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. 20 _X_
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 _X_
Amendment No. 21 _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:
_ X __ immediately upon filing pursuant to Rule 485(b)
____ on _____________, pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)
Title of
Securities
Being Registered
Proposed
Maximum
Offering
Amount Being
Registered
(1)
Proposed
Maximum
Aggregate
Price per
Unit (2)
Proposed
Maximum
Aggregate
Offering
Price (3)
Registration
Fee
Shares of common
stock par value
$0.001 per share
of Smith Barney
Arizona
Municipals Fund
Inc.
196,678
$10.04
$1,974,651.7
6
$100
(1) The shares being registered as set forth in this table are in addition
to the indefinite number of shares of beneficial interest 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 24f-2 Notice for
the fiscal year ended May 31, 1996 was filed on July 26, 1996 as Accession
No. 0000091155-96-000293.
(2) Based on Smith Barney Arizona Municipals Fund's closing price of $10.04
on September 11, 1996, pursuant to Rule 457(d) under the 1933 Act and Rule
24e-2(a) under the 1940 Act.
(3) In response to Rule 24e-2(b) under the 1940 Act: (1) the calculation of
the maximum aggregate offering price is made pursuant to Rule 24e-2; (2)
1,060,023 shares of common stock of Smith Barney Arizona Municipals Fund
were redeemed by the Fund during the fiscal year ended May 31, 1996; (3)
892,229 of such shares are being used for reductions pursuant to Rule 24f-2
during the current fiscal year; and (4) 167,794 shares are being used for
reduction in this amendment pursuant to Rule 24e-2(a).
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Registrant's Rule 24f-2 Notice for the fiscal year ended May 31,
1996 was filed on July 26, 1996.
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 B
Item 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
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
PART A
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PROSPECTUS
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SMITH BARNEY
Arizona
Municipals
Fund
Inc.
SEPTEMBER 30, 1996
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus September 30, 1996
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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
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Fund is contained in a Statement of
Additional Information dated September 30, 1996, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by
contacting a Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Smith Barney Arizona Municipals Fund Inc.
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Table of Contents
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Prospectus Summary 3
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Financial Highlights 10
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Investment Objective and Management Policies 14
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Dividends, Distributions and Taxes 24
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Purchase of Shares 26
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Exchange Privilege 33
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Redemption of Shares 36
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Minimum Account Size 39
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Performance 39
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Management of the Fund 41
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Distributor 42
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Additional Information 43
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund
or the Distributor. This Prospectus does not constitute an offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
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2
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Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary
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The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, 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 intermediate-
and long-term investment-grade municipal securities issued by the State of
Arizona and its political subdivisions, agencies, authorities and
instrumentalities, 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 rates 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."
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
3
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary (continued)
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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 distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of the Class, 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 Fund shares which, when
combined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. 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 duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the Fund. Any investment return on
these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
4
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary (continued)
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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.
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 would 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 different Classes of shares. See "Purchase of Shares" and "Management of
the Fund" for a complete description of the sales charges and service and
distribution fees for each Class of shares and "Valuation of Shares,"
"Dividends, Distributions and Taxes" and "Exchange Privilege" for other
differences between the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000. 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. For minimum investment
requirements for Class A, Class B and Class C shares and the subsequent
investment for all Classes through the Systematic Investment Plan see below.
There is no minimum investment requirement in Class A for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney.
See "Purchase of Shares."
5
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary (continued)
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SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial and subsequent
investment for shareholders purchasing shares through the Systematic Investment
Plan on a monthly basis is $25 and on a quarterly basis is $50. See "Purchase of
Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged through
its subsidiaries principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. See "Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other Smith Barney Mutual Funds at the respective net asset
value next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are generally
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. Distributions of net realized long and
short-term capital gains, if any, are declared and paid annually after the end
of the fiscal year in which they 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
6
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary (continued)
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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."
The Fund is more susceptible to factors adversely affecting issuers of
Arizona 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.
The Fund generally will invest at least 80% of its assets in securities
rated investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Corporation ("S&P"), or in unrated obligations of comparable
quality . Securities in the fourth highest rating category, though considered to
be investment grade, have speculative characteristics. Securities rated as low
as D are extremely speculative and are in actual default of interest and/or
principal payments.
There are several risks in connection with the use of 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."
7
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary (continued)
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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 based on the Fund's current operating expenses:
Class A Class B Class C Class Y
================================================================================
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None* 4.50% 1.00% None
================================================================================
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.50% 0.50% 0.50% 0.50%
12b-1 fees** 0.15 0.65 0.70 None
Other expenses*** 0.31 0.34 0.35 0.31
================================================================================
TOTAL FUND OPERATING EXPENSES 0.96% 1.49% 1.55% 0.81%
================================================================================
* 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
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares had been sold as of
May 31, 1996.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives, with respect to
Class B shares, an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution 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 that 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.
8
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
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Prospectus Summary (continued)
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During the fiscal year ended May 31, 1996, SBMFM waived investment advisory
fees and administrative fees in an amount equal to 0.071% and 0.069%,
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, 1996, as a percentage of
its average daily net assets, would have been 0.99% for Class A shares, 1.50%
for Class B shares, 1.56% for Class C shares and an estimated 0.84% for Class Y
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."
Example 1 Year 3 Years 5 Years 10 Years*
================================================================================
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A $49 $69 $91 $153
Class B 60 77 91 164
Class C 26 49 84 185
Class Y 8 26 45 100
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A $49 $69 $91 $153
Class B 15 47 81 164
Class C 16 49 84 185
Class Y 8 26 45 100
================================================================================
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
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Smith Barney Arizona Municipals Fund Inc.
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Financial Highlights
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The following information for the two-year period ended May 31, 1996 has
been audited by KPMG Peat Marwick LLP, independent accountants, whose report
thereon appears in the Fund's Annual Report dated May 31, 1996. 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
two-year period ended 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. No
information for Class Y is shown as no shares of Class Y were sold for the
period shown. For a Class A share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
5/31/96 5/31/95 5/31/94# 5/31/93 5/31/92
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ........ $ 10.09 $ 9.82 $ 10.40 $ 9.84 $ 9.63
- ----------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income+ .................. 0.53 0.54 0.54 0.58 0.59
Net Realized and Unrealized Gain/(Loss)
on Investments ........................ (0.15) 0.33 (0.38) 0.65 0.32
- ----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .......... 0.38 0.87 0.16 1.23 0.91
======================================================================================================================
Less Distributions:
Dividends from Net Investment Income .... (0.52) (0.52) (0.52) (0.57) (0.60)
Distributions in Excess of Net Investment
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 ....................... (0.52) (0.60) (0.74) (0.67) (0.70)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year .............. $ 9.95 $ 10.09 $ 9.82 $ 10.40 $ 9.84
- ----------------------------------------------------------------------------------------------------------------------
Total Return++ ............................ 3.82% 9.38% 1.33% 12.92% 9.86%
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental
Data:
Net Assets End of Year (in 000's) ....... $ 40,917 $ 43,222 $ 44,552 $ 44,055 $ 38,759
Ratio of Operating Expenses to Average
Net Assets+++ ......................... 0.82% 0.82% 0.83% 0.77% 0.68%
Ratio of Net Investment Income to Average
Net Assets ............................ 5.20% 5.37% 5.24% 5.66% 6.02%
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate ................... 22% 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, 1996, 1995, 1994,
1993, and 1992 were $0.51, $0.50, $0.52, $0.54, and $0.57, 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, 1996,
1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988 were 0.99%, 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.
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
5/31/91 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, 1991, 1990, 1989 and
1988 were $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, 1991,
1990, 1989 and 1988 were 1.13%, 2.13%, 6.20% and 2.58%, respectively.
11
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Year Year Period
Ended Ended Ended Ended
5/31/96 5/31/95 5/31/94# 5/31/93*
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.09 $ 9.82 $ 10.40 $ 9.97
- -----------------------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income+ 0.48 0.49 0.49 0.31
Net Realized and Unrealized Gain/(Loss)
on Investments (0.15) 0.33 (0.37) 0.50
- -----------------------------------------------------------------------------------------------
Total from Investment Operations 0.33 0.82 0.12 0.81
===============================================================================================
Less Distributions:
Dividends from Net Investment Income (0.47) (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
Capital Gains -- (0.00)## -- --
Distributions from Capital -- -- -- (0.01)
- -----------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.55) (0.70) (0.38)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.95 $ 10.09 $ 9.82 $ 10.40
- -----------------------------------------------------------------------------------------------
Total Return++ 3.30% 8.78% 0.84% 8.31%
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental
Data:
Net Assets End of Year (in 000's) $ 22,369 $ 22,838 $ 19,306 $ 8,149
Ratio of Operating Expenses to Average
Net Assets+++ 1.33% 1.33% 1.35% 1.33%**
Ratio of Net Investment Income to Average
Net Assets 4.69% 4.85% 4.73% 5.10%**
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 22% 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, 1996, 1995, 1994, and
the period ended May 31, 1993 were $0.46, $0.46, $0.47 and $0.29,
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, 1996,
1995, 1994, and for the period ended May 31, 1993 were 1.50%, 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.
12
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class C share outstanding throughout the period:
Year Period
Ended Ended
5/31/96 5/31/95*
================================================================================
Net Asset Value, Beginning of Period $ 10.09 $ 9.28
- --------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income+ 0.48 0.24
Net Realized and Unrealized Gain (Loss) on Investments (0.15) 0.86
- --------------------------------------------------------------------------------
Total from Investment Operations 0.33 1.10
================================================================================
Less Distributions:
Dividends from Net Investment Income (0.47) (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)#
- --------------------------------------------------------------------------------
Total Distributions (0.47) (0.29)
================================================================================
Net Asset Value, End of Period $ 9.95 $ 10.09
- --------------------------------------------------------------------------------
Total Return++ 3.26% 12.10%
- --------------------------------------------------------------------------------
Ratios to Average Net Assets/Supplemental Data:
Net Assets End of Period (in 000's) $ 554 $ 386
Ratio of Operating Expenses to Average Net Assets+++ 1.39% 1.38%**
Ratio of Net Investment Income to Average Net Assets 4.63% 4.81%**
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 22% 21%
================================================================================
* The Fund commenced selling Class C shares on December 8, 1994.
** Annualized.
+ Net investment income before voluntary waiver of fees by affiliates for the
year ended May 31, 1996, and for the period ended May 31, 1995 were $0.46
and $0.23, respectively.
++ 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 year ended May 31, 1996, and for the period ended May 31, 1995 were
1.56% and 1.56%, respectively. # Amount represents less than $0.01 per
share.
As of May 31, 1996, no Class Y shares had been sold.
13
<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. This investment objective may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares. 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. 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), but which is
subject to Arizona state personal income tax. For temporary defensive purposes,
the Fund may invest without limit in non-Arizona municipal issuers and in
"Temporary Investments" as described below.
The Fund generally will invest at least 80% of its total assets in
investment grade debt obligations rated no lower than Baa, MIG 3 or Prime-1 by
Moody's or BBB, SP-2 or A-1 by S&P, or in unrated obligations of comparable
quality. Unrated obligations will be considered to be of investment grade if
deemed by SBMFM to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers thereof are rated Baa or better by
Moody's or BBB or better by S&P. The balance of the Fund's assets may be
invested in securities rated as low as C by Moody's or D by S&P, or comparable
unrated securities, which are sometimes referred to as "junk bonds." Securities
in the fourth highest rating category, though considered to be investment grade,
have speculative characteristics. Securities rated as low as D are extremely
speculative and are in actual default of interest and/or principal payments. The
Fund will not purchase an unrated municipal security if, after such purchase,
more than 20% of the Fund's total assets would be invested in unrated municipal
securities. A description of the rating systems of S&P and Moody's is contained
in the Appendix to the Statement of Additional Information.
The Fund's average weighted maturity will vary from time to time based on
the judgment of SBMFM. The Fund intends to focus on intermediate- and long-term
obligations, that is, obligations with remaining maturities at the time of
purchase of from three to in excess of twenty years.
14
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values of
higher-rated securities, the market values of certain low-rated and comparable
unrated municipal securities also tend to be more sensitive than higher-rated
securities to short-term corporate and industry developments and changes in
economic conditions (including recession) in specific regions or localities or
among specific types of issuers. In addition, low-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
During an economic downturn or a prolonged period of rising interest rates, the
ability of issuers of low-rated and comparable unrated securities to service
their payment obligations, meet projected goals or obtain additional financing
may be impaired. The risk of loss due to default by such issuers is
significantly greater because low-rated and comparable unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. The Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings.
While the market for municipal securities is considered to be generally
adequate, the existence of limited markets for particular low-rated and
comparable unrated securities may diminish the Fund's ability to (a) obtain
accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (b) sell the securities at fair value either
to meet redemption requests or to respond to changes in the economy or in the
financial markets. The market for certain low-rated and comparable unrated
securities has not fully weathered a major economic recession. Any such
recession, however, would likely disrupt severely the market for such securities
and adversely affect the value of the securities and the ability of the issuers
of such securities to repay principal and pay interest thereon.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
thus resulting in a decreased return to the Fund.
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
15
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 or debt obligations whose issuers are located in the same state.
Sizable investments in such obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial
difficulties.
The Fund may invest without limit in "municipal leases," which generally
are participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts. Although
lease obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might
16
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 Fund may also invest in zero coupon securities. Such bonds carry an
additional risk in that, unlike bonds which pay interest throughout the period
to maturity, the Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.
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
tax-exempt when distributed to shareholders.
From time to time, proposed legislation restricting or eliminating the
Federal 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.
17
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
securities.
Additional financial considerations relating to the risks associated with
investing in Arizona Municipal Securities are summarized in the Statement of
Additional Information.
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
within 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 when-issued 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 in an amount equal to the purchase price of the Fund's
when-issued commitments. Segregated assets may consist of cash, obligations
issued or guaranteed by the United States government, its agencies or
instrumentalities or debt securities of any grade provided such assets are
liquid, unencumbered and marked to market daily. 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
securities to the seller at an agreed-upon price or yield within a specified
period prior to the
18
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
taxable money market instruments ("Temporary Investments"). In addition, when
SBMFM believes that market conditions warrant, including when acceptable Arizona
Municipal Securities are unavailable, the Fund may take a temporary defensive
posture and invest without limitation in Temporary Investments. Securities
eligible for short-term investment by the Fund are tax-exempt notes of municipal
issuers having, at the time of purchase a rating within the three highest grades
by Moody's or S&P or, if not rated, issued by issuers with outstanding debt
securities rated within the two highest grades by Moody's or S&P, and certain
taxable short-term instruments having quality characteristics comparable to
those for tax-exempt investments. 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 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
contracts 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 fixed-income securities including Treasury bonds, notes and bills,
commercial paper and certificates of deposit, as well as municipal bond indices.
19
<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
maturities 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
contract 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
indices. Options on indices are similar to options on securities except that
settlement is made in cash. No physical delivery of the underlying securities in
the 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
securities
20
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
index, it will be required to deposit and maintain with a custodian portfolio
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 contract 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, cash equivalents, U.S. government securities or debt
securities of any grade (provided such assets are liquid, unencumbered and
market to market daily) 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
maintain 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's 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 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 purchased. 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
21
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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, cash equivalents, U.S.
government securities or debt securities of any grade (provided such assets are
liquid, unencumbered and market to market daily) 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.
The Fund may write puts only if the puts are "secured." A put is "secured"
if the Fund maintains cash, cash equivalents, U.S. government securities or debt
securities of any grade (provided such assets are liquid, unencumbered and
market to market daily) 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,
22
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
provides 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
securities 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
protection of shareholders. These restrictions cannot be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities. 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. In addition, the Fund may invest up to 15% of its net assets in
instruments that are not readily marketable. 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.
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
23
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 generally 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 three
business days prior thereto. Distributions of net realized long- and short-term
capital gains, if any, are declared and paid annually after the end of the
fiscal year in which they have been earned.
If a shareholder does not otherwise instruct, dividends 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
ordinary income or capital gains and expects to pay any other distributions as
are necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions may
be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the Investment Company Act of 1940, as
amended (the "1940 Act"), and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing the
Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B 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.
24
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code and will designate and pay
exempt-interest dividends derived from interest earned on qualifying tax-exempt
obligations. Such exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes although (a) all or a portion
of such exempt-interest dividends will be a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes to
the extent 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.
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 dividends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder will also receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. These statements 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 exempt-interest dividends that is a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Shareholders should consult their tax advisors with specific reference to their
own tax situations.
25
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
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
redemptions. 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 (except for
purchases of Class Y shares by Smith Barney Concert Series Inc., for which there
is no minimum purchase amount). See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must 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.
Subsequent investments of at least $50 may be made for all Classes. For
shareholders purchasing shares through the Fund's Systematic Investment Plan on
a monthly basis, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes is
$25. For shareholders purchasing through the Fund's Systematic Investment Plan
on a quarterly basis, the minimum initial investment requirement for Class A,
Class B and Class C shares, and the minimum subsequent investment requirement
for all Classes is $50. There are no minimum investment requirements for Class A
shares of employees of Travelers and its subsidiaries, including Smith Barney,
unitholders who invest distributions from a UIT sponsored by Smith Barney, and
Trustees or Directors of any of the Smith Barney Mutual Funds, and their spouses
and children. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account by
the Fund's transfer agent, First Data Investor Services Group, Inc. ("First
Data") (formerly, The Shareholder Services Group, Inc.). Share certificates are
issued only upon a shareholder's written request to First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day (the "trade
date").
26
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Orders received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day, provided the
order is received by the Fund or Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for Fund shares is due on the third
business day (the "settlement date") after the trade date. In all other cases,
payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of $25 and $50 or more to charge an account with a bank
or other financial institution on a monthly or quarterly basis, respectively, 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 First Data.
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:
Dealers
Sales Charge as % Sales Charge as % Reallowance as
Amount of Investment of Transaction of Amount Invested % of Offering Price
================================================================================
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 * * *
================================================================================
* 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."
27
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 includes
an individual, his or her spouse and children, or a trustee 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 offered with a sales charge held in funds sponsored by Smith
Barney 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 to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company 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 another Smith Barney Mutual Fund 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; (f)
investments of distributions from a UIT sponsored by Smith Barney; (g) purchases
through programs offered by Travelers Group Diversified Distribution Services
Inc. by employees of participating employers; and
28
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
(h) purchases by investors participating in a Smith Barney fee based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the Fund and of funds sponsored by Smith Barney that are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth 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
29
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
than acquiring Fund shares at a discount and (c) satisfies uniform criteria
which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund and
the members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney. In
order to obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for 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 First Data 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 purchased to date
will be transferred to Class A shares, where they will be subject to all fees
(including a service fee of 0.15%) and expenses applicable to the Fund's Class A
shares, which may include a CDSC of 1.00%. Please contact First Data or a Smith
Barney Financial Consultant for further information.
30
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares 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 aggregated
and deemed to have been made on the last day of the preceding Smith Barney
statement month. The following table sets forth the rates of the charge for
redemptions of Class B shares by shareholders.
Year Since Purchase
Payment was Made CDSC
================================================================================
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 0.00%
================================================================================
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. 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
31
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Class B shares (other than Class B Dividend Shares) owned by the shareholder.
Shareholders who held Class B shares of Smith Barney Shearson 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 Arrangements -- Class B Shares Conversion
Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following
32
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following Smith Barney Mutual Funds, to the extent shares are offered for sale
in the shareholder's state of residence. Exchanges of Class A, Class B and Class
C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income 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
33
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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. -- 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 Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds-- Limited Term Portfolio
Smith Barney Muni Funds-- National Portfolio
Smith Barney Muni Funds-- New York Portfolio
Smith Barney Muni Funds-- Ohio Portfolio
Smith Barney Muni Funds-- Pennsylvania Portfolio
Smith Barney New Jersey 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
34
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc. -- Balanced Portfolio
Smith Barney Concert Series Inc. -- Conservative Portfolio
Smith Barney Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Series Inc. -- High Growth Portfolio
Smith Barney Concert Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
** Smith Barney Money Funds, Inc. -- Retirement Portfolio
++ Smith Barney Municipal Money Market Fund, Inc.
++ Smith Barney Muni Funds--California Money Market Portfolio
++ Smith Barney Muni Funds--New York Money Market Portfolio
- ----------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund. ++
Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder 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, the Fund may, at
its discretion, decide
35
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
to limit additional purchases and/or exchanges by a shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a) redeem his or
her shares 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.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the 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 day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under the
1940 Act in
36
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data Investor 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 registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000, must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data 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 First Data receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive
37
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemption on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset value
next determined. Redemption of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
38
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
Additional Information Regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid 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
39
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
The equivalent taxable yield demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield for
each Class. It is calculated by increasing the yield shown for the Class to the
extent necessary to reflect the payment of taxes at specified tax rates. Thus,
the equivalent taxable yield always will exceed the Fund's yield.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gains 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 by
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 or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of 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 information may include
data from Lipper Analytical Services, Inc. or similar independent services that
monitor the performance of mutual funds or other industry publications.
40
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
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 August 31, 1996, in excess of $77 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 an investment
advisory fee at the annual rate of 0.30% of the Fund's average daily net assets.
Prior to November 17, 1995, the Fund paid SBMFM an investment advisory 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, 1996, SBMFM was paid investment
advisory fees equal to 22.9% 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 managing
the day-to-day operations of the Fund, including making all investment
decisions.
41
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended May 31, 1996 is included in the
Annual Report dated May 31, 1996. A copy of the Annual Report may be obtained
upon request and without charge from a Smith Barney Financial Consultant or by
writing or calling the Fund at the address or phone number listed on page one of
this prospectus.
ADMINISTRATOR
SBMFM serves as the Fund's administrator and oversees all aspects of the
Fund's administration . For administration services rendered, the Fund pays
SBMFM a fee at the following annual rates of average daily net assets: 0.20% to
$500 million and 0.18% in excess of $500 million. For the fiscal year ended May
31, 1996, SBMFM was paid administration fees equal to 13.1% 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 value of the average daily net assets of the respective Class.
Smith Barney is also paid an annual distribution fee with respect to Class B and
Class C shares at the annual rate of 0.50% and 0.55%, respectively, of the
average daily net assets attributable to those Classes. Class B shares which
automatically convert to Class A shares eight years after the date of original
purchase, will no longer be subject to a distribution fee. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and overhead costs of
Smith Barney in connection with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
42
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services 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, if any, 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 meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940
43
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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
vote on a Fund-wide basis on all matters except matters affecting only the
interests of one Class.
PNC Bank, National Association, is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, and serves as custodian of the Fund's
investments.
First Data is located at Exchange Place, Boston, Massachusetts 02109, and
serves as transfer agent of the Fund.
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.
44
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [Logo]
Smith Barney
Arizona
Municipals
Fund
Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
FD 0238 9/96
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
PART B
Smith Barney
Arizona Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information September 30, 1996
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 September 30, 1996, as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or
telephone number set forth above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference the same section headings are used in both the
Prospectus and the Statement of Additional Information, except where shown
below:
Management of the
Fund.......................................................................
........ 1
Investment Objective and Management
Policies............................................. 5
Municipal Bonds (See in the Prospectus "Investment Objective and
Management
Policies'')...................................................................
.............. 11
Purchase of
Shares........................................................................
................ 13
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'').............. 21
Additional
Information................................................................
.................. 24
Financial
Statements.................................................................
.................... 24
Appendix...................................................................
................................... A1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
Name Service
Smith Barney Inc.
("Smith Barney'').......................................................
Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM'')...............................................................
Investment Adviser and
PNC Bank, National Association Administrator
("PNC'').....................................................................
Custodian
First Data Investor Services Group, Inc.
("First
Data'')...............................................................
Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund, together with
information as to their principal business occupations during the past five
years, are shown below. Each Director who is an "interested person'' of the
Fund, as defined in the Investment Company Act of 1940, as amended (the "1940
Act''), is indicated by an asterisk.
Herbert Barg, Director (Age 73). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred J. Bianchetti, Director (Age 73). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07446.
Martin Brody, Director (Age 75). Vice Chairman of the Board of Restaurant
Associates Corp.; His address is HMK Associates, 30 Columbia Turnpike, Florham
Park, New Jersey 07932.
Dwight B. Crane, Director (Age 58). Professor, Graduate School of Business
Administration, Harvard University; Business Consultant. His address is
Graduate School of Business Administration, Harvard University, Morgan Hall
#371, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 65). 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 45 Rockefeller Plaza, New York, New York 10111.
Elliot S. Jaffe, Director (Age 70). Chairman of the Board and Chief
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan Drive,
Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 64). Attorney. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 66). Financial Consultant. His address is
200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 63).
Managing Director of Smith Barney and Chairman of Smith Barney Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers''), Vice Chairman of Shearson
Asset Management Division; a Director of PanAgora Asset Management, Inc. and
PanAgora Asset Management Limited. Mr. McLendon is Chairman of the Board and
Investment Officer of 42 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 62). Chairman of the Board, Cornelius
C. Rose Associates, Inc., financial consultants, and Chairman of Performance
Learning Systems, an educational consultant. His address is P.O. Box 355, Fair
Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Director emeritus (Age 89). Attorney; formerly Justice of
the Supreme Court of the State of New York. His address is 118 East 60th
Street, New York, New York 10022.
Jessica M. Bibliowicz, President (Age 36). 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 serves as President of 40 Smith
Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New York
10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39). Managing
Director of Smith Barney; Director and Senior Vice President of SBMFM. Mr.
Daidone serves as Senior Vice President and Treasurer of 42 Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer (Age 48).
Investment Officer of SBMFM; prior to July 1993, Managing Director of Shearson
Lehman Advisors, the predecessor to SBMFM. Mr. McDermott also serves as
Investment Officer of 11 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM. Ms. Sydor serves as Secretary of 42
Smith Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New
York 10013.
As of July 12, 1996, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding common stock of the Fund. As of July 12,
1996, 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.
Each Director also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney serves as distributor. 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 $1,000 per annum
plus $100 per in-person meeting and $100 per telephonic meeting. Each
Director emeritus who is not an officer, director or employee of Smith Barney
or any of its affiliates receives a fee of $500 per annum plus $50 per meeting
attended. All Directors are reimbursed for travel and out-of-pocket expenses
incurred to attend such meetings.
For the fiscal year ended May 31, 1996, the Directors of the Fund were paid
the following compensation:
Aggregate Compensation
Aggregate Compensation from the Smith
Barney
Director (*) from the Fund
Mutual Funds ***
Herbert Barg (18)................................ $1,500
$48,850
Alfred J. Bianchetti(13)....................... 1,500
48,750
Martin Brody (20)............................... 1,400
47,450
Dwight B. Crane (24).......................... 1,500
48,750
Burt N. Dorsett (13)........................... ------
-------
Elliot S. Jaffe (13)............................... 1,500
51,250
Stephen E. Kaufman (14)..................... 1,500
48,950
Joseph J. McCann (13)........................ 1,500
48,850
Heath B. McLendon (41)..................... ------
-------- Cornelius C. Rose (13)........................
1,500 52,200
James J. Crisona (10)**....................... 750
16,575
_____________________
* Number of directorships/trusteeships held with other 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.
*** Reflects compensation paid during the calendar year ended December 31,
1995.
Pursuant to the Fund's deferred compensation plan, Mr. Dorsett has elected
to defer some or all of the compensation due to him from the Fund for the
1996 calendar year.
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'').) Holdings is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers''). The advisory
agreement is dated July 30, 1993 (the "Advisory Agreement'') and was most
recently approved by the Board of Directors, including a majority of those
Directors who are not "interested persons'' of the Fund or SBMFM ("Independent
Directors"), on July 17, 1996. 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 and bears all expenses in connection with the performance
of its services.
Effective November 17, 1995, the Fund pays SBMFM a fee for investment
advisory services at the annual rate of 0.30% of the value of its daily net
assets. Prior to November 17, 1995, as compensation for investment advisory
services, the Fund paid 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 1994, 1995 and
1996 fiscal years, the Fund $212,048, $220,638 and $218,249, respectively, in
investment advisory fees. SBMFM and its predecessors voluntarily waived
investment advisory fees for the fiscal years ended May 31, 1994, 1995 and
1996 in the amounts of $85,477, $73,668 and $64,184, 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 Independent Directors on July 17, 1996. Prior to April 20, 1994, The
Boston Company Advisors, Inc. ("Boston Advisors") served as administrator to
the Fund and from April 21, 1994 through June 16, 1995 served as sub-
administrator to the Fund. Under the sub-administration agreement, Boston
Advisors was paid a portion of the administration fee paid by the Fund to
SBMFM at a rate agreed upon from time to time between SBMFM and Boston
Advisors. 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
received a fee paid monthly at the following annual percentage of average
daily net assets: 0.20% up to $500 million; and 0.18% thereafter. For the
fiscal years ended May 31, 1994, 1995 and 1996 the Fund paid SBMFM $72,326,
$83,984 and $88,133, respectively, in administration fees. SBMFM and its
predecessors voluntarily waived administrative fees for the fiscal years ended
May 31, 1994, 1995 and 1996 in the amounts of $48,844, $42,095 and $46,226,
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 maintaining corporate existence; costs
of investors services (including allocated telephone and personnel expenses);
costs of preparation and printing of prospectuses for regulatory purposes and
for distribution to existing shareholders; costs of shareholders' reports and
shareholder meetings; and meetings of the officers or Board of Directors of
the Fund.
SBMFM and the Fund have 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. No fee reduction
was required for the 1994, 1995 and 1996 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Independent
Directors have selected Stroock & Stroock & Lavan as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as the Fund's independent auditor to examine and report on the Fund's
financial statements and highlights for the fiscal year ending May 31, 1997.
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.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in municipal securities rated no lower that Baa, MIG 3 or Prime-1
by Moody's Investors Service, Inc. ("Moody's") or BBB, SP-2 or A-1 by Standard
& Poor's Corporation ("S&P") or unrated obligations of comparable quality. The
balance of the Fund's assets may be invested in securities rated as los as C
by Moody's or D by S&P. A description of the ratings of Moody's and S&P is
contained in the Appendix to this Statement of Additional Information.
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. To the extent the Fund
invests in lower rated and comparable unrated securities, the Fund's
achievement of its investment objective may be more dependent on SBMFM's
credit analysis of such securities than would be the case for a portfolio
consisting entirely of higher rated securities.
Subsequent to its purchase by the Fund, an issue of securities may cease
to be rated or its rating may be reduced below the rating given at the time
the securities were acquired by the Fund. Neither event will require the sale
of such 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.
The Fund generally may investment up to 20% of its total assets in
securities rated below Baa, MIG 3 or Prime-1 (P-1) by Moody's or BBB, SP-2 or
A-1 by S&P, or in unrated securities of comparable quality. Such securities
(a) will likely have the some quality and protective characteristics that, in
the judgment of the rating organization, are outweighed by large uncertainties
or major risk exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations.
Zero coupon securities involve special considerations. Zero coupon
securities are debt obligations which do not entitle the holder to any
periodic payments of interest prior to maturity of a specified cash payment
date when the securities begin paying current interest (the "cash payment
date") and therefore are issued and traded at a discount from their face
amounts or par values. The discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. The market prices
of zero coupon securities generally are more volatile than the market prices
of other debt securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do debt
securities having similar maturities and credit quality. The credit risk
factors pertaining to low-rated securities also apply to low-rated zero coupon
bonds. Such zero coupon bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Fund will realize no
cash until the cash payment date unless a portfolio of such securities is sold
and, if the issuer defaults, the Fund may obtain no return at all on its
investment.
Current Federal income tax laws may require the holder of a zero coupon
security to accrue income with respect to that security prior to the receipt
of cash payments. To maintain its qualification as a registered investment
company and avoid liability for Federal income taxes, the Fund may be required
to distribute income accrued with respect to zero coupon securities and may
have to dispose of portfolio securities under disadvantageous circumstances in
order to generate cash to satisfy these distribution requirements.
When-Issued Purchases and Firm Commitment Agreements. When the Fund
purchases new issues of municipal securities on a when-issued basis, a
segregated account equal to the amount of the commitment will be established
by the Fund's custodian. The segregated assets may consist of cash,
obligations issued or guaranteed by the United States government, its agencies
or instrumentalities ("U.S. government securities"), equity securities or debt
securities of any grade so long as such assets are liquid, unencumbered and
marked to market daily. 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
when-issued 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 in an aggregate value
sufficient to make payment for the securities. The segregated assets may
consist of cash, U.S. government securities, equity securities or debt
obligations of any grade so long as such assets are liquid , unencumbered and
marked to market daily.
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 tax-exempt 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. When the Fund is maintaining a defensive
position, the Fund may invest in short-term investments ("Temporary
Investments") consisting of tax-exempt securities in the form of notes of
municipal issuers having, at the time of purchase, a rating within the three
highest grades of Moody's or S&P or, if not rated, having an issue of
outstanding municipal bonds of Arizona issuers rated within the three highest
grades by Moody's or S&P and certain taxable short-term instruments having
quality characteristics comparable to those for tax-exempt investments. The
Fund may invest in Temporary Investments for defensive reasons in anticipation
of a market decline. At no time will more than 20% of the Fund's total assets
be invested in Temporary Investments unless the Fund has adopted a defensive
investment policy. The Fund intends, however, to purchase tax-exempt
Temporary Investments pending the investing of the proceeds of the sale of
portfolio securities or shares of the Fund's common stock, or in order to have
highly liquid securities available to meet anticipated redemptions. For the
fiscal year ended May 31, 1996, the Fund did not invest in taxable Temporary
Investments.
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 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 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 agreed-upon date. Under the terms of a
typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period of time (usually not more than seven
days) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. Under each repurchase agreement,
the selling institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays
or restrictions upon the Fund's ability to dispose of the underlying
securities, the risk of a possible decline in the value of the underlying
securities during the period in which the Fund seeks to assert its rights to
them, the risk of incurring expenses associated with asserting those rights
and the risk of losing all or part of the income from the agreement. In
evaluating these potential risks, 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.
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 the approval of the holders of a majority of the
outstanding shares of the Fund, defined as the lesser of (a) 67% of the Fund's
shares present at a meeting, if the holders of more than 50% of the
outstanding shares 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 Fund's Board of Directors at any time.
The Fund may 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 delayed-delivery basis; (b) purchasing or selling futures
contracts and options on futures contracts and other similar instruments; and
(c) issuing separate classes of shares.
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 Board approval 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
Newly issued securities normally are purchased directly from the issuer
or from an underwriter acting as principal. Other purchases and sales usually
are placed with those dealers from which it appears the best price or
execution will be obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters of newly
issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers normally
are executed at a price between the bid and asked prices. The Fund paid no
brokerage commissions for the 1994, 1995 and 1996 fiscal years.
Allocation of transactions, including their frequency, to various
dealers is determined by SBMFM in its best judgment and in a manner deemed
fair and reasonable to shareholders. The primary considerations are
availability of the desired security and the prompt execution of orders in an
effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment research and
statistical or other services to SBMFM may receive orders for portfolio
transactions by the Fund. Information so received enables SBMFM to supplement
its own research and analysis with the views and information of other
securities firms. Such information may be useful to SBMFM in serving both the
Fund and other clients, and conversely, supplement information obtained by the
placement of business of other clients may be useful to SBMFM in carrying out
its obligations to the Fund.
The Fund will not purchase municipal bonds during the existence of any
underwriting or selling group relating thereto of which Smith Barney is a
member, except to the extent permitted by the Securities and Exchange
Commission ("SEC"). Under certain circumstances, the Fund may be at a
disadvantage because of this limitation in comparison with other investment
companies which have a similar investment objective but which are not subject
to such limitation.
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 or received
by the Fund or the size of the position obtained or disposed of by the Fund.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of purchases or sales of
portfolio securities during the year, excluding purchases or sales of short-
term securities, divided by the monthly average value of portfolio securities)
generally is not expected to exceed 100%, but the portfolio turnover rate will
not be a limiting factor whenever the Fund deems it desirable to sell or
purchase securities. Securities may be sold in anticipation of a rise in
interest rates (market decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In addition, a security may be
sold and another security of comparable quality may be purchased at
approximately the same time in order to take advantage of what the Fund
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for or supply of
various types of tax-exempt securities. For the fiscal years ending May 31,
1994, 1995 and 1996, the Fund's portfolio turnover rates were 49%, 21% and 22
%, 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 finance privately operated facilities are included
within the term municipal bonds if the interest paid thereon qualifies as
excludable from gross income (but not necessarily from alternative minimum
taxable income) for Federal income tax purposes in the opinion of bond counsel
to the issuer.
The yields on municipal bonds are dependent upon a variety of factors,
including general economic and monetary conditions, general money market
conditions, general conditions of the municipal bond market, the financial
condition of the issuer, the size of a particular offering, the maturity of
the obligation offered and the rating of the issue.
Municipal bonds also are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, that may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of 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.
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 the Fund's investments in
Arizona municipal securities are summarized below. This summary information is
derived principally from official statements and prospectuses relating to
securities offerings of the State of Arizona and various local agencies in
Arizona, available as of the date of this Statement of Additional Information
and does not purport to be a complete description of any of the considerations
mentioned herein. The accuracy and completeness of the information contained
in such official statements and documents has not been independently verified
and this summary is qualified by reference to the information from such
documents.
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. Industry and construction continued to lead earnings
growth, though its annual increase was down to 15% from the 24% registered in
1994; its year-end 1995 growth rate was only 11%. Farming, mining and services
all experienced above average growth rates in 1995. The slowest growth was in
all sectors of government. The manufacturing industry also posted subpar
numbers.
In the four years after the 1990-91 recession, earnings growth in
Arizona was greatest in construction and FIRE (finance, insurance and real
estate). The difference from the national average also was greatest in these
two industries. Manufacturing, mining and government had the least growth
over the four years. State and local government was the only sector whose
gains were not well above the national average. Retail sales growth in
Arizona in early 1996 continued at about the same pace experienced since early
1995. Gains continued to be stronger in Maricopa County than in the rest of
the State.
Unemployment levels fell slightly between March 1996 and April 1996 in
Arizona, as job creation continued to keep Arizona's economy strong. The
State's seasonally adjusted unemployment rate fell from 4.9% in March 1996 to
4.8% in April 1996. The torrid pace of job growth has clearly slowed in
recent months. While the State remains among the fastest growing in the
nation, in the last 12 months Arizona employers have created 70,000 jobs for a
growth rate of 3.9%. Over a comparable period a year ago, 98,000 jobs were
created for a growth rate of 5.8%.
Due to the diversification of Arizona's economy and the development of
expanded tourism opportunities the State's economy is becoming less seasonal
in nature. This provides better options for both employers and employees.
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. Effective January 1, 1996, the State's 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 square-mile
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 rights-of-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) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Code; and (f) a trustee or other professional
fiduciary (including a bank, or an investment adviser registered with the SEC
under the Investment Advisers Act of 1940, as amended) purchasing shares of
the Fund for one or more trust estates or fiduciary accounts. Purchasers who
wish to combine purchase orders to take advantage of volume discounts should
contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in Class A
shares of the Fund and in Class A shares of other Smith Barney Mutual Funds
that are offered with a sales charge, including the purchase being made, of
any purchaser is $25,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of appropriate
records. The Fund reserves the right to terminate or amend the combined right
of accumulation at any time after written notice to shareholders. For further
information regarding the right of accumulation, shareholders should contact a
Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of the Fund is equal to the net
asset value per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The
public offering price for a Class B and Class C share (and Class A share
purchases, including applicable rights of accumulation, equaling or exceeding
$500,000), is equal to the net asset value per share at the time of purchase
and no sales charge is imposed at the time of purchase. A contingent deferred
sales charge ("CDSC''), however, is imposed on certain redemptions of Class B
and Class C shares, and Class A shares when purchased in amounts exceeding
$500,000. The method of computation of the public offering price is shown in
the Fund's financial statements, incorporated by reference in their entirety
into this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange, Inc. ("NYSE'') is
closed (other than for customary weekend and holiday closings), (b) when
trading in markets the Fund normally utilizes is restricted, or an emergency
exists, as determined by the SEC, so that disposal of the Fund's investments
or determination of net asset value is not reasonably practicable or (c) for
such other periods as the SEC by order may permit for protection of the Fund's
shareholders.
Distribution in Kind
If the Board of Directors of the Fund determines that it would be detrimental
to the best interests of the remaining shareholders 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 that
are subject to a CDSC.) To the extent withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund,
there will be a reduction in the value of the shareholder's investment, and
continued withdrawal payments will reduce the shareholder's investment and may
ultimately exhaust it. Withdrawal payments should not be considered as income
from investment in the Fund. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in the Fund at
the same time he or she is participating in the Withdrawal Plan, purchases by
such shareholder in amounts of less than $5,000 ordinarily will not be
permitted. All dividends and distributions on shares in the Withdrawal Plan
are reinvested automatically at net asset value in additional shares of the
Fund.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates with
First Data as agent for Withdrawal Plan members. All other investors should
contact a Smith Barney Financial Consultant. A shareholder who purchases
shares directly through First Data may continue to do so and applications for
participation in the Withdrawal Plan must be received by First Data no later
than the eighth day of the month to be eligible for participation beginning
with that month's withdrawal.
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 17, 1996. For the fiscal
years ended May 31, 1994, 1995 and 1996, Shearson Lehman Brothers (the Fund's
distributor prior to Smith Barney) and/or Smith Barney received, $77,285,
$50,874 and $62,000, respectively, in sales charges from the sale of the
Fund's Class A shares, and did not reallow any portion thereof to dealers. For
the fiscal years ended May 31, 1994, 1995 and 1996, Shearson Lehman Brothers
and its successor, Smith Barney, received $19,460, $29,071 and $55,000,
respectively, representing CDSC on redemptions of the Fund's Class B shares.
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 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 they are 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.
For the fiscal year ended May 31, 1996, Smith Barney incurred distribution
expenses totaling approximately $161,882, consisting of approximately $21,402
for advertising, $2,897 for printing and mailing of prospectuses, $84,372 for
support services, $49,434 to Smith Barney Financial Consultants, and $3,777,
for accruals for interest on the excess of Smith Barney expenses incurred in
distribution of the Fund's shares over the sum of the distribution fees and
CDSC received by Smith Barney from the Fund.
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 those 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 1994, 1995 and 1996 fiscal years, Class A shares incurred
$68,366, $64,130 and $65,532, respectively, in services fees. For the 1994,
1995 and 1996 fiscal years, the Class B shares incurred $22,765, $30,291 and
$34,447, respectively, in service fees. For the same periods, Class B shares
incurred $75,884, $100,968 and $114,824, respectively, in distribution fees.
For the period from November 14, 1994 through May 31, 1995, and for the fiscal
year ended, May 31, 1996, Class C shares incurred $138 and $783 in services
fees, respectively. For the period from November 14, 1994 through May 31,
1995 and for the fiscal year ended May 31, 1996, Class C shares incurred $507
and $2,872 in distribution fees, respectively.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Fund's Board of Directors,
including a majority of the Independent Directors who have no direct or
indirect financial interest in the operation of the Plan or in the
Distribution Agreement. The Plan may not be amended to increase the amount of
the service and distribution fees without shareholder approval, and all
material amendments of the Plan also must be approved by the Directors and the
Independent Directors in the manner described above. The Plan may be
terminated with respect to a Class at any time, without penalty, by vote of a
majority of the Independent Directors or by a vote of a majority of the
outstanding voting securities of the Class (as defined in the 1940 Act).
Pursuant to the Plan, Smith Barney will provide the Board of Directors with
periodic reports of amounts expended under the Plan and the purpose for which
such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE currently is
scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively. Because of the differences in distribution
fees and Class-specific expenses, the per share net asset value of each Class
may differ. The following is a description of the procedures used by the Fund
in valuing its assets.
The valuation of the Fund's assets is made by SBMFM after consultation with
an independent pricing service (the "Service'') approved by the Board of
Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and 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 interest of the Fund to do
so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of certain Smith Barney Mutual Funds 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, 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 First Data 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 be included in
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' 30-day yield which is tax-
exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the Class' yield that is not tax-exempt.
The yields on municipal securities are dependent upon a variety of factors,
including general economic and monetary conditions, conditions of the
municipal securities market, size of a particular offering, maturity of the
obligation offered and rating of the issue. Investors should recognize that in
periods of declining interest rates the Fund's yield for each Class of shares
will tend to be somewhat higher than prevailing market rates, and in periods
of rising interest rates the Fund's yield for each Class of shares will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Fund from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the balance of
the Fund's portfolio, thereby reducing the current yield of the Fund. In
periods of rising interest rates, the opposite can be expected to occur.
The Fund's yield for Class A, Class B and Class C shares for the 30-day
period ended May 31, 1996 was 4.95%, 4.65% and 4.63%, respectively. The
equivalent taxable yield for Class A, Class B and Class C shares for that same
period was 9.03%, 8.49% and 8.45%, respectively, assuming the payment of
Federal income taxes at a rate of 39.6% and Arizona taxes at a rate of 5.6%.
Average Annual Total Return
"Average annual total return'' figures 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 average annual total return for Class A shares was as follows for the
periods indicated:
(0.33)% for the one-year period beginning June 1, 1995 through May 31,
1996.
6.50% per annum during the five-year period beginning June 1, 1991
through May 31, 1996.
6.94% per annum during the period from the Fund's commencement of
operations on June 1, 1987 through May 31, 1996.
These Class A average annual total return figures assume that the maximum
4.00% sales charge 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 3.82%, 7.38% and 7.42%, respectively, for those same
periods.
The average annual total return for Class B shares was as follows for the
periods indicated:
(1.20)% for the one-year period beginning June 1, 1995 through May 31,
1996.
5.42% per annum for the period beginning November 6, 1992 through May 31,
1996.
These average annual total return figures assume that the maximum
applicable 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 3.30% and 5.91%,
respectively, for those same periods.
The average annual total return on the Fund's Class C shares since
inception would have been 10.39% with or without the CDSC.
Aggregate Total Return
"Aggregate total return" figures 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):
(0.33)% for the one-year period beginning June 1, 1995 through May 31,
1996.
37.04% for the five-year period beginning June 1, 1991 through May 31,
1996; and
82.95% for the period from the Fund's commencement of operations on June
1, 1987 through May 31, 1996.
These aggregate total return figures assume that the maximum 4.00% sales
charge has been deducted from the investment at the time of purchase. If the
maximum sales charge had not been deducted, Class A's aggregate total return
(reflecting the partial waiver of the investment advisory and sub-investment
advisory and/or administration fees for those same periods) would have been
3.82%, 42.73% and 90.57%, respectively.
The Fund's aggregate total return for Class B shares was as follows for the
periods indicated:
(1.20)% for the one-year period beginning June 1, 1995 through May 31,
1996.
20.72% for the period from inception (November 6, 1992) through May 31,
1996.
These aggregate total return figures assume that the maximum applicable
CDSC has been deducted from the investment at the time of redemption. If the
investment advisory and sub-investment advisory and/or administration fees had
not been partially waived and the maximum CDSC had not been deducted at the
time of redemption, the Fund's aggregate total returns for the same periods
would have been 3.30% and 22.71%, respectively.
The Fund's aggregate total return for Class C shares was as follows for the
period indicated:
2.26% for the one-year period beginning June 1, 1995 through May 31,
1996.
15.75% for the period from inception (November 14, 1994) through May 31,
1996.
These aggregate total return figures assume that the maximum 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, Class
C's aggregate total return for the same periods would have been 3.26% and
15.75%, respectively.
Performance will vary from time to time depending upon market conditions,
the composition of the Fund's portfolio and operating expenses and the
expenses exclusively attributable to the Class. Consequently, any given
performance quotation should not be considered representative of the Class'
performance for any specified period in the future. Because the performance
will vary, it may not provide a basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a fixed yield for a
stated period of time. Investors comparing a Class' performance with that of
other mutual funds should give consideration to the quality and maturity of
the respective investment companies' portfolio securities. 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.
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
tax-exempt institutions, qualified retirement plans, H.R. 10 plans and
individual retirement accounts since such investors would not gain any
additional tax benefit from the receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each year as a
"regulated investment company'' under the Code. Provided that the Fund (a)
qualifies as a regulated investment company and (b) distributes at least 90%
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 and state income taxes to
the extent its taxable net investment income and its net realized short-term
and long-term capital gains, if any, are distributed to shareholders. Any such
taxes paid by the Fund would reduce the amount of income and gains available
for distribution to shareholders.
Because the Fund will distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry Fund shares is not
deductible for Federal income and Arizona personal income tax purposes. If a
shareholder receives exempt-interest dividends 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,
to the extent of the exempt-interest dividend, may be disallowed. In addition,
the Code may require a shareholder, if he or she receives exempt-interest
dividends, to treat as taxable income, a portion of certain otherwise non-
taxable social security and railroad retirement benefit payments. Furthermore,
that portion of any dividends paid by the Fund which represents income derived
from private activity bonds held by the Fund may not retain its Federal tax-
exempt status in the hands of a shareholder who is a "substantial user'' of a
facility financed by such bonds, or a "related person'' thereof. Moreover, as
noted in the Fund's Prospectus, (a) some or all of the Fund's dividends and
distributions may be a specific tax preference item, or a component of an
adjustment item, for purposes of the Federal individual and corporate
alternative minimum taxes, and (b) the receipt of the Fund's 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 as to 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 will increase or decrease the amount
of long-term and short-term capital gains or losses realized by the Fund and,
accordingly, would affect the amount of capital gains distributed to the
Fund's shareholders.
For Federal income tax purposes, gain or loss on the futures contracts and
options described above (collectively referred to as "section 1256
contracts'') is taxed pursuant to a special "mark-to-market'' system. Under
the mark-to-market system, these instruments are treated as if sold at the
Fund's fiscal year end for their fair market value. As a result, the Fund will
be recognizing gains or losses before they are actually realized. As a general
rule, gain or loss on section 1256 contracts generally is treated as 60% long-
term capital gain or loss and 40% short-term capital gain or loss, and,
accordingly, the mark-to-market system generally will 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 certain realized 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 to shareholders after the close of the
Fund's 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 relating to exempt-interest
dividends) on the sale or exchange of such share will be treated as a long-
term capital loss to the extent of the capital gain dividend.
If 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
will not be taken into account when computing gain or loss on the original
shares to the extent the subsequent sales charge is 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, will 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 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 specific 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. In the event 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 for that
year.
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 to the Fund 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
interest-bearing obligations, obligations issued at a discount, financial
options, futures, forward contracts or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
related bond 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 interest-bearing obligations, obligations issued at a discount or
bond indices related thereto 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 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 and 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 custodian of the Fund. Under the custody agreement, PNC
holds the Fund's portfolio securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon the month-end
market value of securities held in custody and also receives securities
transaction charges. The assets of the Fund are held under bank custodianship
in compliance with the 1940 Act.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent. Under the transfer agency agreement, First Data
maintains the shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and distributes dividends and
distributions payable by the Fund. For these services, First Data receives a
monthly fee computed on the basis of assets of 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, 1996, accompanies
this Statement of Additional Information and is incorporated herein by
reference in its entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue bonds.
General obligation bonds are usually secured by all resources available to the
municipality and the factors outlined in the rating definitions below are
weighed in determining the rating. Because revenue bonds in general are
payable from specifically pledged revenues, the essential element in the
security for a revenue bond is the quantity and quality of the pledged
revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality of
general obligation bond credit is usually appropriate in the rating analysis
of a revenue bond, other factors are important, including particularly the
competitive position of the municipal enterprise under review and the basic
security covenants. Although a rating reflects S&P's judgment as to the
issuer's capacity for the timely payment of debt service, in certain instances
it may also reflect a mechanism or procedure for an assured and prompt cure of
a default, should one occur, i.e., an insurance program, Federal or state
guarantee or the automatic withholding and use of state aid to pay the
defaulted debt service.
AAA
Prime -- These are obligations of the highest quality. They have the strongest
capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong,
due to the competitive position of the municipal enterprise or to the nature
of the revenues. Basic security provisions (including rate covenant, earnings
test for issuance of additional bonds, and debt service reserve requirements)
are rigorous. There is evidence of superior management.
AA
High Grade -- The investment characteristics of general obligation and revenue
bonds in this group are only slightly less marked than those of the prime
quality issues. Bonds rated AA have the second strongest capacity for payment
of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category are
regarded as safe. This rating describes the third strongest capacity for
payment of debt service. It differs from the two higher ratings because:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer to
meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional. Stability
of the pledged revenues could show some variations because of increased
competition or economic influences on revenues. Basic security provisions,
while satisfactory, are less stringent. Management performance appears
adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several of the
above factors could contribute to a lesser capacity for payment of debt
service. The difference between "A'' and "BBB'' ratings is that the latter
shows more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged revenues
could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, -2 or -3) by S&P to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds that are rated A possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in default
or present elements of danger may exist with respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a high
degree. These issues are often in default or have other marked short comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and for variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). This
distinction is in recognition of the differences between short-term credit
risk and long-term credit risk. Loans bearing the designation MIG 1 or VMIG 1
are of the best quality, enjoying strong protection by established cash flows
of funds for their servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the designation MIG 2 or VMIG 2
are of high quality, with ample margins of protection although not as large as
the preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of
favorable quality, with all security elements accounted for, but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may be
tight and market access for refinancing, in particular, is likely to be less
well established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial paper
rating assigned by S&P. Paper rated A-1+ must have either the direct credit
support of an issuer or guarantor that possesses excellent long-term operating
and financial strengths combined with strong liquidity characteristics
(typically, such issuers or guarantors would display credit quality
characteristics which would warrant a senior bond rating of AA- or higher), or
the direct credit support of an issuer or guarantor that possesses above
average long-term fundamental operating and financing capabilities combined
with ongoing excellent liquidity characteristics. Paper rated A-1 by S&P has
the following characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated A or better; the issuer has
access to at least two additional channels of borrowing; basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances;
typically, the issuer's industry is well established and the issuer has a
strong position within the industry; and the reliability and quality of
management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the
following: (a) evaluation of the management of the issuer; (b) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (c) evaluation
of the issuer's products in relation to competition and customer acceptance;
(d) liquidity; (e) amount and quality of long-term debt; (f) trend of earnings
over a period of ten years; (g) financial strength of a parent company and the
relationships which exist with the issuer; and (h) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
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, 1996 and the report of Independent Accountants dated May 31,
1996, are incorporated by reference to the Definitive
30b2-1 filed on August 6, 1996 as Assession #0000091155-
96-000319.
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 December 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
incorporated by reference to Post-Effective
Amendment No. 17.
(2) Registrant's By-Laws are incorporated by reference to Pre-
Effective Amendment No. 2 to the Registration Statement filed
on May 26, 1987 ("Pre-Effective Amendment
No. 2").
(3) Not Applicable.
(4) Registrant's form of stock certificate is incorporated 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 incorporated
by reference to Post-Effective Amendment
No. 14.
(b) Form of Transfer and Assumption of Investment Advisory Agreement
dated November 7, 1994 is incorporated by reference to Post-
Effective Amendment No. 17.
(c) Form of Amendment to Investment Advisory Agreement dated as of
November 17, 1995 is incorporated by reference to Post-Effective
Amendment No. 19.
(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 incorporated by reference to
Post-Effective
Amendment No. 17.
(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 filed on August 30, 1994.
(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 filed on July 29, 1994.
(10) Not Applicable.
(11) Consent of Independent Accountants is incorporated by reference
to Post-Effective
Amendment No. 20 (filed herewith).
(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 incorporated
by reference
to Post-Effective Amendment No. 17.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 6
to the Registration Statement filed on July 31, 1989.
(17) Financial Data Schedule is incorporated by reference to Post-
Effective Amendment
No. 17.
(18) Form of Rule 18f-(3)d Multiple Class Plan of Registrant is
incorporated by reference to Post-Effective Amendment No. 18.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1)
Title of
Class
(2)
Number of Record Holders
by class as of July 12, 1996
Common Stock
Class A - 779
par value
$.001 per share
Class B - 572
Class C - 9
Class Y - 0
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 the Fund's 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. 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. 801-3701).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney California Municipals Fund
Inc., Smith Barney Massachusetts Municipals Fund, Smith Barney Aggressive
Growth Fund Inc., Smith Barney Appreciation Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Managed Governments Fund Inc., Smith Barney Income
Funds, Smith Barney Equity Funds, Smith Barney Investment Funds Inc., Smith
Barney Natural Resources 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., Garzarelli Sector Analysis Portfolio
N.V., Smith Barney Fundamental Value Fund Inc., Smith Barney Series Fund,
Consulting Group Capital Markets Funds, Smith Barney Investment Trust, Smith
Barney Adjustable Rate Government Income 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 Tax-Free Money 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., Smith Barney Concert Series Inc. and
various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings, which in turn is a
wholly owned subsidiary of 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.
812-8510).
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) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of
New York, on the 30th day of September, 1996.
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
By:/s/Heath B. McLendon______
Health B. McLendon
Chairman of the Board
We, the undersigned, hereby severally constitute and appoint Heath B.
McLendon, Christina T. Sydor and Caren Cunningham and each of them singly, our
true and lawful attorneys, with full power to them and each of them to sign
for us, and in our hands and in the capacities indicated below, any and all
Amendments to this Registration Statement and to file the same, with all
exhibits thereto, and other documents therewith, with the Securities and
Exchange Commission, granting unto said attorneys and each of them, acting
alone, full authority and power to do and perform each and every act and thing
requisite or necessary to be done in the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys or any of them may lawfully do or cause to be done by
virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement and the above Power of Attorney
has been signed below by the following persons in the capacities and as of the
dates indicated.
Signature:
Title:
Date:
/s/Heath B. McLendon
Chairman of the
Board
September 30, 1996
Heath B. McLendon
(Chief Executive
Officer)
/s/ Lewis E. Daidone
Senior Vice
President and
September 30, 1996
Lewis E. Daidone
Treasurer (Chief
Financial
and Accounting
Officer)
/s/ Herbert Barg
Director
September 30, 1996
Herbert Barg
/s/Alfred J.
Bianchetti
Director
September 30, 1996
Alfred J. Bianchetti
/s/Martin Brody
Director
September 30, 1996
Martin Brody
/s/Dwight B. Crane
Director
September 30, 1996
Dwight B. Crane
/s/Burt N. Dorsett
Director
September 30, 1996
Burt N. Dorsett
/s/Elliot S. Jaffe
Director
September 30, 1996
Elliot S. Jaffe
/s/Stephen E. Kaufman
Director
September 30, 1996
Stephen E. Kaufman
/s/Joseph J. McCann
Director
September30, 1996
Joseph J. McCann
/s/Cornelius C. Rose,
Jr.
Director
September 30, 1996
Cornelius C. Rose,
Jr.
g:\funds\azmu\1996\secdocs\1996sai.doc 1
Independent Auditors' Consent
To the Shareholders and Directors of Smith Barney Arizona Municipals Fund
Inc.:
We consent to the use of our report dated July 12, 1996 incorporated herein
by reference and to the references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Counsel and Auditors" in the Statement of
Additional Information.
KPMG PEAT MARWICK LLP
New York, New York
September 30, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY ARIZONA MUNICIPALS - CLASS A
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY ARIZONA MUNICIPALS - CLASS B
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<NAME> SMITH BARNEY ARIZONA MUNICIPALS - CLASS C
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