
the same results more easily and more quickly due to the generally
greater liquidity in the financial futures markets than in the municipal
securities markets.
The Fund also may purchase and write call and put options on financial
futures contracts. An option on a futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a
futures con tract at a specified exercise price at any time during the
period of the option. Upon exercise, the writer of the option delivers
to the holder the
futures position together with the accumulated balance in the writer's
futures margin account (the amount by which the market price of the
futures contract varies from the exercise price). The Fund will be
required to
deposit or pay initial margin and maintenance margin with respect to
put and call options on futures contracts written by it.
The Fund also may purchase and write call and put options on securities
indi ces. Options on indices are similar to options on securities
except that set tlement is made in cash. No physical delivery of the
underlying securities in the
21 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
index is made. Unlike options on specific securities, gain or loss
depends on the price movements in the securities included in the index
rather than price movements in individual securities. When the Fund
writes an option on a securi ties index,
it will be required to deposit and maintain with a
custodian port folio securities equal in value to 100% of the exercise
price in the case of a put, or the contract value in the case of a call.
In addition, when the con tract value of a call option written by the
Fund exceeds the exercise price, the Fund will segregate cash or cash
equivalents equal in value to such excess.
Regulations of the Commodity Futures Trading Commission applicable to
the Fund require that its transactions in financial futures contracts
and options on financial futures contracts be engaged in for bona fide
hedging purposes,
or if the Fund enters into futures contracts for speculative purposes,
that the aggregate initial margin deposits and premiums paid by the Fund
will not exceed 5% of the market value of its assets. In addition, the
Fund will, with respect to its purchases of financial futures contracts,
establish a segregated account consisting of cash or cash equivalents in
an amount equal to the total market value of the futures contracts, less
the amount of
initial margin on 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
Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
regulated investment company that are described below under "Dividends,
Distributions and Taxes."
There are certain risks associated with the use of futures contracts
and related options. There is no assurance that the Fund will be able to
close out its futures positions at any time, in which case it would be
required to main tain the margin deposits on the contract. The costs
incurred in connection with futures transactions could reduce the Fund's
yield. There can be no assurance that hedging transactions will be
successful, as they depend upon SBMFM' ability to predict changes in
interest rates. Furthermore, there may be an imperfect correlation (or
no correlation) between the price movements of the futures contracts and
price movements of the Fund's portfolio securities being hedged. This
lack of correlation could result from differences between the securities
being hedged and the
securities underlying the futures contracts in interest rate levels,
maturities and creditworthiness of issuers, as well as from variations
in speculative market demand for futures contracts and debt securities.
Where futures contracts are purchased to hedge against an increase in
the price of long-term securities, but the long-term market declines and
the Fund does not invest in
22
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
long-term securities, the Fund would realize a loss on the futures
contracts, which would not be offset by a reduction in the price of the
securities pur chased. Where futures contracts are sold to hedge against
a decline in the value of long-term securities in the Fund's portfolio,
but the long-term market advances, the Fund would lose part or all of
the benefit of the advance due to offsetting losses in its futures
positions. Options on futures contracts and index options involve risks
similar to those risks relating to transactions in financial futures
contracts, described above. The use of futures contracts and related
options may be expected to result in taxable income to the Fund and its
shareholders.
Options on Debt Securities. In connection with its hedging activities,
the Fund may purchase and sell put and call options on debt securities
on national securities exchanges. The Fund proposes to purchase put
options as a defensive measure to minimize
the impact of market price declines on the
value of certain of the securities in the Fund's portfolio. The Fund may
write listed call options only if the calls are "covered" throughout the
life of the option. A call is "covered" if the Fund owns the optioned
securities or maintains in a segregated account with the Fund's
custodian cash or cash equivalents or U.S. government securities with a
value sufficient to meet its obligations under the call. When the Fund
writes a call, it receives a premium and gives the purchaser the right
to buy the underlying security at any time during the call period
(usually not more than fifteen months) at a fixed exercise price
regardless of market price changes during the call period. If the call
is exercised, the Fund would forego any gain from an increase in the
market price of the underlying security over the exercise price. The
Fund may purchase a call on securities only to effect a "closing
purchase transaction," which is the purchase of a call covering the same
underlying security, and having the same exercise price and expiration
date
as a call previously written by the Fund on which it wishes to terminate
its obligations.
The Fund also may write and purchase put options ("puts"). When the Fund
writes a put, it receives a premium and gives the purchaser of the put
the right to sell the underlying security to the Fund at the exercise
price at any time during the option period. When the Fund purchases a
put, it pays a premium in return for the right to
sell the underlying security at the
exercise price at any time during the option period. If any put is not
exercised or sold, it will become worthless on its expiration date. The
Fund will not purchase puts if more than 10% of its net assets would be
invested in premiums on puts.
23 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may write puts only if the puts are "secured." A put is
"secured" if the Fund maintains cash, cash equivalents or U.S.
government securities with a value equal to the exercise price in a
segregated account or holds a
put on the same underlying security at an equal or greater exercise
price. The aggregate value of the obligations underlying puts written by
the Fund
will not exceed 50% of its net assets. The Fund also may write
"straddles," which are combinations of secured puts and covered calls on
the same underlying security.
The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the
premium, plus commission costs, paid to purchase the call or put is less
(or greater) than the premium, less commission costs, received on the
sale of the call or put. A gain also will be realized if a call or put
which the Fund has written lapses unexercised, because the Fund would
retain the premium.
The Fund's option positions may be closed out only on an exchange which
pro vides a secondary market for options of the same series, but there
can be no assurance that a liquid secondary market will exist at a given
time for any particular option. In this regard, trading in options on
U.S. government secu rities is relatively new, so that it is impossible
to predict to what extent liquid markets will develop or continue. The
use of options may be expected to result in taxable income to the Fund.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions for the
pro tection of shareholders. These restrictions cannot be changed
without the approval of the holders of a majority of the Fund's
outstanding voting securi ties. Some of the fundamental restrictions
applicable to the Fund prohibit the Fund from: (a) with respect to 75%
of the value of its total assets, investing more than 5% of the Fund's
total assets in any one issuer (except U.S. government securities), (b)
borrowing money (except from banks for temporary or emergency purposes
in an amount up to 10% of the Fund's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed)) and (c) concentrating in the securities of issuers in a
particular industry. Further information about the Fund's investment
policies, including certain other investment restrictions adopted by the
Fund, is described in the Statement of Additional Information.
24
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
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. Certain securities may be valued on the basis of prices
provided by pricing services approved by the Board of Directors. Short-
term investments that mature in 60 days or less are valued at amortized
cost
whenever the Directors determine that amortized cost is fair value.
Amortized cost valuation involves valuing an instrument at its cost
initially and, thereafter, assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. 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 pays dividends from its net investment income (that is,
income other than its net realized long and short-term capital gains) on
the last Friday of each calendar month to shareholders of record as of
the preceding Tuesday. 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 and capital
gains distributions will be reinvested automatically in additional
shares of the same Class at net asset value, subject to no sales charge
or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may
make an additional
distribution shortly before December 31 of each year of any
undistributed ordi nary income or capital gains and expects to pay any
other distributions as are necessary to avoid the application of this
tax.
25 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If, for any full fiscal year, the Fund's total distributions exceed
net investment income and net realized capital gains, the excess
distributions may be treated as a tax-free return of capital (up to the
amount of the sharehold er's tax basis in his or her shares). The amount
treated as a taxfree 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 invest ment 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 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
reg ulated investment company under the Code and will designate and pay
exempt interest dividends derived from interest earned on qualifying tax
exempt obli gations. Such exempt-interest dividends may be excluded by
shareholders from their gross income for Federal income tax purposes
although (a) all or a por tion 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 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 "environmental" tax liability through the receipt of the Fund's
dividends and distributions. Dividends derived from interest on Arizona
Municipal Securities also will be exempt from Arizona state personal
income (but not corporate franchise or corporate income) taxes. On April
6, 1995, the House of Representatives passed H.R. 1215, which would,
among other things, alter the corporate alternative minimum tax by
repealing the preference relating to taxexempt interest on private
activity bonds for interest accruing after December 31, 1995
26
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
and would otherwise repeal the corporate alternative minimum tax for
taxable years beginning after December 31, 2000. There can be no
assurance that this proposed legislation will be enacted or, if enacted,
will include the provi sions described herein.
Dividends paid from taxable net investment income, if any, and
distributions of any net realized short-term capital gains (whether from
tax exempt or taxable securities) are taxable to shareholders as
ordinary income, regardless of how long they have held their Fund shares
and whether such dividends or distributions are received in cash or
reinvested in additional Fund shares. Distributions of net realized long-
term capital gains will be 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
additional 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. The Fund's dividends and distributions will not
qualify for the dividendsreceived 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 set forth the dollar amount
of income excluded from Federal income taxes or Arizona state income
taxes and the dollar amount, if any, subject to Federal income taxes.
Moreover, these statements will designate the amount of exemptinterest
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 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 redemp-
27 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
tions. Class Y shares are sold without an initial sales charge or CDSC
and are available only to investors investing a minimum of $5,000,000.
See
"Prospectus Summary--Alternative Purchase Arrangements" for a discussion
of factors to con sider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, with an Introducing Broker or with 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. No maintenance fee will be charged by the
Fund in connection with a brokerage account through which an investor
purchases or holds shares.
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. Sub sequent investments of at least $50 may be
made for all Classes. For the Fund's Systematic Investment Plan, the
minimum initial investment requirement 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 Bar-
ney, 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 Fund's transfer agent, The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation ("TSSG"). Share certificates are
issued only upon a shareholder's written request to TSSG.
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 val ue, are priced according to the net asset value determined
on that day. 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 (the "trade
date"). Payment for Fund shares is due on the third business day after
the trade date (the "settlement date").
28
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
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 TSSG is
authorized through preau thorized transfers of $50 or more to charge an
account 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 TSSG. 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:
<TABLE>
<CAPTION>
DEALERS SALES CHARGE AS % SALES CHARGE AS %
REALLOWANCE AS
AMOUNT OF INVESTMENT OF TRANSACTION OF AMOUNT INVESTED % OF
OFFERING PRICE --------------------------------------------------------
- ------------------<S> <C> <C> <C>
Under $ 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 * * *
- -----------------------------------------------------------------------
- ---</TABLE>
* Purchases of Class A shares which, when combined with current
holdings
of
Class A shares offered with a sales charge equal or exceed $500,000
in the aggregate, 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.
The reduced sales charges shown above apply to the aggregate of
purchases of Class A shares of the Fund made at one time by "any
person," which
29 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
includes an individual, his or her spouse and children, or a Director
or other fiduciary of a single trust estate or single fiduciary
account. The reduced sales charge minimums may also be met by
aggregating the purchase with the net asset value of all Class A shares
held in funds sponsored by
Smith Barney that are offered with a sales charge listed under "Exchange
Privilege."
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 of Class A shares
to Directors of the Fund and employees of Travelers and its
subsidiaries, or to the spouses and children of such persons (including
the surviving spouse of a deceased Director or employee, and
retired Directors or employees) or
employees of NASD members; (b) offers of Class A shares to any other
investment company in connection with 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) shareholders who have redeemed Class A shares in the Fund
(or Class A shares of other Smith Barney Mutual Funds that are offered
with a sales charge equal to or greater than the maximum sales charge of
the Fund) and who wish to reinvest their redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar days of the
redemption; (e) accounts managed by registered investment advisory
subsidiaries of Travelers; and (f) investments of distributions from a
UIT sponsored by Smith Barney. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to
permit verifica tion 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
aggregat ing 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
30
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
person and applying the sales charge applicable to such aggregate. In
order to obtain such discount, the purchaser must provide sufficient
information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The right of
accumulation is subject to modification or discontinuance at any time
with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
pur chase 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 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 employer 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 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
31 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
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 amounts of $50,000 or more
provides an opportunity for an investor to obtain a reduced sales charge
by aggregating investments over a 13 month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge
table includes (i) all Class A shares of the Fund and other Smith Barney
Mutual Funds offered with a
sales charge acquired during the term of the Letter plus (ii) the value
of all Class A shares previously purchased and still owned. Each
investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference
between the sales charges applicable to the purchases made and the
charges actually 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 TSSG 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. 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 6 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 pur chased to date will be transferred to Class A shares,
where
they will be sub ject 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 TSSG or a Smith Barney Financial
Consultant 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;
32
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
(b) Class C shares; and (c) Class A shares which when combined with
Class A shares offered with a sales charge
currently held by an investor equal
or exceed $500,000 in the aggregate.
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.
Class C 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 aggre-
gated and deemed to have been made on the last day of the preceding
Smith Bar ney statement month. The following table sets forth the rates
of the charge for redemptions of Class B shares by shareholders.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- --------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- --------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight
years after the date on which they were purchased and thereafter will
no longer be subject to any distribution fees. There will also be
converted at that time such proportion of Class B Dividend Shares owned
by the shareholder
as
the total number of his or her Class B shares converting at the time
bears to the total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder. Shareholders who held
Class B shares of Smith Barney Shearson
33 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchanged those shares for Class B
shares of the Fund will be offered the opportunity to exchange all such
Class B shares for Class A shares of the Fund four years after the date
on which those shares were deemed to have been purchased. Holders of
such Class B shares will be notified of the pending exchange in writing
approximately 30 days before the fourth anniversary of the purchase date
and, unless the exchange has been rejected in writing, the exchange will
occur on or about the fourth
anniversary date. See "Prospectus Summary--Alternative Purchase
ArrangementsClass 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 addi tional 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 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
34
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
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
in connection with 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 TSSG
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 funds of the 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 the other
requirements of the fund into which exchanges are made and a sales
charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund
Inc. Smith Barney Growth Opportunity
Fund Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth
Fund
35 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and
Growth
Portfolio Smith Barney Funds, Inc.--
Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors
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.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government
Portfolio ++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 California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
*Smith Barney Intermediate Maturity
California Municipals
Fund
*Smith Barney Intermediate Maturity New York
Municipals Fund
*Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund
Inc.
Smith Barney Massachusetts Municipals
Fund Smith Barney Muni Funds--
California Portfolio
*Smith Barney Muni Funds--Florida
Limited Term
Portfolio
Smith Barney Muni Funds--Florida
Portfolio Smith Barney Muni Funds--
Georgia Portfolio 36
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
*Smith Barney Muni Funds--Limited
Term Portfolio
Smith Barney Muni Funds--National
Portfolio Smith Barney Muni Funds--New
Jersey Portfolio
Smith Barney Muni Funds--New York
Portfolio Smith Barney Muni Funds--Ohio
Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio Smith
Barney New Jersey Municipals Fund Inc. Smith Barney
New York Municipals Fund Inc. 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 Smith Barney World
Funds, Inc.International Equity Portfolio Smith
Barney World Funds, Inc.-Pacific Portfolio
Smith Barney Precious Metals and Minerals Fund Inc.
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 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.
37 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less
than the maximum
charged by other Smith Barney Mutual Funds will be subject to the
appropriate "sales charge differential" upon the exchange of such shares
for Class A shares of a fund sold with a higher sales charge. The "sales
charge differential" is limited to a percentage rate no greater than the
excess of the sales charge rate applicable to purchases of shares of the
mutual fund being acquired in the exchange, over the sales charge
rate(s) actually paid on the mutual fund shares relinquished in the
exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of
dividends and capital gains distributions are treated as having paid the
same sales charges applicable to the shares on which the dividends or
distributions were paid; however, if no sales charge was imposed upon
the initial purchase of shares, any shares obtained through automatic
reinvestment will be subject to a sales charge differential upon
exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
share holder was a Class B shareholder of the Short-Term World Income
Fund on July 15, 1994) 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 Y Exchanges. Class Y shareholders of the Fund who wish to
exchange all or a portion of their Class Y shares for Class Y shares 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 interests of the Fund's other
shareholders. In this event, SBMFM will notify Smith Barney and Smith
Barney may, at its discretion, decide to limit additional purchases
and/or exchanges by a shareholder. Upon such a determina-
38
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
tion, Smith Barney will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege
and during the 15 day period the shareholder will be required to (a)
redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any 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.
Exchanges will be processed at the net asset value next determined,
plus any applicable sales charge differential. 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
privi leges 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 spec ify which Class, or if the investor owns fewer shares of
the Class than speci fied, the redemption request will be delayed until
the Fund's transfer agent receives further instructions from Smith
Barney, or if the shareholder's account is not with Smith Barney, from
the shareholder directly. The redemption proceeds will be remitted on or
before the third business day following receipt of proper tender, except
on any days on which the NYSE is closed or as permitted under the
39 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
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 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 Arizona Municipals Fund Inc.
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
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 regis tered. If the shares to be redeemed were issued in certificate
form, the cer tificates must be endorsed for transfer (or be accompanied
by an endorsed stock power) and must be submitted to TSSG together with
the redemption request. Any signature appearing on a redemption request,
share certificate or stock power 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. TSSG may
require additional supporting documents for redemptions made by
corporations, executors, administrators, Directors or guardians. A
redemption request will not be deemed properly received until TSSG
receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may
elect
40
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
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 value 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.
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 this 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
automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise its 30-day "yield" and
"equivalent taxable yield" for each Class of shares. The yield refers to
the income generated by an investment in those shares 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
semiannually. 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
taxexempt yield for
41 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
PERFORMANCE (CONTINUED)
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.
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 histori cal earnings and are not intended to indicate
future performance. Total return is computed for a specific 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 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 dividing by the net
asset value of 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 its 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 informa tion may include data from Lipper Analytical
Services, Inc. or similar independent services that monitor the
performance of mutual funds or other industry publications. The Fund
will include performance data for Class A, Class B, Class C and Class Y
shares in any advertisement or information including performance data
of the Fund.
42
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
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 its distributor,
investment adviser and administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated by the Board to the
Fund's investment adviser and administrator. The Statement of
Additional Information contains background information regarding each
Director and executive officer of the Fund.
INVESTMENT ADVISER
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. (Mutual Management Corp. and SBMFM are both
wholly owned subsidiaries of Holdings.) Investment advisory services
continue to be provided to the Fund by the same portfolio managers who
provided services under the agreement with Mutual Management Corp.
SBMFM (through predecessor entities) has been in
the investment counseling business since 1934 and is a registered
investment adviser. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of June 30,
1995, in excess of $64 billion.
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 stated investment objective and policies, makes investment
decisions for the Fund, places orders to purchase and sell securities
and employs professional portfolio managers and securities analysts who
provide research services to the Fund. For investment advisory services
rendered, the Fund pays SBMFM a fee at the following annual rates of
average daily net assets: 0.35% up to $500 million and 0.32% of the
value of its average daily net assets in excess of $500 million. For
the fiscal year ended May 31, 1995, SBMFM was paid investment advisory
fees equal to 0.35% of the value of the average daily net assets of the
Fund.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, Vice President and Investment Officer of the
Fund
since October 1988 and a Managing Director of SBMFM, is responsible for
man-
43 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
MANAGEMENT OF THE FUND (CONTINUED)
aging the day-to-day operations of the Fund including, making all
investment decisions.
Management's discussion and analysis, and additional performance
regarding the Fund during the fiscal year ended May 31, 1995 is included
in the Annual Report dated May 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writ ing or calling the Fund at the address
or phone number listed on page one of this Prospectus.
ADMINISTRATOR
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% of the value of its average
daily net assets in excess of $500 million. For the fiscal year ended
May 31, 1995, SBMFM was paid administration fees equal to 0.20% of the
value of the average daily net assets of the Fund.
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
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 rate of 0.50% and 0.55%, respectively, of the average daily net
assets attributable to those Classes. Class B shares which automatically
con vert 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 per-
sons who provide support services in connection with the distribution of
shares; interest and/or
44
<PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
DISTRIBUTOR (CONTINUED)
carrying charges; and indirect and overhead costs of Smith Barney in
connection 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 con tinuing 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 May
4, 1987 and is registered with the SEC as a diversified, open-end
management investment company.
Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights,
privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges for each
Class; (c) the distribution and/or service fees borne by each Class; (d)
the expenses allocable exclusively to each Class; (e) voting rights on
matters exclusively affecting a single Class; (f) the exchange privilege
of each Class; and (g) the conversion feature of the Class B shares. The
Board of Directors does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes. The
Directors, on an ongoing basis, will consider whether any such conflict
exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will
be no meetings of shareholders for the purpose of electing Directors
unless and
45 <PAGE>
SMITH BARNEY
Arizona Municipals Fund Inc.
ADDITIONAL INFORMATION (CONTINUED)
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 Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia Pennsylvania 19103, serves as custodian of the Fund's
investments.
TSSG, 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 the investment
securities held by the Fund at the end of the reporting period. In an
effort to reduce the Fund's printing and mailing costs, the Fund plans
to consolidate the mailing of its semi-annual and annual reports by
household. This consolidation means that a household having multiple
accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want
this consolidation to apply to their account should contact their
Financial Consultants or the Fund's transfer agent.
46
<PAGE>
SMITH BARNEY ---------
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388 Greenwich
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(
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FD 0238
7/95
Smith Barney
Arizona Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
July 30, 1995
This Statement of Additional Information
expands
upon and supplements the information contained
in the current Prospectus of Smith Barney
Arizona Municipals Fund Inc. (the "Fund''),
dated July 30, 1995, 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
<TABLE>
<CAPTION>
For ease of reference the same section headings
are used in both the Prospectus and the
Statement of Additional Information, except
where shown below: <S> <C> Management of the
Fund...........................................
.. .. .. .. .. .. .
.......................
1
Investment Objective and Management
Policies.......................................
.. .. .. 5
Municipal Bonds (See in the Prospectus
"Investment Objective and
Management
Policies'')....................................
.. .. .. .. .. .. .
................................
11
Purchase of
Shares.........................................
.. .. .. .. .. .. .
..................................
14
Redemption of
Shares.........................................
.. .. .. .. .. .. .
..............................
14
Distributor (See in the Prospectus "Management
of the Fund")....................... 15
Valuation of
Shares.........................................
.. .. .. .. .. .. .
.................................
16
Exchange
Privilege......................................
.. .. .. .. .. .. .
.....................................
17
Performance Data (See in the Prospectus
"Performance'')..............................
17 Taxes (See in the Prospectus "Dividends,
Distributions and Taxes'')..............
20 Additional
Information....................................
.. .. .. .. .. .. .
................................. 23
Financial
Statements.....................................
.. .. .. .. .. .. .
................................... 24
Appendix.......................................
.. .. .. .. .. .. .
...............................................
.. . A1
</TABLE>
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: <TABLE>
<S> <C>
Name Service
Smith Barney Inc.
("Smith
Barney'')......................................
.. .. .. ..
.. .. . .... Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM'').....................................
.. .. .. .. .. .. . ............. Investment
Adviser and
Administrator
PNC Bank, National Association
("PNC'').......................................
.. .. .. .. .. .. . .................
Custodian The Shareholder Services Group, Inc.
("TSSG''),
a subsidiary of First Data
Corporation........................
Transfer Agent </TABLE>
These organizations and the functions they
perform for the Fund are 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 73) . Private
Investor. His address is 273 Montgomery Avenue,
Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director (Age
72) . Retired; formerly Senior Consultant to
Dean Witter Reynolds Inc. His address is 19
Circle End Drive, Ramsey, New Jersey 17466.
Martin Brody, Director (Age 73) . Vice
Chairman of the Board of Restaurant Associates
Industries Corp.; a Director of Jaclyn, Inc.
His address is HMK Associates, Three ADP
Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (Age 57) .
Professor, Graduate School of Business
Administration, Harvard University; a Director
of Peer Review Analysis, Inc. His address is
Graduate School of Business Administration,
Harvard University, Boston, Massachusetts
02163.
Burt N. Dorsett, Director (Age 69). Managing
Partner of
Dorsett McCabe Management, Inc., an investment
counseling firm; Director of Research
Corporation Technologies, Inc., a non-profit
patent-clearing and licensing firm. His address
is 201 East 62nd Street, New York, New York
10021.
Elliot S. Jaffe, Director (Age 68). 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 63) .
Attorney. His address is 277 Park Avenue, New
York, New York 10172.
Joseph J. McCann, Director (Age 64) .
Financial Consultant; formerly Vice President
of Ryan Homes, Inc., Pittsburgh, Pennsylvania.
His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and
Investment Officer (Age 62). 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. His address is 388
Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 61).
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
87) . 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.
Jessica M. Bibliowicz, President (Age 35).
Executive Vice President of Smith Barney; prior
to 1994, Director of Sales and Marketing for
Prudential Mutual Funds; prior to 1990, First
Vice President, Asset Management Division of
Shearson Lehman Brothers. Ms. Bibliowicz also
serves as
President of 39 other Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and
Treasurer (Age 37). Managing Director of
Smith Barney; Director and Senior Vice
President
of SBMFM. Mr. Daidone also serves as Senior
Vice President and Treasurer of 41 other Smith
Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and
Investment Officer (Age 46). Investment Officer
of SBMFM; prior
to July 1993, Managing Director of Shearson
Lehman Advisors, the predecessor to SBMFM. Mr.
McDermott also serves as Investment Officer of
10 other Smith Barney Mutual Funds. His address
is 388 Greenwich Street, New York, New York
10013.
Karen L. Mahoney-Malcomson, Investment Officer
(Age 38). Investment Officer of SBMFM; prior to
July 1993, Vice President of Shearson Lehman
Advisors. Ms. Mahoney Malcomson
also serves as Investment Officer of 7 other
Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 44).
Managing Director of Smith Barney ; General
Counsel and Secretary of SBMFM. Ms. Sydor also
serves as Secretary of 41 other Smith Barney
Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
Each Director also serves as a director,
trustee and/or general partner of certain other
mutual funds for which Smith Barney serves as
distributor. As of June 30, 1995 , the
Directors and officers of the Fund as a group
owned less than 1.00% of the outstanding common
stock of the Fund. As of June 30, 1995, to
the knowledge of the Fund and the Board, no
single shareholder or "group" (as that term is
used in Section 13(d) of the Securities Act of
1934) beneficially owned more than 5% of the
outstanding shares of the Fund with the
exception of the following: <TABLE>
<S> <C>
<C>
Shareholder Class Percent
Ownership
American Western Trading Co.6531 N. 3rd Ave
#15Phoenix, AZ 85013-1258 Class C 57.25%
Rachel Fritch Harris7046 N. 59th
PlaceScottsdale, AZ 85253 3412 Class C
22.82%
Peter BrowneHilda Browne3031 N. Civic
CenterPlaza Apt 26DScottsdale, AZ 85251-7910
Class C 14.45% </TABLE>
No Director, officer or employee of Smith
Barney or of any parent or subsidiary 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 $1000 per annum plus
$100 per meeting attended
and each Director
emeritus who is not an officer, director or
employee of Smith Barney or any of its
affiliates a fee of $500 per annum plus $50 per
meeting attended. The Fund
reimburses all Directors for travel and out
ofpocket expenses incurred to attend such
meetings. For the fiscal year ended May 31,
1995, such fees and expenses totaled $15,733.
For the fiscal year ended May 31, 1995, the
Directors of the Fund were paid the following
compensation: <TABLE>
<S>
<C>
<C>
Aggregate Compensation
<C> Aggregate Compensation
from the Smith Barney
Director from the
Fund
Mutual Funds 11
Herbert Barg (13)*...............................
$1,850 $ 77,850
Alfred J. Bianchetti(8)*........................
1,500 38,850
Martin Brody (15)*...............................
1,500 111,675
Dwight B. Crane (18)*..........................
1,500 125,975
Burt N. Dorsett (12)*............................
1,050 34,300
Robert Frankel1(7)*.............................
800 75,850
Paul Hardin1(12)*................................
800 68,600
Elliot S. Jaffe (12)*...............................
1,050 33,300
Stephen E. Kaufman (10)*....................
1,500 83,600
Joseph J. McCann (18)*........................
1,500 51,100
Heath B. McLendon (29)*.....................
- -- --
Cornelius C. Rose (12)*........................
1,050 33,300
James J. Crisona** (10)*.......................
1,150 67,350 <FN>_____________________
* Number of directorships/trusteeships held with other
mutual funds in the Smith Barney Mutual Funds.
** Director Emeritus. A Director emeritus may attend
meetings of the Fund's Board of Directors but has no
voting rights at such meetings.
1As of January 1, 1995, Messrs. Frankel and Hardin
resigned from the Fund's Board of Directors. The
information presented in this table for aggregate
compensation reflects the compensation paid to Messrs.
Frankel and Hardin by funds within the Smith Barney
Mutual Funds for which they served as directors as of
the date of this Statement of Additional Information.
11 The information presented in this column reflects the
compensation paid to each director during the calendar
year ended December 31, 1994.
</TABLE>
Investment Adviser and Administrator-SBMFM
SBMFM serves as investment adviser to the Fund
pursuant to a transfer of the investment advisory
agreement effective November 7, 1994, from its
affiliate, Mutual Management Corp. Mutual Management
Corp. and SBMFM are both wholly owned subsidiaries
of Smith Barney Holdings Inc. ("Holdings'') which,
in turn, 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 those Directors who are
not "interested persons'' of the Fund or Smith
Barney, on April 7, 1993. The services provided by
SBMFM under the Advisory Agreement are described
in the Prospectus under "Management of the Fund.''
SBMFM pays the salary of any officer or employee
who is employed by both it and the Fund.
As compensation for investment advisory services,
the Fund pays SBMFM a fee computed daily and paid
monthly 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 1993, 1994 and 1995 fiscal years, the
investment advisory fees paid to SBMFM and its
predecessors amounted to, $152,895, $212,048 and
$220,638, respectively. SBMFM and its predecessors
voluntarily waived investment advisory fees for
the fiscal years ended May 31, 1993, 1994 and 1995
in the amounts of $91,408, $85,477 and $73,668,
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 Directors who
are not "interested persons'' of the Fund or
SBMFM, on July 19, 1994. The services provided by
SBMFM under the Administration Agreement are
described in the Prospectus under "Management of
the Fund.'' SBMFM pays the salary of any officer
and employee who is employed by both it and the
Fund and bears all expenses in connection with the
performance of its services.
As compensation for administrative 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 years ended May 31, 1993,
1994 and 1995 administrative fees paid to SBMFM
and its predecessors equaled $87,369, 121,170 and
126,079, respectively. SBMFM and its predecessors
voluntarily waived administrative fees for the
fiscal years ended May 31, 1993, 1994 and 1995 in
the amounts of $52,233, $48,844 and $42,095,
respectively. 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 investors services (including
allocated telephone and personnel expenses); costs
of preparation and printing of prospectuses for
regulatory purposes and for distribution to
existing shareholders; costs of shareholders'
reports and shareholder meetings and meetings of
the officers or Board of Directors of the Fund.
SBMFM 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 and 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
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 May 31,
1995 no such fee reduction was required.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel
to the Fund. The Directors who are not
"interested persons'' of the Fund ("Independent
Directors") have selected Stroock & Stroock &
Lavan as their legal counsel.
KPMG Peat Marwick LLP ("Peat Marwick"),
independent accountants, 345 Park Avenue, New
York, New York 10154,
serve as auditors of the Fund and will render an
opinion on the Fund's financial statements
annually beginning with the fiscal year ending
May 31, 1995. Prior to Peat
Marwick's appointment, Coopers and Lybrand
L.L.P. served as auditors
of the Fund and rendered an opinion on the
Fund's financial statements for the fiscal year
ended May 31, 1995. 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.
To achieve its investment objective, the Fund
invests in "investment grade" municipal
securities of issuers in the State of Arizona,
i.e., securities within the four highest rating
categories of Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation
("S&P"). With respect to rated securities,
there is no percentage limitation on the amount
of the Fund's assets
which may be invested in securities within any
particular rating classification. A description
of the ratings of Moody's and S&P is contained
in the Appendix to this Statement of Additional
Information. Baa securities are considered
"medium grade" obligations by Moody's, and BBB
is the
lowest classification which is still considered
an "investment grade" rating by S&P. Baa
securities are described by Moody's as
obligations on which "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." According to
Moody's, "such bonds lack outstanding
investment characteristics and in fact have
speculative characteristics as well."
Use of Ratings as Investment Criteria. In
general, the ratings of Moody's and S&P
represent the opinions of those agencies as to
the quality of the securities 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 which will be considered are
the long-term ability of the issuer to pay
principal and interest and general economic
trends.
Subsequent to its purchase by the Fund, an
issue of securities may cease to be rated or
its rating may be reduced below the minimum
required for purchase by the Fund. Neither
event will require the sale of such securities
by the Fund, but SBMFM will consider
such event in its determination of whether the
Fund should continue to hold such securities.
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.
When-Issued Purchases and Firm Commitment
Agreements.
When the Fund purchases new issues of municipal
securities on a when-issued basis, a segregated
account consisting of cash, obligations issued
or guaranteed by the United States government,
its agencies or instrumentalities ("U.S.
government securities") or high quality debt
securities equal to the amount of the
commitment, will be established by the Fund's
custodian. If the value of securities in the
account should decline, additional cash or
securities will be placed in the account so
that the market value of the account will equal
the amount of such commitments by the Fund on a
daily basis.
Securities purchased on a when-issued basis
and
the securities held in the Fund's portfolio are
subject to changes in market value based upon
various factors, including changes in the level
of market interest rates. Generally, the value
of such securities will fluctuate inversely to
changes in interest rates (i.e., they will
appreciate in value when market interest rates
decline, and decrease in value when market
interest rates rise). For this reason, placing
securities rather than cash in a
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 that 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
commitment.
Upon the settlement date of the when-issued
securities, the Fund ordinarily will meet its
obligation to purchase the securities from
available cash flow or from use of the cash (or
liquidation of securities) held in the
segregated account or sale of other securities.
Although it normally would not expect to do so,
the Fund also may meet its obligation from the
sale of the whenissued securities themselves
(which may have a current market value
greater or less than the
Fund's payment obligation). Sale of securities
to meet such obligations carries
with it a greater potential for the realization
of net capital gains, which are not exempt from
Federal income tax.
When the Fund engages in when-issued
transactions, it relies on the seller to
consummate the trade. Failure of the seller to
do so may result in the Fund's incurring a loss
of opportunity to obtain a price considered to
be advantageous.
The Fund also may enter into firm commitment
agreements for the purchase of securities at an
agreed upon price on a specified future date.
During the time that the Fund is obligated to
purchase such securities, it will maintain in a
segregated account with the Fund's custodian
U.S. government securities, high grade debt
obligations or cash or cash equivalents of an
aggregate value sufficient to make payment for
the securities.
Puts or Stand-by Commitments. As discussed in
the
Prospectus, the Fund may acquire puts or stand-
by commitments which will enable the Fund to
improve its portfolio liquidity by providing a
ready market for certain municipal securities
in its portfolio at an acceptable price. The
price the Fund pays for municipal securities
with puts generally is higher than the price
which otherwise would be paid for the municipal
securities alone. The put generally is for a
shorter term than the maturity of the municipal
security and
does not restrict in any way the Fund's ability
to dispose of (or retain) the municipal
security.
In order to ensure that the
interest on municipal
securities subject to puts is tax-exempt for
the Fund, the Fund will limit its use of puts
in accordance with current interpretations or
rulings of the Internal Revenue Service (the
"IRS"). The IRS has issued a ruling (Rev. Rule.
82-
144) in which it determined that a regulated
investment company was the owner for tax
purposes of municipal securities subject to
puts (with the result that interest on those
securities would not lose its taxexempt status
when paid to the company). The IRS position in
Rev. Rule. 82-144 relates to a particular
factual situation,
including that (a) the municipal securities
with puts were purchased at prices higher than
the underlying municipal securities without
puts, (b) a relatively small number of the
municipal securities owned by the company were
subject to puts, (c) the puts were
nonassignable and terminated upon disposal of
the underlying securities by the company, (d)
the puts were for periods substantially less
than the terms of the underlying securities,
(e) the puts did not include call arrangements
or restrict the disposal of the underlying
securities by the company and gave the seller
no rights in the underlying securities, and (f)
the securities were acquired by the company for
its own account and not as security for a loan
from the seller.
Because it is difficult to evaluate the
likelihood of exercise or the potential benefit
of a put, it is expected that puts will be
determined to have a "value" of zero,
regardless of whether any direct or indirect
consideration was paid. Where the Fund has paid
for a put, its cost will be reflected as
unrealized depreciation in the underlying
security for the period during which the
commitment is held, and therefore would reduce
any potential gains on the
sale of the underlying security by the cost of
the put. There is a risk that the seller of the
put may not be able to repurchase the security
upon exercise of the put by the Fund.
Temporary Investments. As stated in the
Prospectus, the Fund may invest in short-term
municipal securities of Arizona issuers. Short
term municipal securities consist of short-term
municipal notes and short-term municipal loans
and obligations, including municipal paper,
master demand notes and variable rate demand
notes. Shortterm municipal notes include Tax
Anticipation Notes (notes issued in
anticipation of the receipt of tax funds) and
Revenue Anticipation Notes (notes issued in
anticipation of the receipt of revenues other
than taxes or bond placements). Municipal paper
typically consists of the very shortterm
unsecured negotiable promissory notes of
municipal issuers.
A municipal master demand note is an
arrangement
under which the Fund participates in a note
agreement between a bank acting on behalf of
its clients and a municipal borrower, whereby
amounts maintained by the Fund in an account
with the bank are provided to the municipal
borrower and payments of interest and principal
on the note are credited to the Fund's account.
Interest rates on master demand notes typically
are tied to market interest rates, and
therefore may fluctuate daily. The amounts
borrowed under these notes may be repaid at any
time by the borrower without penalty, and must
be repaid upon the demand of the Fund. Variable
rate demand notes are taxexempt obligations
which are payable by the municipal issuer at
par value plus accrued interest on demand by
the Fund (generally with
three to ten days' notice). If no demand is
made, the note will mature on a specified date
from one to thirty years from its issuance.
Payment on the note may be backed by a standby
letter of credit. As with a master demand note,
the yield on
a variable rate demand note is adjusted
automatically to reflect a particular market
rate. Variable rate demand notes typically may
be called by the issuer prior to maturity.
Where short-term municipal securities are
rated, the Fund will limit its investments to
"high quality" short term securities (i.e., for
shortterm municipal notes, ratings of AA or
better by S&P or MIG 2 or better by Moody's;
for municipal paper, ratings of A2 or better by
S&P or Prime-2 or better by Moody's). Unrated
shortterm municipal securities will be included
within the Fund's overall limitation on
investments in unrated securities.
This limitation provides that not more than 20%
of the Fund's total assets may be invested in
unrated municipal securities, exclusive of
unrated securities which are guaranteed as to
principal and interest by the full faith and
credit of the United States government or are
issued by an issuer having outstanding an issue
of municipal bonds within one of the four
highest ratings classifications.
From time to time on a temporary basis, the
Fund may invest in fixed-income obligations on
which the interest is subject to Federal income
tax. Except when the Fund is in a "defensive"
investment
position, it will not purchase a taxable
security if, as a result, more than 20% of its
total assets would be invested in taxable
securities. This limitation is a fundamental
policy of the Fund, that is, it may not be
changed without a majority vote of the
shareholders of the outstanding securities of
the Fund. Temporary taxable investments of the
Fund may consist of U.S. government securities,
commercial paper rated A-1 by S&P or Prime1 by
Moody's, corporate obligations rated AAA or AA
by S&P or Aaa or Aa by Moody's, certificates of
deposit or bankers' acceptances of domestic
banks or thrift institutions with at least $1
billion in assets, or repurchase agreements
with certain banks or dealers. Repurchase
agreements may be entered into with respect to
any securities eligible for investment by the
Fund, including municipal securities.
Repurchase Agreements. 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
agreedupon 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 seller, 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 risk. The
income from a repurchase agreement with respect
to a municipal security would not be tax
exempt. The Fund may not enter into a
repurchase agreement having more than seven
days remaining to maturity if, as a result,
such agreements, together with any other
securities which are illiquid or not readily
marketable, would exceed 10% of the net assets
of the Fund.
Investment Restrictions
The Fund has adopted the following investment
restrictions for the protection of
shareholders. Restrictions 1 through 8 below
are fundamental policies, and may not be
changed without a majority vote 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 of the Fund are
present or represented 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 will not:
1. With respect to 75% of the value of its
total assets, invest more than 5% of its total
assets in securities of any one issuer, except
securities issued or guaranteed by the United
States government, or purchase more than 10% of
the outstanding voting securities of such
issuer.
2. 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 delayeddelivery basis; (b)
purchasing or selling futures contracts and
options on futures contracts and other similar
instruments; and (c) issuing separate classes
of shares.
3. 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.
4. 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.
5. 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.
6. 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. 7. 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. 8. 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. 9. 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.
10. Invest in oil, gas or other mineral
exploration or development programs.
11. Purchase securities of other investment
companies, except in connection with a merger,
consolidation, acquisition or reorganization.
12. Purchase or retain securities of any issuer
if the officers or Directors of the Fund, its
advisers or managers own individually more than
1/2 of 1% of the securities of such issuer, or
together own more than 5% of the securities of
such issuer.
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 the approval of the
Board of Directors and appropriate notice to
shareholders.
If a percentage restriction is complied with
at the
time of investment, a later increase or
decrease in the percentage of assets resulting
from a change in 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
The Fund does not anticipate that it will incur
a significant amount of brokerage commissions,
because municipal securities generally are
traded on a "net" basis, that is, at principal
amount without the addition or
deduction of a stated brokerage commission,
although the net price usually includes a
profit to the dealer. The Fund will deal
directly with the selling or purchasing
principal without incurring charges for the
services of a broker on its behalf unless it is
determined that a
better price or execution may be obtained by
utilizing the services of a broker. The Fund
also will purchase portfolio securities in
underwritings where the price includes a fixed
underwriter's concession or discount. Money
market instruments may be purchased directly
from the issuer at no commission or discount.
The Fund has paid no brokerage commissions
since its commencement of operations.
In arranging for the purchase and sale of
portfolio securities, SBMFM may employ or deal
with such brokers or dealers, including Smith
Barney, as may in its best judgment provide
prompt and reliable execution of the
transaction at favorable security prices and
reasonable commission rates, if any. In
selecting broker dealers for particular
portfolio transactions, SBMFM considers all
relevant factors, including
the execution capabilities required by the
transaction, the importance of speed,
efficiency or confidentiality, familiarity with
sources from whom or to whom particular
securities might be purchased or sold, as well
as other relevant matters.
SBMFM may select broker-dealers which
provide it with research services and may cause
the Fund to pay such broker dealers commissions
for effecting portfolio transactions in excess
of the
commissions other broker dealers may have
charged, provided it has determined in good
faith that such commissions are reasonable in
relation to the value of the brokerage and/or
research services provided.
Securities will be purchased and sold
principally in response to the Fund's current
evaluation of an issuer's ability to meet its
debt obligations in the future, and to the
Fund's current assessment of general economic
conditions as well as future changes in the
levels of interest rates on municipal
securities of varying maturities.
The Fund also may engage to a limited extent
in portfolio trading consistent with its
investment objective. Securities may be sold in
anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of
a market rise (a decline in interest rates) and
later sold. In addition, a security may be sold
and another of comparable quality purchased at
approximately the same time 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 a
particular issue or the general movement of
interest rates, such as changes in the overall
demand for, or supply of, various types of
municipal securities.
Portfolio securities will not be purchased
from or
through Smith Barney or any affiliated person
(as defined in the 1940 Act) of Smith Barney,
when such entities are acting as principal,
except pursuant to the terms and conditions of
exemptive rules or orders promulgated by the
SEC. Under the 1940 Act, the Fund may not
purchase portfolio securities from any
underwriting syndicate
of which Smith Barney or an affiliate of Smith
Barney is a member except under certain limited
conditions set forth in Rule 10f-3 under the
1940 Act. These conditions relate to, among
other things, the terms of and reasonableness
of the dealer spread, the amount of municipal
securities which may be purchased of
any one issuer, and the amount of the Fund's
assets which may be invested in a particular
issue. The Rule also requires that any
purchases made subject to its provisions be
reviewed at least quarterly by the Fund's Board
of Directors, including a majority of the
Fund's Directors who are not interested persons
of the Fund (as defined under the 1940 Act).
While investment decisions for the Fund are
made independently from those of the other
accounts managed by SBMFM, investments of the
type 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 for
or the amount received by the Fund or the size
of the position obtained or disposed of by the
Fund. Portfolio Turnover
The Fund's portfolio turnover rate (the lesser
of purchases or sales of portfolio securities
during the year, excluding purchases or sales
of short term securities, divided by the
monthly average value of portfolio securities)
generally is not expected to exceed 100%, but
the portfolio turnover rate will not be a
limiting factor whenever the Fund deems it
desirable to sell or purchase securities.
Securities may be sold in anticipation of a
rise in interest rates (market decline) or
purchased in anticipation of a decline in
interest rates (market rise) and later sold. In
addition, a security may be sold and another
security of comparable quality may be purchased
at approximately the same time in order to take
advantage of what the Fund believes to be a
temporary disparity in the normal yield
relationship between the two securities. These
yield disparities may occur for reasons not
directly related to the investment quality of
particular issues or the general movement of
interest rates, such as changes in the overall
demand for or supply of various types of tax
exempt securities. For the fiscal years ending
May 31, 1994 and 1995, the Fund's portfolio
turnover rates were 49% and 21%,
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 issued by or on behalf of public
authorities to obtain funds to provide
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 conditions, general conditions of the
municipal bond market, the financial condition
of the issuer, the size of a particular
offering, the maturity of the obligation
offered and the
rating of the issue. Municipal bonds are also
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. There
is also the possibility that as a result of
litigation or other conditions, the power or
ability of any one or more issuers to pay,
when due, principal of and interest on its, or
their, municipal bonds may be materially
affected.
For the purpose of certain requirements under
the 1940 Act, and various of the investment
restrictions applicable to the Fund,
identification of the "issuer" of a municipal
security depends on the terms and conditions
of the security. When the assets and revenues
of a political subdivision are separate from
those
of the government which created the
subdivision, and the security is backed only by
the assets and revenues of the subdivision, the
subdivision 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 the nongovernmental user would be
deemed to be the sole issuer. If, however, in
either case, the creating
government or some other entity guarantees the
security, the guarantee would be considered a
separate security and would be treated as an
issue of the government or other agency.
Interest on certain types of private
activity bonds
(generally small issues and obligations to
finance certain exempt facilities which may be
leased to or used by persons other than the
issuer) will not be excluded from gross income
for Federal income tax purposes when received
by "substantial users" or persons related to
"substantial users" as defined in the Internal
Revenue Code of 1986, as amended (the "Code").
The term "substantial user" generally includes
any "non-exempt person" who regularly uses in
his or her trade or business as part of a
facility financed from the proceeds of private
activity bonds. The Fund may invest
periodically in private activity bonds and,
therefore, may not be an appropriate investment
for entities which are substantial users of
facilities financed by such bonds or "related
persons" of substantial users. Generally, an
individual will not be a related person of a
substantial user under the Code unless the
person or his or her immediate family (spouse,
brothers, sisters, ancestors and lineal
descendants) owns directly or indirectly in the
aggregate more than 50%
in value of the equity of the substantial user,
although special related persons rules apply
when the substantial user is a partnership or
Subchapter S corporation.
Special Considerations Relating to Arizona
Municipal Securities. Some of the significant
financial considerations relating to
investments in Arizona municipal
securities are summarized below. The following
information constitutes only a brief summary,
does not purport to be a complete description,
and is qualified by
reference to the information from official
statements relating to securities offerings of
the issuers.
Arizona's population increased by
approximately 35%
during the 10-year period from 1980 to 1990,
ranking Arizona as the third fastest growing
state in the country for the period. The rate
of growth,
however, has slowed substantially in recent
years. The State's principal economic sectors
include
services, manufacturing dominated by
electrical, transportation and military
equipment, government, tourism and the
military. Arizona's economy, however, has been
adversely affected by problems in the real
estate industry, including an excessive supply
of commercial, residential and retail buildings
and severe problems with Arizona-based
financial institutions, many of which have been
placed under the control of the Resolution
Trust Corporation. In addition, current and
proposed reductions in Federal military
expenditures are expected to cause difficulties
with the State's economy. These factors are
expected to negatively impact Arizona's economy
for the foreseeable future. However, per-person
retail sales, adjusted for inflation, which had
fallen for five consecutive years, increased by
3% in 1992 indicating a slight turnaround in
the state's economy. Also, State unemployment
rates have remained below the national average
since 1991.
Arizona is required by law to maintain a
balanced budget. To achieve this objective, the
State has, in the past, utilized a combination
of spending reductions and tax increases. The
Arizona legislature was able to balance the
State's budget for the fiscal year ending June
30, 1994 without enacting any income tax
increases. For the fiscal year ended June 30,
1995, the State's budget had a slight surplus
and, effective January 1, 1996, the State
income taxes will be lowered.
Arizona's state constitution limits the
amount of debt that may be contracted by the
State to $350,000. However, certain other
issuers have the power to issue obligations
which affect the whole or large portions of the
State. For example, the Transportation Board of
the State of Arizona Department of
Transportation may issue debt for highways
which is paid from revenues generated from
state gasoline taxes. Salt River Project
Agricultural & Improvement District, an
agricultural improvement district that operates
the Salt River Project (a Federal reclamation
project and an electric system which generates,
purchases, and distributes electric power to
residential, commercial, industrial, and
agricultural power users in a 2,900 squaremile
service area around Phoenix), may issue debt
payable from a number of sources.
Arizona's state constitution also
restricts the debt of certain of the State's
political subdivisions. No county, city, town,
school district, or other municipal corporation
of the State may for any purpose become
indebted in any manner in an amount exceeding
six percent of the taxable property in such
county, city, town, school district, or other
municipal corporation without the assent of a
majority
of the qualified electors thereof voting at an
election provided by law to be held for that
purpose; provided, however, that (a) under no
circumstances may any county or school district
of the State become indebted in an amount
exceeding fifteen percent (or thirty percent in
the case of a
unified school district) of such taxable
property and (b) any incorporated city or town
of the State with such assent may be allowed to
become indebted up to a twenty percent
additional amount for supplying such city or
town with (i) water, artificial light, or
sewers, when the works for supplying such
water, light, or sewers are or shall be owned
and controlled by the municipality, (ii) the
acquisition and development by the incorporated
city or town of land or interests therein for
open space preserves, parks, playgrounds and
recreational facilities, or (iii) the
construction, reconstruction, improvement or
acquisition of streets, highways or bridges or
interests in land for rightsof-way for streets,
highways or bridges. Irrigation, power,
electrical, agricultural improvement, drainage,
flood control and tax levying public
improvement districts are, however, exempt from
such restrictions of the constitution.
Annual property tax levies for the payment
of general obligation bonded indebtedness of
political subdivisions are unlimited as to rate
or amount. Other obligations may be issued by
such entities, sometimes without an election,
which are payable from, among other sources,
project revenues, special assessments and
excise taxes.
Arizona's local governmental entities are
subject to certain other limitations on their
ability to assess taxes and levies which could
affect their ability to meet their financial
obligations. Subject to certain exceptions, the
maximum amount of property taxes levied by any
Arizona county, city, town or community college
district for their operations and maintenance
expenditures cannot exceed the amount levied in
a preceding year by more than two percent.
Certain taxes are specifically exempt from this
limit, including taxes levied for debt service
payments.
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's spouse and his or her children
purchasing shares for his or her own account;
(c) a trustee or other fiduciary purchasing
shares for a single trust estate or single
fiduciary account; (d) a pension, profit
sharing or other employee benefit plan
qualified under Section 401(a) of the Code and
qualified employee benefit plans of employers
who are "affiliated persons'' of each other
within the meaning of the 1940 Act; (e)
taxexempt organizations enumerated in Section
501(c)(3) or (13) of the Code; and (f) a
trustee or other professional fiduciary
(including a bank, or an investment adviser
registered with the SEC under the Investment
Advisers Act of 1940, as amended) purchasing
shares of the Fund for one or more trust
estates or fiduciary accounts. Purchasers who
wish to combine purchase orders to take
advantage of volume discounts should contact a
Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the
schedule in the Prospectus, apply to any
purchase of Class A shares if the aggregate
investment in Class A shares of the Fund and in
Class A shares of other funds of the Smith
Barney Mutual Funds that are offered with a
sales charge, including the purchase being
made, of any purchaser is $25,000 or more. The
reduced sales charge is subject to confirmation
of the shareholder's holdings through a check
of appropriate records. The Fund reserves the
right to terminate or amend the combined right
of accumulation at any time after written
notice to shareholders. For further information
regarding the right of 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
Securities and Exchange Commission ("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 $50 may be made under
the Withdrawal Plan by redeeming as many shares
of the Fund as may be necessary to cover the
stipulated withdrawal payment. Any applicable
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 TSSG 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 TSSG may
continue to do so and applications for
participation in the Withdrawal Plan must be
received by TSSG no later than the eighth day
of the month to be eligible for participation
beginning with that month's withdrawal. For
additional information, shareholders should
contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor
on a best efforts basis pursuant to a written
agreement (the "Distribution Agreement'')
which was most recently approved by the Fund's
Board of Directors on July 20, 1994. For the
fiscal years ended May 31, 1993, 1994 and
1995, Shearson Lehman Brothers (the Fund's
distributor prior to Smith Barney) and/or
Smith Barney received, $218,862, $77,285 and
$50,874, respectively, in sales charges from
the sale of the Fund's Class A shares, and did
not reallow any portion thereof to dealers.
From the fiscal year ended May 31, 1995, Smith
Barney recieved $99 representing CDSC on
redemptions of the Fund's Class A shares.For
the period from November 6, 1992 through May
31, 1993, and the fiscal years ended May 31,
1994 and 1995, Shearson Lehman Brothers and
its successor, Smith Barney, received $135,
$19,460 and $29,071, respectively,
representing CDSC on redemptions of the
Fund's Class B
shares.
For the fiscal year ended May 31, 1995, Smith
Barney incurred distribution expenses totaling
approximately $157,265, consisting of
approximately $2,000 for advertising, $3,378
for printing and mailing of prospectuses,
$12,960 for support services, $120,000 to
Smith Barney Financial Consultants, and
$18,903, respectively in accruals for interest
on the excess of Smith Barney expenses
incurred in distributing the Fund's shares
over the sum of the distribution fees and CDSC
received by Smith Barney from the Fund.
When payment is made by the investor before
settlement date, unless otherwise noted by the
investor, the funds will be held as a free
credit balance in the investor's brokerage
account and 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 the fact that by receiving
fees from both such investment companies for
managing these assets, computed on the basis
of their average daily net assets. The Fund's
Board of Directors has been advised of the
benefits to Smith Barney resulting from these
settlement procedures and will take such
benefits into consideration when reviewing the
Advisory, Administration and 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.
For the fiscal years ended May 31, 1995, the
Fund's Class A, Class B and Class C shares
paid $64,130, $30,291 and $138, respectively,
in service fees. For the same period, the
Fund's Class B and Class C shares paid and
$100,968 and $507, respectively, in
distribution fees.
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. 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
Classspecific 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, and the
sales charge differential, if any, will be
applied. Class A shares of any fund may be
exchanged without a sales charge for shares of
the funds that are offered without a sales
charge. Class A shares of any fund purchased
without a sales charge may be exchanged for
shares sold with a sales charge, and the
applicable sales charge will be applied.
B. Class A shares of any fund acquired by a
previous exchange of shares purchased with a
sales charge may be exchanged for Class A
shares of any of the other funds, and the
sales charge differential, if any, will be
applied.
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 purchased. Dealers other than
Smith Barney must notify TSSG of the
investor's prior ownership of Class A shares
of
Smith Barney High Income Fund and the 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. Yield
A Class' 30-day yield figure described below
is calculated according to a formula
prescribed by the SEC.
The formula can be expressed as follows:
YIELD =2 [(a-b +1)6-1]
cd
Where: a = dividends and interest earned
during
the
period.
b = expenses accrued for the period
(net of reimbursement).
c = the average daily number of
shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on
the
last
day of the period.
For the purpose of determining the interest
earned (variable "a'' in the formula) on
debt obligations that were purchased by the
Fund at a discount or premium, the formula
generally
calls for amortization of the discount or
premium. The amortization schedule will be
adjusted monthly to
reflect changes in the market values of the
debt obligations.
The Fund's equivalent taxable 30-day yield for
a Class of shares is computed by dividing that
portion of the Class' 30day yield which is tax
exempt by one minus a stated income tax rate
and adding the product to that portion, if
any, of the Class' yield that is not tax
exempt.
The yields on municipal securities are
dependent upon a variety of factors, including
general economic and monetary conditions,
conditions of the municipal securities market,
size of a particular offering, maturity of the
obligation offered and rating of the issue.
Investors should recognize that in periods of
declining interest rates the Fund's yield for
each Class of shares will tend to be somewhat
higher than prevailing market rates, and in
periods of rising interest rates the Fund's
yield for each Class of shares will tend to be
somewhat lower. Also, when interest rates are
falling, the inflow of net new money to the
Fund from the continuous sale of its shares
will likely be invested in portfolio
instruments producing lower yields than the
balance of the Fund's portfolio, thereby
reducing the current yield of the Fund. In
periods of rising interest rates, the opposite
can be expected to occur. The Fund's yield for
Class A, Class B and Class C
shares for the 30-day period ended May 31,
1995 was 4.94%, 4.64%
and 4.48%, respectively. The equivalent
taxable
yield
for
Class A, Class B and Class C shares for that
same period was 7.55%, 7.09% and 6.85%,
respectively, assuming the
payment of Federal income taxes at a rate of
31% and Arizona taxes at a rate of 5.20 %.
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 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:
5.00% for the one-year period beginning June 1,
1994
through
May 31, 1995.
7.53% per annum during the five-year period
beginning on June 1, 1990 through May 31, 1995.
7.34% per annum during the period from the
Fund's commencement of operations on June 1,
1987 through May 31,1995.
These total return figures assume that the
maximum 4.00% sales charge assessed by the Fund
has been deducted from the investment at the
time of purchase. 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 9.13%, 7.97 % and
6.20%, respectively, for those same periods.
The average annual total return for Class B
shares was as follows for the periods
indicated:
4.28% for the one-year period from June 1, 1994
through May 31, 1995.
5.89% per annum for the period from November 6,
1992 through May 31, 1995.
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 8.52% and 6.67%,
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):
5.00% for the one-year period beginning June 1,
1994 through May 31, 1995.
43.77% for the five-year period from June 1,
1990 through May 31, 1995; and
76.24% for the period from the Fund's
commencement of operations on June 1, 1987
through May 31, 1995.
These aggregate total return figures assume
that the maximum 4.00% sales charge assessed by
the Fund has been deducted from the investment
at the time of purchase. If the maximum sales
charge had not been deducted at the time of
purchase, the Fund's aggregate total return
reflecting the partial waiver of the investment
advisory and subinvestment advisory and/or
administration fees for those same periods
would have been 9.38%, 49.76% and 83.59%,
respectively.
The Fund's aggregate total return for Class B
shares was as follows for the periods
indicated:
4.28% for the one-year period from June 1, 1994
through May 31, 1995.
15.81% for the period beginning on November 6,
1992 through May 31, 1995.
These figures assume that the maximum
applicable CDSC has been deducted from the
investment at the time of redemption. Had 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 redemption, the
Fund's aggregate total returns for the same
periods would have been 8.52% and 18.01%,
respectively.
The Fund's aggregate total return for Class C
shares was as follows for the period indicated:
11.10% for the period beginning December 8,
1994 through May 31, 1995.
This figure assumes that the maximun applicable
CDSC has been deducted from the investment at
the time of redemption. If the investment
advisory and/or administration fees had not
been partially waived and the maximum CDSC had
not been deducted at the time of redemption,
the Fund's aggregate total return for the same
period would have been 12.04%.
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 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 Federal income tax purposes and
exempt from Arizona 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 taxexempt 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 taxexempt 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 to its
shareholders at least 90% of the sum of its
taxable net investment income and net realized
short-term capital gains, and 90% of its tax-
exempt interest income (reduced by certain
expenses), the Fund will not be liable for
Federal income taxes. 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 Arizona 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 exemptinterest 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
nontaxable 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 taxexempt 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 or 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 longterm and shortterm
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 tomarket'' 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% longterm
capital gain or loss and 40% short-term capital
gain or loss, and, accordingly, the mark
tomarket system will generally affect the
amount of capital
gains or losses taxable to the Fund and the
amount of distributions to a shareholder.
Moreover, if the Fund invests in both section
1256 contracts and offsetting positions in
those contracts, which together constitute a
straddle, then the Fund may be required to
defer 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, will 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 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 longterm
capital loss to the extent of the capital gain
dividend.
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 Arizona
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 Federal income taxation or Arizona
personal income taxation and the dollar amount
of dividends subject to Federal income taxation
or Arizona personal income taxation, if any,
will vary for each shareholder depending upon
the size and duration of each shareholder's
investment in the Fund. To the extent that the
Fund earns taxable net investment
income, it intends to designate as taxable
dividends the same percentage of each day's
dividend as its actual taxable net
investment income bears to its total net
investment income earned on that day.
Therefore, the percentage of each
day's dividend designated as taxable,
if any, may vary from dayto-day.
Investors considering buying shares of
the Fund just prior to a record date
for a capital gain distribution should
be aware that, regardless of whether
the price of the Fund shares to be
purchased reflects the amount of the
forthcoming distribution payment, any
such payment will be a 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'' are exempt from the
Arizona personal income tax to the
extent attributable to Arizona
Municipal Securities or to obligations
that are free from state or local
taxation under Arizona 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
interestbearing 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
indices 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 interestbearing
obligations, obligations issued at a
discount or bond indices related there
to as authorized under the Code, cash
and cash items, such as receivables,
invested in Arizona 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 Arizona or its
local government entities or
obligations which are free from state
or local taxes under Arizona or
Federal law, are exempt from the
Arizona personal income tax.
The Arizona personal income tax is not
applicable to corporations. For all
corporations subject to the Arizona
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 Arizona 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 May
4, 1987. The Fund commenced operations
on June 1, 1987 under the name Hutton
Municipal Series Inc. On December 29,
1988, March 31, 1992 July 30, 1993 and
October 14, 1994, the Fund changed its
name to SLH Municipals Series Fund
Inc., Shearson Lehman Brothers Arizona
Municipals Fund Inc., Smith Barney
Shearson Arizona Municipals Fund Inc.
and Smith Barney Arizona Municipals
Fund Inc., respectively.
PNC, located at Chestnut and 17th
Streets, Philadelphia, Pennsylvania
19103, serves as the Fund's custodian.
Under the custody agreement, PNC holds
the Fund's portfolio securities and
keeps all necessary accounts and
records. For
its services, PNC receives a monthly
fee based upon the month-end market
value of securities held in custody
and also receives securities
transaction charges. The assets of the
Fund are held under bank custodianship
in compliance with the 1940 Act.
TSSG, located at Exchange Place,
Boston, Massachusetts 02109, serves as
the Fund's transfer agent. Under the
transfer agency agreement, TSSG
maintains the shareholder account
records for the Fund, handles certain
communications between shareholders
and the Fund and distributes dividends
and distributions payable by the Fund.
For these services, TSSG receives a
monthly fee computed on the basis of
the number of shareholder accounts it
maintains for the Fund during the
month and is reimbursed for out-of
pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the
fiscal year ended May 31, 1995,
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 SP1 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 speculativetype
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 ARIZONA MUNICIPALS FUND
INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report
for
the
fiscal
year ended May 31, 1995 and the
report of Independent Accountants dated May 31,
1995, are incorporated by
reference to the Definitive 30b2-1 filed
on July 27, 1995 as Assession #0000091155-95
000237.
Included in Part C:
None.
(b) Exhibits
All references are to the Registrant's
Registration Statement on Form N-1A as filed
with
the Securities and Exchange Commission
File
Nos. 33-12792 and 811-5066 (the
"Registration Statement").
(1) Registrant's Articles of Incorporation and
Amendments to Articles of Incorporation
dated Decemder 29, 1988, November 5, 1992 and
July 30, 1993 are incorporated by
reference to Post Effective Amendment No. 14 to
the Registration Statement filed on October 1,
1993 ("Post-Effective Amendment No. 14").
Amendment to Articles of Incorporation dated
November 7, 1994 is filed herein.
(2) Registrant's By-Laws are incorporated by
reference to Pre-Effective Amendment No. 2
to the Registration Statement ("Pre-Effective
Amendment No. 2").
(3) Not Applicable.
(4) Registrant's form of stock certificate
is incproporated by
reference to Post-Effective Amendment
No. 11
to the Registration Statement filed on
October 23, 1992 ("Post-Effective
Amendment No. 11").
(5)(a) Investment Advisory Agreement
dated
July
30, 1993 between the Registrant and
Greenwich Street Advisors is incoroporated by
reference to Post Effective Amendment
No. 14.
(b) Form of Transfer and
Assumption of Investment Advisory
Agreement dated November 7, 1994 is
filed herein.
(6) Distribution Agreement dated July 30,
1993,
between the Registrant and Smith Barney
Shearson Inc. is incorporated by reference to
Post Effective Amendment No. 14.
(7) Not Applicable.
(8) Form of Custodian Agreement dated as
of
June
19, 1995 between the Registrant
and PNC Bank, National Association is filed
herein.
(9)(a) Transfer Agency Agreement between the
Registrant and The Shareholder Services
Group, Inc. is incorporated by reference to Post
Effective Amendment No. 16 to the
Registration Statement ("Post-Effective
Amendment No. 16").
(b) Administration Agreement dated April 20,
1994 between the Registrant and Smith,
Barney Advisers, Inc. is incorporated by
reference to Post Effective Amendment No. 15
to the Registration Statement ("Post-
Effective Amendment No. 15").
(10) Not Applicable.
(11) Consent of Indepedent Accountants is filed
herein.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Amended Service and Distribution Plan dated
as of November 7, 1994 pursuant to Rule
12b-1 between the Registrant and Smith
Barney Inc. is filed herein.
(16) Performance Data is incorporated by
reference to Post-Effective Amendment No. 6 to
the Registration Statement ("Post-Effective
Amendment No. 6").
Item 25. Persons Controlled by or Under
Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(1)Title ofClass (2)Number of Record Holdersby
class as of June 30, 1995
Common Stock Class A - 854
par value $.001 per share Class B - 603Class
C
006
Item 27. Indemnification.
The response to this item is incorporated by
reference to Post-Effective Amendment No. 11.
Item 28(a). Business and Other
Connections of Investment Adviser
Investment Adviser--Smith Barney Mutual Funds
Management Inc., formerly known as Smith, Barney
Advisers, Inc. ("SBMFM").
SBMFM was incorporated in December 1968 under the
laws of the State of Delaware. SBMFM is a wholly
owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings
Inc.), which in turn is a wholly owned subsidiary
of Travelers Group Inc. (formerly known as
Primerica
Corporation) ("Travelers"). SBMFM is registered
as an investment adviser under the Investment
Advisers Act of 1940 ("Advisers Act").
The list required by this Item 28 of officers and
directors of SBMFM together with information as
to any other business, profession, vocation or
employment of a substantial nature engaged in by
such officers and directors during the past two
years, is incorporated by reference to Schedules
A and D of Form ADV filed by SBMFM pursuant to
the Advisers Act (SEC File No. 801 8314).
Prior to the close of business on November 7,
1994, Greenwich Street Advisors served as
investment adviser. Greenwich Street Advisors,
through its predecessors, has been in the
investment counseling business since 1934 and was
a division of Mutual Management Corp. ("MMC").
MMC was incorporated in 1978 and is a wholly
owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings
Inc.) ("Holdings"), which in turn is a wholly
owned subsidiary of Travelers Group Inc.
(formerly known as Primerica Corporation)
("Travelers"). The list required by this Item 28
of officers and directors of MMC and Greenwich
Street Advisors, together with information as to
any other business, profession, vocation or
employment of a substantial nature engaged in by
such officers and directors during the past two
fiscal
years, is incorporated by reference to Schedules
A and D of Form ADV filed by MMC on behalf of
Greenwich Street Advisors pursuant to the
Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993
(the "Closing"), Shearson Lehman Advisors, a
member of the Asset Management Group of Shearson
Lehman Brothers Inc. ("Shearson Lehman
Brothers"), served as the Registrant's investment
adviser. On the Closing, Travelers and Smith
Barney Inc. (formerly known as Smith Barney
Shearson Inc.) acquired the domestic retail
brokerage and asset management
business of Shearson Lehman Brothers, which
included the business of the Registrant's prior
investment adviser. Shearson Lehman Brothers was
a wholly owned subsidiary of Shearson Lehman
Brothers Holdings Inc. ("Shearson Holdings"). All
of the issued and outstanding common stock of
Shearson Holdings (representing 92% of the voting
stock) was held by American Express Company.
Information as to any past business, vocation or
employment of a substantial nature engaged in by
officers or directors of Shearson Lehman Advisors
can be located in Schedules A and D of Form ADV
filed by Shearson Lehman Brothers on behalf of
Shearson Lehman Advisors prior to July 30, 1993
(SEC File No. 8013701).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts
as a distributor for Smith Barney Managed
Municipals Fund Inc., Smith Barney New York
Municipals Fund Inc., Smith Barney California
Municipals Fund Inc.,
Smith Barney Massachusetts Municipals Fund, Smith
Barney Managed Government Fund Inc., Smith Barney
Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Income Funds, Smith
Barney Equity Funds, Smith Barney Investment
Funds Inc., Smith Barney Precious Metals and
Minerals Fund Inc., Smith Barney
Telecommunications Trust, Smith Barney Arizona
Municipals Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., The USA High Yield Fund
N.V., Smith Barney/Travelers Series Fund, Smith
Barney Fundamental Value Fund Inc., Smith Barney
Series Fund, Consulting Group Capital Markets
Funds, Smith Barney Income Trust, Smith Barney
Adjustable Rate Government Income Fund, Smith
Barney Florida Municipals Fund, Smith Barney
Oregon Municipals Fund, Smith Barney Funds, Inc.,
Smith Barney Muni Funds, Smith Barney World
Funds, Inc., Smith Barney Money Funds, Inc.,
Smith Barney Municipal Money Market Fund, Inc.,
Smith Barney Variable Account Funds, Smith
Barney U.S. Dollar Reserve Fund (Cayman),
Worldwide Special Fund, N.V., Worldwide
Securities Limited (Bermuda), Smith Barney
International Fund (Luxembourg), Smith Barney
Institutional Cash Management Fund, Inc. and
various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of
Smith Barney Holdings Inc. (formerly known as
Smith Barney Shearson Holdings Inc.), which in
turn is a wholly owned subsidiary of Travelers
Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). On June
1, 1994, Smith Barney changed its name from Smith
Barney Shearson Inc. to its current name. The
information required by this Item 29 with respect
to each officer, director and partner of Smith
Barney is incorporated by reference to Schedule A
of Form BD filed by Smith Barney pursuant to the
Securities Exchange Act of 1934 (SEC File No.
8128510).
Item 30. Location of Accountants and
Records
(1) Smith Barney Arizona Municipals Fund
Inc. 388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management
Inc. 388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania
19103
(4) The Shareholder Services Group,
Inc. One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None.
485(b) Certification
The Registrant hereby certifies that it meets
all the
requirements for effectiveness pursuant to Rule
485(b)(1)(ix) under the Securities Act or 1933,
as amended.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, and the Investment Company Act of
1940, the Registrant, SMITH BARNEY ARIZONA
MUNICIPALS FUND INC., has duly caused this
registration statement to be signed on its
behalf by the undersigned, thereto duly
authorized in the City of New York, and State of
New York on the 25th day of July, 1995.
SMITH
BARNEY
ARIZONA
MUNICIPA
LS FUND
INC.
/s/Heath
B.
McLendon
Heath B.
McLendon
,
Chief
Executive
Officer
Pursuant to the requirements of the
Securities Act of 1933, this registration
statement has been signed below by the following
persons in the capacities and on the date
indicated.
/s/Heath B. McLendon
Heath B. McLendon Chairman of
the
Board
July 25, 1995
(Chief Executive
Officer)
/s/Lewis E. Daidone
Lewis E. Daidone Treasurer
July 25, 1995
(Chief Financial
and Accounting
Officer)
/s/Herbert Barg
Herbert Barg Director
July
25, 1995
/s/Alfred Bianchetti
Alfred J. Bianchetti
Director
July 25, 1995
/s/Martin Brody
Martin Brody
Director July
25, 1995
/s/Dwight B. Crane
Dwight B. Crane
Director July 25, 1995
/s/Burt N. Dorsett
Burt N. Dorsett
Director
July 25, 1995
/s/Elliot S. Jaffe
Elliot S. Jaffe
Director
July 25, 1995
/s/Stephen E. Kaufman
Stephen E. Kaufman
Director July
25, 1995
/s/Joseph J. McCann
Joseph J. McCann
Director July
25, 1995
/s/Cornelius C. Rose, Jr.
Cornelius C. Rose, Jr.
Director
July 25, 1995
ARTICLES SUPPLEMENTARY
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
Smith Barney Arizona Municipals Fund Inc., a
Maryland corporation having its principal office in the
State of Maryland in Baltimore City (hereinafter called the
"Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Corporation is authorized to issue
3,000,000,000 shares of capital stock, par value $.001 per
share, with an aggregate par value of $3,000,000. These
Articles Supplementary do not increase the total authorized
capital stock of the Corporation or the aggregate par value
thereof. The Board of Directors hereby classifies and
reclassifies all of the unissued shares of capital stock of
all classes of the Corporation in such manner that the
Corporation will have 2,500,000,000 authorized shares of
unclassified capital stock, par value $.001 per share, and
that the remaining 500,000,000 shares of authorized capital
stock will be classified into five classes, each with a par
value of $.001 per share, designated Class A Common Stock,
Class B Common Stock, Class C Common Stock, Class Y Common
Stock and Class Z Common Stock. The Corporation shall be
authorized to issue up to 500,000,000 shares of each of the
Class A Common Stock, the Class B Common Stock, the Class C
Common Stock, the Class Y Common Stock, and the Class Z
Common Stock less, at any time, the total number of shares
of all other such classes of capital stock then issued and
outstanding. At no time may the Corporation cause to be
issued and outstanding more than 500,000,000 shares of its
Class A Common Stock, Class B Common Stock, Class C Common
Stock, Class Y Common Stock and Class Z Common Stock in the
aggregate unless such number be hereafter increased in
accordance with the Maryland General Corporation Law.
SECOND: The shares of Class A Common Stock, Class
B Common Stock and Class C Common Stock classified hereby
shall have the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption as
currently set forth in the charter of the Corporation with
<PAGE> 2
respect to those respective classes of capital stock. The
shares of Class Y Common Stock and Class Z Common Stock
classified hereby shall have the preferences, conversion and
other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of
redemption as set forth in Article V of the Corporation's
Articles of Incorporation and shall be subject to all
provisions of its Articles of Incorporation relating to
stock of the Corporation generally, and those set forth as
follows:
(1) The assets belonging to each of the Class
Y Common Stock and Class Z Common Stock
shall be invested in the same investment
portfolio of the Corporation as the
assets belonging to the Class A Common
Stock, Class B Common Stock, and Class C
Common Stock.
(2) The dividends and distributions of
investment income and capital gains with
respect to each of the Class Y Common
Stock and Class Z Common Stock shall be
in such amounts as may be declared from
time to time by the Board of Directors,
and such dividends and distributions with
respect to each such class of capital
stock may vary from dividends and
distributions with respect to each other
class of capital stock to reflect
differing allocation of the expenses of
the Corporation among the holders of each
such class and any resultant differences
among the net asset values per share of
each such class, to such extent and for
such purposes as the Board of Directors
may deem appropriate.
(3) The allocation of investment income,
capital gains and losses, expenses and
liabilities of the Corporation among the
Class Y Common Stock, Class Z Common
Stock and any other class of the
Corporation's stock shall be determined
conclusively by the Board of Directors in
a manner that is consistent with the
order dated July 7, 1992 (Investment
Company Act of 1940 Release No. 18832),
as amended January 19, 1993 (Investment
Company Act Release No. 19216), and
January 28, 1994 (Investment Company Act
of 1940, Release No. 20042) issued by the
Securities and Exchange Commission in
connection with the application for
<PAGE> 3
exemption filed by Smith Barney
Appreciation Fund, Inc. (formerly
Shearson Lehman Brothers Appreciation
Fund Inc.) et al., and any existing or
future amendment to such order or any
rule or interpretation under the
Investment Company Act of 1940 that
modifies or supersedes such order.
THIRD: The Board of Directors of the Corporation
has classified the above described shares of stock pursuant
to authority contained in the Corporation's charter.
FOURTH: These Articles Supplementary will become
effective at 9:01 A.M. on November 7, 1994.
The undersigned Chairman of the Board of the
Corporation acknowledges these Articles Supplementary to be
the corporate act of the Corporation and states that to the
best of his knowledge, information and belief, the matters
and facts set forth in these Articles with respect to
authorization and approval are true in all material respects
and that this statement is made under penalties of perjury.
IN WITNESS WHEREOF, Smith Barney Arizona Municipals
Fund Inc. has caused these Articles Supplementary to be
signed and filed in its name and on its behalf by its
Chairman of the Board, and witnessed by its Assistant
Secretary on , 1994.
SMITH BARNEY ARIZONA
MUNICIPALS FUND INC.
By:
Heath B. McLendon,
Chairman of the Board
WITNESS:
Lee D. Augsburger,
Assistant Secretary
FORM OF TRANSFER AND ASSUMPTION OF
INVESTMENT ADVISORY AGREEMENT
for
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
TRANSFER AND ASSUMPTION OF INVESTMENT ADVISORY
AGREEMENT, made as of the 7th day of November, 1994, by and
among Smith Barney Arizona Municipals Fund Inc., a Maryland
corporation, (the "Fund"), Mutual Management Corp., a New
York corporation ("MMC"), and Smith Barney Mutual Funds
Management Inc. ("SBMFM") a Delaware corporation.
WHEREAS, the Fund is registered with the Securities and
Exchange Commission as an open-end management investment
company under the Investment Company Act of 1940, as amended
(the "Act"); and
WHEREAS, the Fund and MMC entered into an Investment
Advisory Agreement on July 30, 1993, under which MMC serves
as the investment adviser (the "Investment Adviser") for the
Fund; and
WHEREAS, MMC desires that its interest, rights,
responsibilities and obligations in and under the Investment
Advisory Agreement be transferred to SBMFM and SBMFM desires
to assume MMC's interest, rights, responsibilities and
obligations in and under the Investment Advisory Agreement;
and
WHEREAS, this Agreement does not result in a change of
actual control or management of the Investment Adviser to
the Fund and, therefore, is not an "assignment" as defined
in Section 2(a)(4) of the Act nor an "assignment" for the
purposes of Section 15(a)(4) of the Act.
NOW, THEREFORE, in consideration of the mutual
covenants set forth in this Agreement and other good and
valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereby agree as follows:
1. Assignment. Effective as of November 7, 1994 (the
"Effective Date"), MMC hereby transfers to SBMFM all of
MMC's interest, rights, responsibilities and obligations in
and under the Investment Advisory Agreement dated July 30,
1993, to which MMC is a party with the Fund.
2. Assumption and Performance of Duties. As of the
Effective Date, SBMFM hereby accepts all of MMC's interest
and rights, and assumes and agrees to perform all of MMC's
responsibilities and obligations in, and under the
Investment Advisory Agreement; SBMFM agrees to subject to
all of the terms and conditions of said Agreement; and SBMFM
shall indemnify and hold harmless MMC from any claim or
demand made thereunder arising or incurred after the
Effective Date.
3. Representation of SBMFM. SBMFM represents and
warrants that: (1) it is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended; and
(2) Smith Barney Holdings Inc. is its sole shareholder.
4. Consent. The Fund hereby consents to this
transfer by MMC to SBMFM of MMC's interest, rights,
responsibilities and obligations in and under the Investment
Advisory Agreement and to the acceptance and assumption by
SBMFM of the same. The Fund agrees, subject to the terms
and conditions of said Agreement, to look solely to SBMFM
for the performance of the Investment Adviser's
responsibilities and obligations under said Agreement from
and after the Effective Date, and to recognize as inuring
solely to SBMFM the interest and rights heretofore held by
MMC thereunder.
5. Limitation of Liability of Directors, Officers and
Shareholders. It is expressly agreed that the obligations of
the Fund hereunder shall not be binding upon any of the
Directors, shareholders, nominees, officers, agents, or
employees of the Fund, personally, but shall bind only the
property of the Fund, as provided in the Articles of
Incorporation of the Fund. The execution and delivery of
this Agreement have been authorized by the Directors of the
Fund and signed by the President of the Fund, acting as
such, and neither such authorization by such Directors nor
such execution and delivery by such officer shall be deemed
to have been made by any of them individually or to impose
any liability on any of them, personally, but shall bind
only the property of the Fund as provided in its Articles of
Incorporation.
6. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto
were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers
hereunto duly attested.
Attest:
By:
Secretary Smith Barney Arizona Municipals
Fund Inc.
Attest:
By:
Secretary Mutual Management Corp.
Attest:
By:
Secretary Smith Barney Mutual Funds
Management Inc.
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of June 19, 1995 by and
between SMITH BARNEY ARIZONA MUNICIPALS FUND INC., a
Maryland corporation (the "Fund") and PNC BANK, NATIONAL
ASSOCIATION, a national banking association ("PNC Bank").
The Fund is registered as an open-end investment
company under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund wishes to retain PNC Bank to
provide custodian services and PNC Bank wishes to furnish
such services, either directly or through an affiliate or
affiliates, as more fully described herein. In
consideration of the premises and mutual covenants herein
contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person." The term "Authorized
Person" shall mean any officer of the Fund and any other
person, who is duly authorized by the Fund's Governing
Board, to give Oral and Written Instructions on behalf of
the Fund. Such persons are listed in the Certificate
attached hereto as the Authorized Persons Appendix, as such
Appendix may be amended in writing by the Fund's Governing
Board from time to time.
(b) "Book-Entry System." The term "Book-Entry
System" means Federal Reserve Treasury book-entry system for
United States and federal agency securities, its successor
or successors, and its nominee or nominees and any book-
entry system maintained by an exchange registered with the
SEC under the 1934 Act.
(c) "CFTC." The term "CFTC" shall mean the
Commodities Futures Trading Commission.
(d) "Governing Board." The term "Governing
Board" shall mean the Fund's Board of Directors if the Fund
is a corporation or the Fund's Board of Trustees if the Fund
is a trust, or, where duly authorized, a competent committee
thereof.
(e) "Oral Instructions." The term "Oral
Instructions" shall mean oral instructions received by PNC
Bank from an Authorized Person or from a person reasonably
believed by PNC Bank to be an Authorized Person.
(f) "SEC." The term "SEC" shall mean the
Securities and Exchange Commission.
(g) "Securities and Commodities Laws." The term
"Securities and Commodities Laws" shall mean the "1933 Act"
which shall mean the Securities Act of 1933, the "1934 Act"
which shall mean the Securities Exchange Act of 1934, the
1940 Act, and the "CEA" which shall mean the Commodities
Exchange Act, as amended.
(h) "Shares." The term "Shares" shall mean the
shares of stock of any series or class of the Fund, or,
where appropriate, units of beneficial interest in a trust
where the Fund is organized as a Trust.
(i) "Property." The term "Property" shall mean:
(i) any and all securities and other
investment items which the Fund may from time to time
deposit, or cause to be deposited, with PNC Bank or which
PNC Bank may from time to time hold for the Fund;
(ii) all income in respect of any of such
securities or other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities
issued by the Fund, which are received by PNC Bank from
time to time, from or on behalf of the Fund.
(j) "Written Instructions." The term "Written
Instructions" shall mean written instructions signed by one
Authorized Person and received by PNC Bank. The
instructions may be delivered by hand, mail, tested
telegram, cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to
provide custodian services to the Fund, and PNC Bank accepts
such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or,
where applicable, will provide PNC Bank with the following:
(a) certified or authenticated copies of the
resolutions of the Fund's Governing Board, approving the
appointment of PNC Bank or its affiliates to provide
services;
(b) a copy of the Fund's most recent effective
registration statement;
(c) a copy of the Fund's advisory agreement or
agreements;
(d) a copy of the Fund's distribution agreement
or agreements;
(e) a copy of the Fund's administration
agreements if PNC Bank is not providing the Fund with such
services; (f) copies of any shareholder
servicing agreements made in respect of the Fund; and
(g) certified or authenticated copies of any and
all amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
PNC Bank undertakes to comply with all applicable
requirements of the Securities and Commodities Laws and any
laws, rules and regulations of governmental authorities
having jurisdiction with respect to all duties to be
performed by PNC Bank hereunder. Except as specifically set
forth herein, PNC Bank assumes no responsibility for such
compliance by the Fund.
5. Instructions. Unless otherwise provided in this
Agreement, PNC Bank shall act only upon Oral and Written
Instructions. PNC Bank shall be entitled to rely upon any
Oral and Written Instructions it receives from an Authorized
Person (or from a person reasonably believed by PNC Bank to
be an Authorized Person) pursuant to this Agreement. PNC
Bank may assume that any Oral or Written Instructions
received hereunder are not in any way inconsistent with the
provisions of organizational documents or this Agreement or
of any vote, resolution or proceeding of the Fund's
Governing Board or of the Fund's shareholders.
The Fund agrees to forward to PNC Bank Written
Instructions confirming Oral Instructions so that PNC Bank
receives the Written Instructions by the close of business
on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not
received by PNC Bank shall in no way invalidate the
transactions or enforceability of the transactions
authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no
liability to the Fund in acting upon Oral or Written
Instructions provided such instructions reasonably appear to
have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt
as to any action it should or should not take, PNC Bank may
request directions or advice, including Oral or Written
Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in
doubt as to any questions of law pertaining to any action it
should or should not take, PNC Bank may request advice at
its own cost from such counsel of its own choosing (who may
be counsel for the Fund, the Fund's advisor or PNC Bank, at
the option of PNC Bank).
(c) Conflicting Advice. In the event of a
conflict between directions, advice or Oral or Written
Instructions PNC Bank receives from the Fund, and the advice
it receives from counsel, PNC Bank shall be entitled to rely
upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be
protected in any action it takes or does not take in
reliance upon directions, advice or Oral or Written
Instructions it receives from the Fund or from counsel and
which PNC Bank believes, in good faith, to be consistent
with those directions, advice or Oral or Written
Instructions.
Nothing in this paragraph shall be construed so as to
impose an obligation upon PNC Bank (i) to seek such
directions, advice or Oral or Written Instructions, or (ii)
to act in accordance with such directions, advice or Oral or
Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PNC
Bank's properly taking or not taking such action.
7. Records. The books and records pertaining to the
Fund which are in the possession of PNC Bank, shall be the
property of the Fund. Such books and records shall be
prepared and maintained as required by the 1940 Act and
other applicable securities laws, rules and regulations.
The Fund, or the Fund's Authorized Persons, shall have
access to such books and records at all time during PNC
Bank's normal business hours. Upon the reasonable request
of the Fund, copies of any such books and records shall be
provided by PNC Bank to the Fund or to an Authorized Person
of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep
confidential all records of the Fund and information
relative to the Fund and its shareholders (past, present and
potential), unless the release of such records or
information is otherwise consented to, in writing, by the
Fund. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PNC Bank
may be exposed to civil or criminal contempt proceedings or
when required to divulge. The Fund further agrees that,
should PNC Bank be required to provide such information or
records to duly constituted authorities (who may institute
civil or criminal contempt proceedings for failure to
comply), PNC Bank shall not be required to seek the Fund's
consent prior to disclosing such information.
9. Cooperation with Accountants. PNC Bank shall
cooperate with the Fund's independent public accountants and
shall take all reasonable action in the performance of its
obligations under this Agreement to ensure that the
necessary information is made available to such accountants
for the expression of their opinion, as required by the
Fund.
10. Disaster Recovery. PNC Bank shall enter into and
shall maintain in effect with appropriate parties one or
more agreements making reasonable provision for emergency
use of electronic data processing equipment to the extent
appropriate equipment is available. In the event of
equipment failures, PNC Bank shall, at no additional expense
to the Fund, take reasonable steps to minimize service
interruptions but shall have no liability with respect
thereto.
11. Compensation. As compensation for custody
services rendered by PNC Bank during the term of this
Agreement, the Fund will pay to PNC Bank a fee or fees as
may be agreed to in writing from time to time by the Fund
and PNC Bank.
12. Indemnification. The Fund agrees to indemnify and
hold harmless PNC Bank and its nominees from all taxes,
charges, expenses, assessment, claims and liabilities
(including, without limitation, liabilities arising under
the Securities and Commodities Laws and any state and
foreign securities and blue sky laws, and amendments
thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or
indirectly from any action which PNC Bank takes or does not
take (i) at the request or on the direction of or in
reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its
nominees, shall be indemnified against any liability to the
Fund or to its shareholders (or any expenses incident to
such liability) arising out of PNC Bank's own willful
misfeasance, bad faith, negligence or reckless disregard of
its duties and obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be
under no duty to take any action on behalf of the Fund
except as specifically set forth herein or as may be
specifically agreed to by PNC Bank, in writing. PNC Bank
shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith
and to use its best effort, within reasonable limits, in
performing services provided for under this Agreement. PNC
Bank shall be responsible for its own negligent failure to
perform its duties under this Agreement. Notwithstanding the
foregoing, PNC Bank shall not be responsible for losses
beyond its control, provided that PNC Bank has acted in
accordance with the standard of care set forth above; and
provided further that PNC Bank shall only be responsible for
that portion of losses or damages suffered by the Fund that
are attributable to the negligence of PNC Bank.
Without limiting the generality of the foregoing or of
any other provision of this Agreement, PNC Bank, in
connection with its duties under this Agreement, shall not
be under any duty or obligation to inquire into and shall
not be liable for (a) the validity or invalidity or
authority or lack thereof of any Oral or Written
Instruction, notice or other instrument which conforms to
the applicable requirements of this Agreement, and which PNC
Bank reasonably believes to be genuine; or (b) delays or
errors or loss of data occurring by reason of circumstances
beyond PNC Bank's control, including acts of civil or
military authority, national emergencies, labor
difficulties, fire, flood or catastrophe, acts of God,
insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
Notwithstanding anything in this Agreement to the
contrary, PNC Bank shall have no liability to the Fund for
any consequential, special or indirect losses or damages
which the Fund may incur or suffer by or as a consequence of
PNC Bank's performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was
known by PNC Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will
deliver or arrange for delivery to PNC Bank, all the
property owned by the Fund, including cash received as a
result of the distribution of its Shares, during the period
that is set forth in this Agreement. PNC Bank will not be
responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank,
acting upon Written Instructions, shall open and maintain
separate account(s) in the Fund's name using all cash
received from or for the account of the Fund, subject to the
terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial
accounts for each separate series, class or portfolio of the
Fund and shall hold in such account(s) all cash received
from or for the accounts of the Fund specifically designated
to each separate series, class or portfolio. PNC Bank shall
make cash payments from or for the account of the Fund only
for:
(i) purchases of securities in the name of
the Fund or PNC Bank or PNC Bank's nominee as provided in
sub-paragraph j and for which PNC Bank has received a copy
of the broker's or dealer's confirmation or payee's invoice,
as appropriate;
(ii) purchase or redemption of Shares of the
Fund delivered to PNC Bank;
(iii) payment of, subject to Written
Instructions, interest, taxes, administration, accounting,
distribution, advisory, management fees or similar expenses
which are to be borne by the Fund;
(iv) payment to, subject to receipt of
Written Instructions, the Fund's transfer agent, as agent
for the shareholders, an amount equal to the amount of
dividends and distributions stated in the Written
Instructions to be distributed in cash by the transfer agent
to shareholders, or, in lieu of paying the Fund's transfer
agent, PNC Bank may arrange for the direct payment of cash
dividends and distributions to shareholders in accordance
with procedures mutually agreed upon from time to time by
and among the Fund, PNC Bank and the Fund's transfer agent;
(v) payments, upon receipt of Written
Instructions, in connection with the conversion, exchange or
surrender of securities owned or subscribed to by the Fund
and held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends
received with respect to securities sold short; payments
made to a sub-custodian pursuant to provisions in sub-
paragraph c of this Paragraph; and
(viii) payments, upon Written Instructions made
for other proper Fund purposes. PNC Bank is hereby
authorized to endorse and collect all checks, drafts or
other orders for the payment of money received as custodian
for the account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities
received by it for the account of the Fund in a separate
account that physically segregates such securities from
those of any other persons, firms or corporations, except
for securities held in a Book-Entry System. All such
securities shall be held or disposed of only upon Written
Instructions of the Fund pursuant to the terms of this
Agreement. PNC Bank shall have no power or authority to
assign, hypothecate, pledge or otherwise dispose of any such
securities or investment, except upon the express terms of
this Agreement and upon Written Instructions, accompanied by
a certified resolution of the Fund's Governing Board,
authorizing the transaction. In no case may any member of
the Fund's Governing Board, or any officer, employee or
agent of the Fund withdraw any securities. At PNC Bank's
own expense and for its own convenience, PNC Bank may enter
into sub-custodian agreements with other banks or trust
companies to perform duties described in this sub-paragraph
c. Such bank or trust company shall have an aggregate
capital, surplus and undivided profits, according to its
last published report, of at least one million dollars
($1,000,000), if it is a subsidiary or affiliate of PNC
Bank, or at least twenty million dollars ($20,000,000) if
such bank or trust company is not a subsidiary or
affiliate of PNC Bank. In addition, such bank or trust
company must agree to comply with the relevant provisions of
the 1940 Act and other applicable rules and regulations.
PNC Bank shall remain responsible for the performance of all
of its duties as described in this Agreement and shall hold
the Fund harmless from PNC Bank's own (or any sub-custodian
chosen by PNC Bank under the terms of this sub-paragraph c)
acts or omissions, under the standards of care provided for
herein.
(d) Transactions Requiring Instructions. Upon
receipt of Oral or Written Instructions and not otherwise,
PNC Bank, directly or through the use of the Book-Entry
System, shall:
(i) deliver any securities held for the Fund
against the receipt of payment for the sale of such
securities;
(ii) execute and deliver to such persons as
may be designated in such Oral or Written Instructions,
proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any
securities may be exercised;
(iii) deliver any securities to the issuer
thereof, or its agent, when such securities are called,
redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is
to be delivered to PNC Bank;
(iv) deliver any securities held for the Fund
against receipt of other securities or cash issued or paid
in connection with the liquidation, reorganization,
refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise of any
conversion privilege;
(v) deliver any securities held for the Fund
to any protective committee, reorganization committee or
other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or sale
of assets of any corporation, and receive and hold under the
terms of this Agreement such certificates of deposit,
interim receipts or other instruments or documents as may be
issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the
assets of the Fund and take such other steps as shall be
stated in said Oral or Written Instructions to be for the
purpose of effectuating a duly authorized plan of
liquidation, reorganization, merger, consolidation or
recapitalization of the Fund;
(vii) release securities belonging to the Fund
to any bank or trust company for the purpose of a pledge or
hypothecation to secure any loan incurred by the Fund;
provided, however, that securities shall be released only
upon payment to PNC Bank of the monies borrowed, except that
in cases where additional collateral is required to secure a
borrowing already made subject to proper prior
authorization, further securities may be released for that
purpose; and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by
the Fund in connection with any repurchase agreement entered
into on behalf of the Fund, but only on receipt of payment
therefor; and pay out moneys of the Fund in connection with
such repurchase agreements, but only upon the delivery of
the securities;
(ix) release and deliver or exchange
securities owned by the Fund in connection with any
conversion of such securities, pursuant to their terms, into
other securities;
(x) release and deliver securities owned by
the Fund for the purpose of redeeming in kind shares of the
Fund upon delivery thereof to PNC Bank; and
(xi) release and deliver or exchange
securities owned by the Fund for other corporate purposes.
PNC Bank must also receive a certified resolution describing
the nature of the corporate purpose and the name and address
of the person(s) to whom delivery shall be made when such
action is pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver
to PNC Bank certified resolutions of the Fund's Governing
Board approving, authorizing and instructing PNC Bank on a
continuous and on-going basis, to deposit in the Book-Entry
System all securities belonging to the Fund eligible for
deposit therein and to utilize the Book-Entry System to the
extent possible in connection with settlements of purchases
and sales of securities by the Fund, and deliveries and
returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with
borrowings. PNC Bank shall continue to perform such duties
until it receives Written or Oral Instructions authorizing
contrary actions(s).
To administer the Book-Entry System properly, the
following provisions shall apply:
(i) With respect to securities of the Fund
which are maintained in the Book-Entry system, established
pursuant to this sub-paragraph e hereof, the records of PNC
Bank shall identify by Book-Entry or otherwise those
securities belonging to the Fund. PNC Bank shall furnish
the Fund a detailed statement of the Property held for the
Fund under this Agreement at least monthly and from time to
time and upon written request.
(ii) Securities and any cash of the Fund
deposited in the Book-Entry System will at all times be
segregated from any assets and cash controlled by PNC Bank
in other than a fiduciary or custodian capacity but may be
commingled with other assets held in such capacities. PNC
Bank and its sub-custodian, if any, will pay out money only
upon receipt of securities and will deliver securities only
upon the receipt of money.
(iii) All books and records maintained by PNC
Bank which relate to the Fund's participation in the Book-
Entry System will at all times during PNC Bank's regular
business hours be open to the inspection of the Fund's duly
authorized employees or agents, and the Fund will be
furnished with all information in respect of the services
rendered to it as it may require.
(iv) PNC Bank will provide the Fund with
copies of any report obtained by PNC Bank on the system of
internal accounting control of the Book-Entry System
promptly after receipt of such a report by PNC Bank. PNC
Bank will also provide the Fund with such reports on its own
system of internal control as the Fund may reasonably
request from time to time.
(f) Registration of Securities. All Securities
held for the Fund which are issued or issuable only in
bearer form, except such securities held in the Book-Entry
System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name
of the Fund; PNC Bank; the Book-Entry System; a sub-
custodian; or any duly appointed nominee(s) of the Fund, PNC
Bank, Book-Entry system or sub-custodian. The Fund reserves
the right to instruct PNC Bank as to the method of
registration and safekeeping of the securities of the Fund.
The Fund agrees to furnish to PNC Bank appropriate
instruments to enable PNC Bank to hold or deliver in proper
form for transfer, or to register its registered nominee or
in the name of the Book-Entry System, any securities which
it may hold for the account of the Fund and which may from
time to time be registered in the name of the Fund. PNC
Bank shall hold all such securities which are not held in
the Book-Entry System in a separate account for the Fund in
the name of the Fund physically segregated at all times from
those of any other person or persons.
(g) Voting and Other Action. Neither PNC Bank
nor its nominee shall vote any of the securities held
pursuant to this Agreement by or for the account of the
Fund, except in accordance with Written Instructions. PNC
Bank, directly or through the use of the Book-Entry System,
shall execute in blank and promptly deliver all notice,
proxies, and proxy soliciting materials to the registered
holder of such securities. If the registered holder is not
the Fund then Written or Oral Instructions must designate
the person(s) who owns such securities.
(h) Transactions Not Requiring Instructions. In
the absence of contrary Written Instructions, PNC Bank is
authorized to take the following actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account
of the Fund, all income, dividends, distributions, coupons,
option premiums, other payments and similar items, included
or to be included in the Property, and, in addition,
promptly advise the Fund of such receipt and credit such
income, as collected, to the Fund's custodian account;
(B) endorse and deposit for collection,
in the name of the Fund, checks, drafts, or other orders for
the payment of money;
(C) receive and hold for the account of
the Fund all securities received as a distribution on the
Fund's portfolio securities as a result of a stock dividend,
share split-up or reorganization, recapitalization,
readjustment or other rearrangement or distribution of
rights or similar securities issued with respect to any
portfolio securities belonging to the Fund held by PNC Bank
hereunder;
(D) present for payment and collect the
amount payable upon all securities which may mature or be
called, redeemed, or retired, or otherwise become payable on
the date such securities become payable; and
(E) take any action which may be
necessary and proper in connection with the collection and
receipt of such income and other payments and the
endorsement for collection of checks, drafts, and other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver
or cause to be delivered Property against payment or other
consideration or written receipt therefor in the following
cases:
(1) for examination by a broker or
dealer selling for the account of the Fund in accordance
with street delivery custom;
(2) for the exchange of interim
receipts or temporary securities for definitive securities;
and
(3) for transfer of securities
into the name of the Fund or PNC Bank or nominee of either,
or for exchange of securities for a different number of
bonds,certificates, or other evidence, representing the same
aggregate face amount or number of units bearing the same
interest rate, maturity date and call provisions, if any;
provided that, in any such case, the new securities are to
be delivered to PNC Bank.
(B) Unless and until PNC Bank receives
Oral or Written Instructions to the contrary, PNC Bank
shall:
(1) pay all income items held by
it which call for payment upon presentation and hold the
cash received by it upon such payment for the account of the
Fund;
(2) collect interest and cash
dividends received, with notice to the Fund, to the Fund's
account;
(3) hold for the account of the
Fund all stock dividends, rights and similar securities
issued with respect to any securities held by PNC Bank; and
(4) execute as agent on behalf of
the Fund all necessary ownership certificates required by
the Internal Revenue Code or the Income Tax Regulations of
the United States Treasury Department or under the laws of
any State now or hereafter in effect, inserting the Fund's
name, on such certificate as the owner of the securities
covered thereby, to the extent it may lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written
or Oral Instructions establish and maintain segregated
account(s) on its records for and on behalf of the Fund.
Such account(s) may be used to transfer cash and securities,
including securities in the Book-Entry System:
(A) for the purposes of compliance by
the Fund with the procedures required by a securities or
option exchange, providing such procedures comply with the
1940 Act and any releases of the SEC relating to the
maintenance of segregated accounts by registered investment
companies; and
(B) Upon receipt of Written
Instructions, for other proper corporate purposes.
(ii) PNC Bank may enter into separate
custodial agreements with various futures commission
merchants ("FCMs") that the Fund uses ("FCM Agreement").
Pursuant to an FCM Agreement, the Fund's margin deposits in
any transactions involving futures contracts and options on
futures contracts will be held by PNC Bank in accounts ("FCM
Account") subject to the disposition by the FCM involved in
such contracts and in accordance with the customer contract
between FCM and the Fund ("FCM Contract"), SEC rules and the
rules of the applicable commodities exchange. Such FCM
Agreements shall only be entered into upon receipt of
Written Instructions from the Fund which state that:
(A) a customer agreement between the
FCM and the Fund has been entered into; and
(B) the Fund is in compliance with all
the rules and regulations of the CFTC. Transfers of initial
margin shall be made into a FCM Account only upon Written
Instructions; transfers of premium and variation margin may
be made into a FCM Account pursuant to Oral Instructions.
Transfers of funds from a FCM
Account to the FCM for which PNC Bank holds such an account
may only occur upon certification by the FCM to PNC Bank
that pursuant to the FCM Agreement and the FCM Contract, all
conditions precedent to its right to give PNC Bank such
instructions have been satisfied.
(iii) PNC Bank shall arrange for the
establishment of IRA custodian accounts for such share-
holders holding Shares through IRA accounts, in accordance
with the Fund's prospectuses, the Internal Revenue Code
(including regulations), and with such other procedures as
are mutually agreed upon from time to time by and among the
Fund, PNC Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall
settle purchased securities upon receipt of Oral or Written
Instructions from the Fund or its investment advisor(s) that
specify:
(i) the name of the issuer and the title of
the securities, including CUSIP number if applicable;
(ii) the number of shares or the principal
amount purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such
purchase; and
(vi) the name of the person from whom or the
broker through whom the purchase was made. PNC Bank shall
upon receipt of securities purchased by or for the Fund pay
out of the moneys held for the account of the Fund the total
amount payable to the person from whom or the broker through
whom the purchase was made, provided that the same conforms
to the total amount payable as set forth in such Oral or
Written Instructions.
(k) Sales of Securities. PNC Bank shall settle
sold securities upon receipt of Oral or Written Instructions
from the Fund that specify:
(i) the name of the issuer and the title of
the security, including CUSIP number if applicable;
(ii) the number of shares or principal amount
sold, and accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund
upon such sale;
(vi) the name of the broker through whom or
the person to whom the sale was made; and
(vii) the location to which the security must
be delivered and delivery deadline, if any. PNC Bank shall
deliver the securities upon receipt of the total amount
payable to the Fund upon such sale, provided that the total
amount payable is the same as was set forth in the Oral or
Written Instructions. Subject to the foregoing, PNC Bank
may accept payment in such form as shall be satisfactory to
it, and may deliver securities and arrange for payment in
accordance with the customs prevailing among dealers in
securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the
following reports:
(A) such periodic and special reports
as the Fund may reasonably request;
(B) a monthly statement summarizing all
transactions and entries for the account of the Fund,
listing the portfolio securities belonging to the Fund with
the adjusted average cost of each issue and the market value
at the end of such month, and stating the cash account of
the Fund including disbursement;
(C) the reports to be furnished to the
Fund pursuant to Rule 17f-4; and
(D) such other information as may be
agreed upon from time to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the
Fund any proxy statement, proxy material, notice of a call
or conversion or similar communication received by it as
custodian of the Property. PNC Bank shall be under no other
obligation to inform the Fund as to such actions or events.
(m) Collections. All collections of monies or
other property, in respect, or which are to become part of
the Property (but not the safekeeping thereof upon receipt
by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time
after proper demands have been made, PNC Bank shall notify
the Fund in writing, including copies of all demand letters,
any written responses, memoranda of all oral responses and
telephonic demands thereto, and await instructions from the
Fund. PNC Bank shall not be obliged to take legal action
for collection unless and until reasonably indemnified to
its satisfaction. PNC Bank shall also notify the Fund as
soon as reasonably practicable whenever income due on
securities is not collected in due course.
15. Duration and Termination. This Agreement shall
continue until terminated by the Fund or by PNC Bank on
sixty (60) days' prior written notice to the other party.
In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the
shareholders of the Fund to dissolve or to function without
a custodian of its cash, securities or other property), PNC
Bank shall not deliver cash, securities or other property of
the Fund to the Fund. It may deliver them to a bank or
trust company of PNC Bank's choice, having an aggregate
capital, surplus and undivided profits, as shown by its last
published report, of not less than twenty million dollars
($20,000,000), as a custodian for the Fund to be held under
terms similar to those of this Agreement. PNC Bank shall
not be required to make any such delivery or payment until
full payment shall have been made to PNC Bank of all of its
fees, compensation, costs and expenses. PNC Bank shall have
a security interest in and shall have a right of setoff
against Property in the Fund's possession as security for
the payment of such fees, compensation, costs and expenses.
16. Notices. All notices and other communications,
including Written Instructions, shall be in writing or by
confirming telegram, cable, telex or facsimile sending
device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address: Airport Business Center, International Court
2, 200 Stevens Drive, Lester, Pennsylvania 19113, marked for
the attention of the Custodian Services Department (or its
successor) (b) if to the Fund, at the address of the Fund;
or (c) if to neither of the foregoing, at such other address
as shall have been notified to the sender of any such notice
or other communication. If notice is sent by confirming
telegram, cable, telex or facsimile sending device, it shall
be deemed to have been given immediately. If notice is sent
by first-class mail, it shall be deemed to have been given
five days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day
it is delivered.
17. Amendments. This Agreement, or any term hereof,
may be changed or waived only by a written amendment, signed
by the party against whom enforcement of such change or
waiver is sought. 18. Delegation. PNC Bank may
assign its rights and delegate its duties hereunder to any
wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i)
PNC Bank gives the Fund thirty (30) days prior written
notice; (ii) the delegate agrees with PNC Bank to comply
with all relevant provisions of the 1940 Act; and (iii) PNC
Bank and such delegate promptly provide such information as
the Fund may request, and respond to such questions as the
Fund may ask, relative to the assignment, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and
the same instrument. 20. Further Actions. Each party
agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire
agreement and understanding between the parties and
supersedes all prior agreements and understandings relating
to the subject matter hereof, provided that the parties may
embody in one or more separate documents their agreement, if
any, with respect to delegated duties and/or Oral
Instructions. The captions in this Agreement are included
for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect
their construction or effect.
This Agreement shall be deemed to be a contract made in
Pennsylvania and governed by Pennsylvania law, without
regard to principles of conflicts of law. If any provision
of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement
shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted
assigns.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below
on the day and year first above written.
PNC BANK, NATIONAL ASSOCIATION
By:
Title:
SMITH BARNEY ARIZONA
MUNICIPALS FUND INC.
By:
Title:
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
21
INDEPENDENT AUDITORS' CONSENT
The Directors and Shareholders
Smith Barney Arizona Municipals Fund Inc.
We consent to the use of our report dated June 30,
1995, included herein and to the reference to our firm under
the captions "Financial Highlights" in the Prospectus and
"MANAGEMENT OF THE FUND, Counsel and Auditors" in the
Statement of Additional Information.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
July 26, 1995
FORM OF AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
This Services and Distribution Plan (the "Plan") is
adopted in
accordance with rule 12b-1 (the "Rule") under the Investment
Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Arizona
Municipals Fund Inc., a
Maryland coporation (the "Fund"), subject to the following
terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the
distributor of its
shares, Smith Barney Inc., a corporation organized under the
laws of the
State of Delaware ("Distributor"), a service fee under the
Plan at the
annual rate of .15% of the average daily net assets of the
Fund
attributable to the Class A shares (the "Class A Service
Fee").
(b) Service Fee for Class C shares. The Fund will pay
to the
Distributor a service fee under the Plan at the annual rate
of .15% of the
average daily net assets of the Fund attributable to the
Class C shares
(the "Class C Service Fee," and collectively with the Class
A Service Fee
and the Class B Service Fee, the "Service Fees").
(c) Distribution Fee for Class C shares. In addition
to the Class C
Service Fee, the Fund will pay the Distributor a
distribution fee under the
Plan at the annual rate of .20% of the average daily net
assets of the Fund
attributable to the Class C shares (the "Class C
Distribution Fee," and
collectively with the Class B Distribution Fee, the
"Distribution Fees").
(d) Payment of Fees. The Service Fees and Distribution
Fees will be
calculated daily and paid monthly by the Fund with respect
to the foregoing
classes of the fund's shares (each a "Class" and together
the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its
respective
Service Fees and/or Distribution Fees may be used for; (a)
costs of
printing and distributing the Fund's prospectus, statement
of additional
information and reports to prospective investors in the
Fund; (b) costs
involved in preparing, printing and distributing sales
literature
pertaining o the Fund; (c) an allocation of overhead and
other branch
office distribution-related expenses of the Distributor; (d)
payments made
to, and expenses of Smith Barney Financial Consultants and
other persons
who provide support services in connection with the
distribution of the
Fund's shares, including but not limited to, office space
and equipment,
telephone facilities, answering routine inquires regarding
the Fund,
processing shareholder transactions and providing any other
shareholder
services not otherwise provided by the Fund's Transfer
agent; and (e)
accruals for interest on the amount of the foregoing
expenses that exceed
the Distribution Fee and, in the case of Class B shares, the
contingent
deferred sales charge received by the Distributor; provided,
however, that
the Distribution Fees may be used by the Distributor only to
cover expenses
primarily intended to result in the sale of the Fund's Class
B and C
shares, including without limitation, payments to
Distributor's financial
consultants ant the time of the sale of Class B and C
shares. In addition,
Service Fees are intended to be used by the Distributor
primarily to pay
its financial consultants for servicing shareholder
accounts, including a
continuing fee to each such financial consultant, which fee
shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be
payable in
accordance with Section 1 of the Plan, with respect to a
Class until the
Plan has been approved by a vote of a least a majority of
the outstanding
voting securities of the Class. The Plan will be deemed to
have been
approved with respect to a class so longer as a majority of
the outstanding
voting securities of the Class votes for the approval of the
Plan,
notwithstanding that: (a) the Plan has not been approved by
a major of the
outstanding voting securities of any other Class, or (b) the
Plan has not
been approved by a majority of the outstanding voting
securities of the
Fund.
Section 4. Approval of Directors
Neither the Plan nor any related agreements will take
effect until
approved by a majority of both (a) the full Board of
Directors of the Fund
and (b) those Directors who are not interested persons of
the Fund and who
have not direct or indirect financial interest in the
operation of the Plan
or in any agreements related to it (the "Qualified
Directors"), cast in
person at a meeting called for the purpose of voting on the
Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each
Class until
November 7, 1995, and thereafter for successive twelve-month
periods with
respect to each Class; provided, however, that such
continuance is
specifically approved at least annually by the Directors of
the Fund and by
a majority of the Qualified Directors.
Section 6. Termination
The Plan may be terminated at any time with respect to
a Class (i) by
the Fund without the payment of any penalty, by the vote of
a majority of
the outstanding voting securities of such Class or (ii) by a
vote of the
Qualified Directors. The Plan may remain in effect with
respect to a
particular Class even if the Plan has been terminated in
accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so
as to
increase materially the amounts of the Fees described in
Section 1 above,
unless the amendment is approved by a vote of the holders of
at least a
majority of the outstanding voting securities of that class.
No material
amendment to the Plan may be made unless approved by the
Fund's Board of
Directors in the manner described in Section 4 above.
Section 8. Selection of Certain Directors
While the Plan is in effect, the selection and
nomination of the
Fund's Directors who are not interested persons of the Fund
will be
committed to the discretion of the Directors then in office
who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a
person
authorized to direct the disposition of monies paid or
payable by the Fund
pursuant to the Plan or any related agreement will prepare
and furnish to
the Fund's Board of Directors and the Board will review, at
least quarterly,
written reports complying with the requirements of the Rule,
which sets out
the amounts expended under the Plan and the purposes for
which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any
agreement relating to
the Plan and any report made pursuant to Section 9 above,
for a period of
not less than six years (the first two years in an easily
accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and
"majority of
the outstanding voting securities" will be deemed to have
the same meaning
that those terms have under the 1940 Act by the Securities
and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund
hereunder
shall not be binding upon of the Trustees, shareholders,
nominees,
officers, employees or agents, whether past, present or
future, of the
Fund, individually, but are binding only upon the assets and
property of
the Fund, as provided, as provided in the Articles of
Incorporation of the
Fund. The execution and delivery of this Plan has been
authorized by the
Directors and by shareholders of the Fund holding at least a
majority of the
outstanding voting securities and signed by an authorized
officer of the
Fund, acting as such, and neither such authorization by such
Directors and
shareholders nor such execution and delivery by such officer
be deemed to
have made by any of them individually or to impose any
liability on any of
them personally, but shall bind only the trust property or
the Fund as
provided in its Articles of Incorporation.
IN WITNESS WHEREOF, the Fund execute the Plan as of
November 7, 1994.
SMITH BARNEY ARIZONA MUNICIPALS FUND
INC.
By:_______________________
Heath B. McLendon
Chairman of the Board
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER>
<NAME> SB ARIZONA MUNICIPALS - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 65,934,871
<INVESTMENTS-AT-VALUE> 67,506,358
<RECEIVABLES> 1,617,826
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 69,124,184
<PAYABLE-FOR-SECURITIES> 2,001,650
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<OTHER-ITEMS-LIABILITIES> 676,646
<TOTAL-LIABILITIES> 2,678,296
<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 4,281,585
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<OVERDISTRIBUTION-NII> 41,120
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (246,184)
<ACCUM-APPREC-OR-DEPREC> 1,571,487
<NET-ASSETS> 66,445,888
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,903,823
<OTHER-INCOME> 0
<EXPENSES-NET> 623,962
<NET-INVESTMENT-INCOME> 3,279,861
<REALIZED-GAINS-CURRENT> (246,183)
<APPREC-INCREASE-CURRENT> 2,755,230
<NET-CHANGE-FROM-OPS> 5,788,908
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,271,075
<DISTRIBUTIONS-OF-GAINS> 286,216
<DISTRIBUTIONS-OTHER> 106,361
<NUMBER-OF-SHARES-SOLD> 759,234
<NUMBER-OF-SHARES-REDEEMED> 1,170,667
<SHARES-REINVESTED> 154,771
<NET-CHANGE-IN-ASSETS> 2,587,511
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 416,358
<OVERDISTRIB-NII-PRIOR> 40,726
<OVERDIST-NET-GAINS-PRIOR> 0
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<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> 0.54
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<ARTICLE> 6
<SERIES>
[NUMBER]
<NAME> SB ARIZONA MUNICIPALS - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
[INVESTMENTS-AT-COST] 65,934,871
[INVESTMENTS-AT-VALUE] 67,506,358
[RECEIVABLES] 1,617,826
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 69,124,184
[PAYABLE-FOR-SECURITIES] 2,001,650
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 676,646
[TOTAL-LIABILITIES] 2,678,296
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 65,161,705
[SHARES-COMMON-STOCK] 2,262,456
[SHARES-COMMON-PRIOR] 1,966,896
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 41,120
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] (246,184)
[ACCUM-APPREC-OR-DEPREC] 1,571,487
[NET-ASSETS] 66,445,888
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 3,903,823
[OTHER-INCOME] 0
[EXPENSES-NET] 623,962
[NET-INVESTMENT-INCOME] 3,279,861
[REALIZED-GAINS-CURRENT] (246,183)
[APPREC-INCREASE-CURRENT] 2,755,230
[NET-CHANGE-FROM-OPS] 5,788,908
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 964,048
[DISTRIBUTIONS-OF-GAINS] 130,136
[DISTRIBUTIONS-OTHER] 45,162
[NUMBER-OF-SHARES-SOLD] 520,204
[NUMBER-OF-SHARES-REDEEMED] 292,062
[SHARES-REINVESTED] 67,418
[NET-CHANGE-IN-ASSETS] 2,587,511
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 416,358
[OVERDISTRIB-NII-PRIOR] 40,726
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 220,638
[INTEREST-EXPENSE] 2,728
[GROSS-EXPENSE] 739,725
[AVERAGE-NET-ASSETS] 63,039,401
[PER-SHARE-NAV-BEGIN] 9.82
[PER-SHARE-NII] 0.49
[PER-SHARE-GAIN-APPREC] 0.33
[PER-SHARE-DIVIDEND] 0.49
[PER-SHARE-DISTRIBUTIONS] 0.06
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 10.09
[EXPENSE-RATIO] 1.33
[AVG-DEBT-OUTSTANDING] 44,658
[AVG-DEBT-PER-SHARE] 0.01
<ARTICLE> 6
<SERIES>
[NUMBER]
<NAME> SB ARIZONA MUNICIPALS - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> MAY-31-1995
[INVESTMENTS-AT-COST] 65,934,871
[INVESTMENTS-AT-VALUE] 67,506,358
[RECEIVABLES] 1,617,826
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 69,124,184
[PAYABLE-FOR-SECURITIES] 2,001,650
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 676,646
[TOTAL-LIABILITIES] 2,678,296
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 65,161,705
[SHARES-COMMON-STOCK] 38,253
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 41,120
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] (246,184)
[ACCUM-APPREC-OR-DEPREC] 1,571,487
[NET-ASSETS] 66,445,888
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 3,903,823
[OTHER-INCOME] 0
[EXPENSES-NET] 623,962
[NET-INVESTMENT-INCOME] 3,279,861
[REALIZED-GAINS-CURRENT] (246,183)
[APPREC-INCREASE-CURRENT] 2,755,230
[NET-CHANGE-FROM-OPS] 5,788,908
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 4,012
[DISTRIBUTIONS-OF-GAINS] 6
[DISTRIBUTIONS-OTHER] 187
[NUMBER-OF-SHARES-SOLD] 37,852
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 401
[NET-CHANGE-IN-ASSETS] 2,587,511
[ACCUMULATED-NII-PRIOR] 0
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[PER-SHARE-NII] 0.24
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</TABLE>
