As filed with the Securities and Exchange Commission on
September 25, 1997
Registration Nos. 33-12792
811-5066
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
___
Post-Effective Amendment No. 21
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 22
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) 816-6474
Registrant's Telephone Number, including area code
Christina T. Sydor
Secretary
Smith Barney Arizona Municipals Fund Inc.
388 Greenwich Street,
New York, NewYork 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment becomes
effective.
It is proposed that this filing becomes effective:
__ immediately upon filing pursuant to Rule 485(b)
XX on September 26, 1997, pursuant to Rule 485(b)
____ 60 days after filing pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice for the
fiscal year ended May 31, 1997 was filed on July 14, 1997 (Accession
Number 91155-97-315).
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
PROSPECTUS
SMITH BARNEY
Arizona
Municipals
Fund
Inc.
SEPTEMBER 26, 1997
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing in your future.
Every day.
<PAGE>
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Prospectus September 26, 1997
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 (the "SAI") dated September 26, 1997, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Fund at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The SAI 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 Manager and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
================================================================================
Table of Contents
================================================================================
Prospectus Summary 3
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Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 14
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 23
- --------------------------------------------------------------------------------
Purchase of Shares 25
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Exchange Privilege 31
- --------------------------------------------------------------------------------
Redemption of Shares 34
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Minimum Account Size 37
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Performance 37
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Management of the Fund 38
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Distributor 39
- --------------------------------------------------------------------------------
Additional Information 40
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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.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. 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 of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a contingent deferred sales charge ("CDSC")
of 1.00% on redemptions made within 12 months of purchase. See "Prospectus
Summary -- Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of 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 automati-
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
cally 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.
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
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 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. The minimum investment
requirements for Class A, Class B and Class C shares and the subsequent
investment for all Classes through the Systematic Investment Plan are described
below. There is no minimum investment requirement in Class A for unitholders who
invest distributions from a unit investment trust ("UIT") sponsored by Smith
Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum 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."
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment manager (the "Manager") and administrator (the
"Administrator"). The Manager provides investment advisory and management
services to investment companies affiliated with Smith Barney. The Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a 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 paid
monthly. Distributions of net realized long and short-term capital gains, if
any, are declared and paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. Assets of the Fund may be invested in the
municipal securities of non-Arizona municipal issuers ("Other Municipal
Securities"). 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
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 SAI
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 Ratings Group ("S&P"), or in unrated obligations of comparable
quality . Securities in the fourth highest rating category, though considered to
be investment grade, have speculative characteristics. Securities rated as low
as D are extremely speculative and are in actual default of interest and/or
principal payments.
There are several risks in connection with the use of certain portfolio
strategies by the Fund, such as the use of when-issued securities, puts,
stand-by commitments, municipal leases, financial futures contracts and related
put and call options and options on debt securities and securities indices. See
"Investment Objective and Management Policies -- Certain Portfolio Strategies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption based on the Fund's current operating expenses
for its most recent fiscal year:
<TABLE>
<CAPTION>
Smith Barney Arizona Municipals Fund Inc. Class A Class B Class C Class Y
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 4.50% 1.00% None
- --------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.50% 0.50% 0.50% 0.50%
12b-1 fees** 0.15 0.65 0.70 None
Other expenses*** 0.23 0.24 0.22 0.23
- --------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.88% 1.39% 1.42% 0.73%
======================================================================================
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares had been sold as of
May 31, 1997.
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives, with respect to
Class B shares, an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution 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.
The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
Smith Barney Arizona Municipals Fund Inc. 1 Year 3 Years 5 Years 10 Years*
- ---------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
<S> <C> <C> <C> <C>
Class A $49 $67 $87 $144
Class B 59 74 86 153
Class C 25 45 78 170
Class Y 7 23 41 91
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A $49 $67 $87 $144
Class B 15 44 76 153
Class C 14 45 78 170
Class Y 7 23 41 91
================================================================================
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
8
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
<PAGE>
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Financial Highlights
- --------------------------------------------------------------------------------
The following information for each of the years in
the three-year period ended May 31, 1997 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated May 31, 1997. The following
information for the fiscal years from May 31, 1988 to May 31, 1994
has been audited by other
auditors. 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 SAI. As of May 31, 1997, no
Class Y shares were outstanding and, accordingly, no comparable information is
available at this time for that class.
For a Class A share outstanding throughout each year(1):
<TABLE>
<CAPTION>
Smith Barney Arizona
Municipals Fund Inc.
Year Ended May 31 1997 1996 1995 1994(2) 1993 1992
===================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year $ 9.95 $ 10.09 $ 9.82 $ 10.40 $ 9.84 $ 9.63
- ---------------------------------------------------------------------------------------------------
Income From
Operations:
Net Investment Income(3) 0.53 0.53 0.54 0.54 0.58 0.59
Net Realized and Unrealized
Gain/(Loss) 0.26 (0.15) 0.33 (0.38) 0.65 0.32
- ---------------------------------------------------------------------------------------------------
Total Income from Operations 0.79 0.38 0.87 0.16 1.23 0.91
===================================================================================================
Less Distributions From:
Net Investment Income (0.53) (0.52) (0.54) (0.53) (0.57) (0.60)
Net Realized Gains -- -- (0.06) (0.21) (0.08) (0.06)
Capital -- -- -- -- (0.02) (0.04)
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.53) (0.52) (0.60) (0.74) (0.67) (0.70)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.21 $ 9.95 $ 10.09 $ 9.82 $ 10.40 $ 9.84
- ---------------------------------------------------------------------------------------------------
Total Return++ 8.06% 3.82% 9.38% 1.33% 12.92% 9.86%
- ---------------------------------------------------------------------------------------------------
Net Assets End of Year (in 000's) $37,304 $40,917 $43,222 $44,552 $44,055 $38,759
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets/
Expenses(3) 0.88% 0.82% 0.82% 0.83% 0.77% 0.68%
Net Investment Income 5.17% 5.20% 5.37% 5.24% 5.66% 6.02%
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 22% 21% 49% 44% 44%
===================================================================================================
</TABLE>
(1) Certain prior year numbers have been restated to reflect current year's
presentation. Net investment income, net realized gains and net assets were
not affected by this change.
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) The investment adviser has waived all or part of its fees for the four
years ended May 31, 1996. If such fees had not been waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------- -------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
---- ---- ---- --- ---- --- ---- ---- ---- ----
Class A $0.02 $0.04 $0.02 $0.04 $0.02 0.99% 1.01% 1.05% 1.10% 0.90%
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class A share outstanding throughout each year:
<TABLE>
<CAPTION>
Smith Barney Arizona
Municipals Fund Inc.
Year Ended May 31 1991 1990 1989 1988*
==========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.49 $ 9.66 $ 9.22 $ 9.60
- ------------------------------------------------------------------------------------------
Income From Operations:
Net Investment Income(1) 0.68 0.71 0.82 0.40
Net Realized and Unrealized Gain/(Loss) 0.14 (0.12) 0.31 (0.19)
- ------------------------------------------------------------------------------------------
Total Income from Operations 0.82 0.59 1.13 0.21
==========================================================================================
Less Distributions From:
Net Investment Income (0.68) (0.71) (0.69) (0.40)
Net Realized Gains -- (0.05) -- (0.19)
- ------------------------------------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------------
Net Assets End of Year (in 000's) $28,373 $18,167 $4,903 $1,626
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Expenses(1) 0.14% 0.03% 0.34% 0.16%
Net Investment Income 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.
(1) The investment adviser has waived all or part of its fees for the four
years ended May 31, 1991. If such fees had not been waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------- -------------------
1991 1990 1989 1988 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ----
Class A $0.10 $0.20 $0.66 $0.13 1.13% 2.13% 6.20% 2.58%
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class B share outstanding throughout each year(1):
<TABLE>
<CAPTION>
Smith Barney Arizona
Municipals Fund Inc.
Year Ended May 31 1997 1996 1995 1994(2) 1993(3)
=========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.95 $10.09 $ 9.82 $10.40 $ 9.97
- -----------------------------------------------------------------------------------------
Income From Operations:
Net Investment Income(4) 0.48 0.48 0.49 0.49 0.31
Net Realized and Unrealized Gain/(Loss) 0.26 (0.15) 0.33 (0.37) 0.50
- -----------------------------------------------------------------------------------------
Total Income from Operations 0.74 0.33 0.82 0.12 0.81
=========================================================================================
Less Distributions From:
Net Investment Income (0.48) (0.47) (0.49) (0.49) (0.29)
Net Realized Gains -- -- (0.06) (0.21) (0.08)
Capital -- -- -- -- (0.01)
- -----------------------------------------------------------------------------------------
Total Distributions (0.48) (0.47) (0.55) (0.70) (0.38)
=========================================================================================
Net Asset Value, End of Year $10.21 $ 9.95 $10.09 $ 9.82 $10.40
- -----------------------------------------------------------------------------------------
Total Return 7.53% 3.30% 8.78% 0.84% 8.31++
- -----------------------------------------------------------------------------------------
Net Assets End of Year (in 000's) $19,886 $22,369 $22,838 $19,306 $8,149
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4) 1.39% 1.33% 1.33% 1.35% 1.33%+
Net Investment Income 4.66% 4.69% 4.85% 4.73% 5.10%+
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 22% 21% 49% 44%
=========================================================================================
</TABLE>
(1) Certain prior year numbers have been restated to reflect current year's
presentation. Net investment income, net realized gains and net assets were
not affected by this change.
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from November 6, 1992 (inception date)to May 31, 1993.
(4) The investment adviser has waived all or part of its fees for the four
years ended May 31, 1996. If such fees had not been waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ -------------------
1996 1995 1994 1993 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ----
Class B $0.02 $0.03 $0.02 $0.02 1.50% 1.52% 1.57% 1.66%+
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a Class C share outstanding throughout the period:(1)
Smith Barney Arizona
<TABLE>
<CAPTION>
Municipals Fund Inc.
Year Ended May 31 1997 1996 1995(2)
===========================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $ 9.95 $10.09 $ 9.28
- -------------------------------------------------------------------------------------------
Income From Operations:
Net Investment Income(3) 0.47 0.48 0.24
Net Realized and Unrealized Gain (Loss) 0.26 (0.15) 0.86
- -------------------------------------------------------------------------------------------
Total Income from Operations 0.73 0.33 1.10
===========================================================================================
Less Distributions From:
Net Investment Income (0.47) (0.47) (0.23)
Net Realized Gains -- -- (0.06)
- -------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.47) (0.29)
===========================================================================================
Net Asset Value, End of Year $10.21 $ 9.95 $10.09
- -------------------------------------------------------------------------------------------
Total Return 7.49% 3.26% 12.10%++
- -------------------------------------------------------------------------------------------
Net Assets End of Year (in 000's) $822 $554 $386
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.42% 1.39% 1.38%+
Net Investment Income 4.63% 4.63% 4.81%+
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 22% 21%
===========================================================================================
</TABLE>
(1) Certain prior year numbers have been restated to reflect current year's
presentation. Net investment income, net realized gains and net assets were
not affected by this change.
(2) For the period from December 8, 1994 (inception date)to May 31, 1995.
(3) The investment adviser has waived all or part of its fees for the four
years ended May 31, 1996. If such fees had not been waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
Class C $0.02 $0.01 1.56% 1.56%+
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide 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
Other Municipal Securities, 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 SAI
The Fund's average weighted maturity will vary from time to time based on
the judgment of the Manager. The Fund intends to focus on intermediate- and
long-term obligations -- obligations with remaining maturities at the time of
purchase of from three to in excess of twenty years.
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
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
Sizeable 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 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.
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 SAI.
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 SAI.
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
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 consisting of cash, debt securities of any grade or equity
securities, having a value equal to or greater than the Fund's purchase
commitments, provided such securities have been determined by the Manager to be
liquid and unencumbered, and are marked to market daily, pursuant to guidelines
established by the directors. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets. The
Fund generally will make commitments to purchase 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 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
the Manager 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. the Manager 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
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 SAI 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.
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.
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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
marked 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
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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 marked 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
21
<PAGE>
- --------------------------------------------------------------------------------
Investment Object and Management Policies (continued)
- --------------------------------------------------------------------------------
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
marked 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, 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 SAI.
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
22
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
the Fund's net assets attributable to each Class by the total number of shares
of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors. Certain
securities may be valued on the basis of prices provided by pricing services
approved by the Board of Directors. Short-term investments that mature in 60
days or less are valued at amortized cost whenever the Directors determine that
amortized cost is fair value. Amortized cost valuation involves valuing an
instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Further
information regarding the Fund's valuation policies is contained in the SAI.
- --------------------------------------------------------------------------------
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) monthly.
Distributions of net realized long- and short-term capital gains, if any, are
declared and paid annually.
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.
23
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Class Y shares principally as a result of the
distribution fee applicable with respect to Class B and Class C shares. The per
share dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, B, C and Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
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. 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
24
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
that is a specific preference item for purposes of the Federal individual and
corporate alternative minimum taxes. Shareholders should consult their tax
advisors with specific reference to their own tax situations.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Fund offers four classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
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. 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.
Smith Barney and other broker/dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at the Fund's
transfer agent, First Data Investor Services Group Inc. ("First Data") are not
subject to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account in the
Fund by making an initial investment of at least $1,000. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
shareholders purchasing shares 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
First Data. Share certificates are issued only upon a shareholder's written
request to First Data.
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
The minimum initial and subsequent investment requirements in the Fund for
an account established under the Uniform Gift to Minors Act is $250 and the
subsequent investment requirement is $50
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day (the "trade
date"). Orders received by dealers or Introducing Brokers prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day, provided the
order is received by the Fund or Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or Introducing Brokers
purchasing 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:
<TABLE>
<CAPTION>
Dealers
Sales Charge as % Sales Charge as % Reallowance as
Amount of Investment of Transaction of Amount Invested % of Offering Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $25,000 4.00% 4.17% 3.60%
$25,000-$49,999 3.50 3.63 3.15
$50,000-$99,999 3.00 3.09 2.70
$100,000-$249,999 2.50 2.56 2.25
$250,000-$499,999 1.50 1.52 1.35
$500,000 and over * * *
==========================================================================================
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
26
<PAGE>
- --------------------------------------------------------------------------------
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 immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such company
with the Fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) purchases by shareholders who have redeemed Class A shares in
the Fund (or Class A shares of another Smith Barney Mutual Fund that are offered
with a sales charge 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)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith
Barney; and (g) purchases by investors participating in a Smith Barney fee based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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.
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 six months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six month period, all Class Y shares purchased
to date will be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.15%) and expenses applicable to the Fund's
Class A shares, which may include a CDSC of 1.00%. Please contact First Data or
a Smith Barney Financial Consultant for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class C shares and Class A shares that are CDSC
Shares,
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
- -- Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
$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 the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by 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 Disciplined Small Cap Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
31
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney 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
32
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
++ Smith Barney Municipal Money Market Fund, Inc.
++ Smith Barney Muni Funds--California Money Market Portfolio
++ Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the Fund
that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. the Manager may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may, at
its discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, the Fund will provide notice in writing
or by telephone
33
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares 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.
34
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to 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,
trustees 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 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.
35
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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.
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
36
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
YIELD
From time to time, the Fund may advertise its 30-day "yield" and
"equivalent taxable yield" for each Class of shares. The yield refers to the
income generated by an investment in those shares over the 30-day period
identified in the advertisement and is computed by dividing the net investment
income per share earned by the Class during the period by the maximum public
offering price per share on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month over
a one-year period and is compounded 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
37
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with its distributor, investment adviser and administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated by the Board to the Fund's investment adviser and administrator. The
SAI contains background information regarding
each Director and executive officer of the Fund.
INVESTMENT MANAGER
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment manager. 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 July 31, 1997, in excess of $81 billion.
38
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's 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.
For the fiscal year ended May 31, 1997, SBMFM was paid investment advisory fees
equal to 0.30% 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 Smith Barney, is responsible for
managing the day-to-day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended May 31, 1997 is included in the
Annual Report dated May 31, 1997. A copy of the Annual Report may be obtained
upon request and without charge from a Smith Barney Financial Consultant or by
writing or calling the Fund at the address or 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,
1997, SBMFMwas paid administration fees equal to 0.20% of the value of the
average daily net assets of the Fund.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.15% of the value of the average daily net assets of the respective Class.
Smith Barney is also
39
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder 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
40
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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 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.
41
<PAGE>
SMITH BARNEY
[LOGO] A Member of the TravelersGroup
Smith Barney
Arizona
Municipals
Fund
Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
FD 0238 9/97
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
PART B
Smith Barney
Arizona Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information September 26, 1997
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 26,
1997, as amended or supplemented from time to time, and should be read
in conjunction with the Fund's Prospectus. The Fund's Prospectus may be
obtained from a Smith Barney Financial Consultant or by writing or
calling the Fund at the address or telephone number set forth above.
This Statement of Additional Information, although not in itself a
prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
For ease of reference the same section headings are used in both the
Prospectus and the Statement of Additional Information, except where
shown below:
Management of the
Fund.................................................................
.............. 1
Investment Objective and Management
Policies............................................. 5
Municipal Bonds (See in the Prospectus "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 Manager
and Administrator
PNC Bank, National Association
("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 74). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred J. Bianchetti, Director (Age 74). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End
Drive, Ramsey, New Jersey 07446.
Martin Brody, Director (Age 76). Private Investor; Formerly, 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 59). Professor, Harvard Business
School. His address is Harvard Business School, Boston, Massachusetts
02163.
Burt N. Dorsett, Director (Age 66). 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 71). 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 65). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 67).Retired Executive of Ryan Homes
Inc.. His address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
64). Managing Director of Smith Barney and Chairman of Smith Barney
Strategy Advisers Inc.; President of SBMFM and Travelers Investment
Advisor, Inc. ("TIA"); 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 41 Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 63). 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 90). Attorney; formerly
Justice of the Supreme Court of the State of New York. His address is
118 East 60th Street, New York, New York 10022.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney; Director and Senior Vice President of
SBMFM and TIA. Mr. Daidone serves as Senior Vice President and
Treasurer of 41 Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer (Age
49). 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 6 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM and TIA. Ms. Sydor
serves as Secretary of 41 Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
As of September 5, 1997, the Directors and officers of the Fund as a
group owned less than 1% of the outstanding common stock of the Fund. As
of September 5, 1997, to the knowledge of the Fund and the Board, the
following shareholders 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:
CLASS C SHARES
American Western Trading Co.
6531 N. 3rd Ave. #15
Phoenix, AZ 85013-1258
owned 28,440.238 (35.85%) shares
Rachel Fritch Harris & Richard
Franklin Harris Co. TTEES
FBO Rachel Fritch Harris Trust
U/A/D 5/1/89
7046 N. 59th Place
Scottsdale, AZ 85253-3412
owned 11,355.861(14.29%) shares
Margaret Kane and Nicholas Wyatt
Ten by Ent
Tax Account
PO Box 274
Arivaca, AZ 85601-0274
owned 11,126.832(14.03%) shares
GT Kearney TTEE
FBO Glenn T. Kearney Trust
U/A/D 8/11/93
101 S. Yucca Street, #156
Chandler, AZ 85224-8177
owned 7,524.113(9.49%) shares
Peter Browne
Hilda Browne JTWROS
3031 N. Civic Center
Plaza Apt. 260
Scottsdale, AZ 85251-7910
owned 7,182.432 (9.06%) shares
Kathleen Reardon and
Robert Nichol JTWROS
2925 Ranchero Drive
Lake Havasu City, AZ 86406-6130
owned 6,683.365(8.43%) shares
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. During
the Fund's last fiscal year aggregate compensation paid by the Fund to
Directors achieving emeritus status totaled $800. All Directors are
reimbursed for travel and out-of-pocket expenses incurred to attend such
meetings.
For the fiscal year ended May 31, 1997, the Directors of the Fund
were paid the following compensation:
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors Fund Complex
Herbert Barg $1,700 $0 $100,550 16
Alfred Bianchetti 1,600 0 49,800 11
Martin Brody 1,500 0 119,600 19
Dwight Crane 1,600 0 137,725 22
Burt Dorsett+ 1,600 0 46,900 11
Elliot Jaffe 1,600 0 49,600 11
Stephen Kaufman 1,700 0 86,050 13
Joseph McCann 1,700 0 50,700 11
Heath McLendon++ 0 0 0 41
Cornelius Rose 1,700 0 50,800 11
+ 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: $800. As of January 1, 1997, Mr. Dorsett has elected not to
defer his future compensation.
++ Designates an "interested" Director.
Investment Manager and Administrator-SBMFM
SBMFM serves as investment manager to the Fund. SBMFM is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings'') and 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 16, 1997. 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.
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 1995, 1996 and
1997 fiscal years, the Fund paid $220,638, $218,249 and $184,078,
respectively, in investment advisory fees. SBMFM and its predecessors
voluntarily waived investment advisory fees for the fiscal years ended
May 31, 1995 and 1996 in the amounts of $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 16, 1997. The Boston Company
Advisors, Inc. ("Boston Advisors") served as sub-administrator to the
Fund from April 21, 1994 through June 16, 1995. 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, 1995, 1996 and 1997, the
Fund paid SBMFM $83,984, $88,133 and $122,719, respectively, in
administration fees. SBMFM and its predecessors voluntarily waived
administrative fees for the fiscal years ended May 31, 1995 and 1996 in
the amounts of $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 1995, 1996 and
1997 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. The
Independent Directors have selected Stroock & Stroock & Lavan LLP as
their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditor to examine and report on
the Fund's financial statements and highlights for the fiscal year
ending May 31, 1998.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve that objective. The following discussion
supplements the description of the Fund's investment policies in the
Prospectus.
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 Ratings Group ("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 invest 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 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, equity securities or debt securities of any grade
having a value equal to or greater than the Fund's purchase commitments,
provided such securities, having a value equal to or greater than the
Fund's purchase commitments, provide such securities have been
determined by SBMFM to be liquid and unencumbered and marked to market
daily, pursuant to guidelines established by the Directors. 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, 1997, 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 1995,
1996 and 1997 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, 1995, 1996 and 1997, the Fund's portfolio turnover rates were 21%,
22% and 27 %, 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.
As of July 1996, Arizona's population stood at an estimated
4,297,775. Over the past five years, the population has grown at an
average annual rate of nearly 2.9%. Arizona Department of Economic
Security projections call for a 2.5% increase for 1997 with net
migration levels declining from their currently high rate. Although 73%
of the population growth is the result of net migration, the natural
population growth rate of 0.9% still exceeds the national average of
0.6%.
The State's principal economic sectors include services,
manufacturing dominated by electrical, transportation and military
equipment, government, trade, construction, finance, insurance and real
estate, tourism and the military.
The State's seasonally adjusted unemployment rate as of February
1997, stood at 5.0%, which is on par with the national rate of 5.0%.
Total wage and salary employment has grown at a3.8% average annual rate
from 1990 to 1995, with annual gains of 6.7% and 5.4% respectively for
1994 and 1995. Major expansions are presently underway by Microsoft,
Charles Schwab, Intel, Microchip Technology and MCI. However, there are
signs that the rate of employment growth has begun to slow. Total wage
and salary employment is forecast to increase by more moderate rates of
3.3% in 1997 and 2.4% in 1998. The services sector is projected to
experience the highest rate of growth over the next two years, with
increases of 5.5% and 4.8%. Manufacturing employment is expected to
increase 2.9% and 0.9% over the same period while construction
employment is expected to increase 0.2% in 1997 and decline 2.5% in
1998. This compares with construction employment increases of 21.6% in
1994 and 10.6% in 1995.
Due to the international diversification of Arizona's economy and
the development of expanded tourism opportunities the State's economy is
becoming less seasonal in nature. Exports rose 45.2% from 1993 to 1995
to $9.7 billion. To furhter promote Arizona exports, the Arizona
Department of Commerce opened a foreign trade office in London in
October 1995. High-tech products account for about 75% of total
exports. 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. Arizona's top
individual income tax rate of 6.9% is moderately high and there is no
local income taxes levied by any city or county. The general sales tax
rate matches the US median at 5.0%, although county and city taxes push
combined rates as high as 7.20%. General governmental revenues totaled
about $10.32 billion for June 30,1996, a 7.2% increase over 1995. The
higher sales tax revenues are reflective of statewide economic growth,
while the rise in motor vehicle and fuel taxes resulted from increases
in vehicle registrations and vehicle usage.
The general fund ended the June 30, 1996 fiscal year with a $628.2
million unreserved fund balance, which is about 8.5 % of general fund
revenues. In addition, there is a $309.3 million reserved fund balance
that includes $233.1 million for a "rainy day fund" established by the
State Legislature in 1991. The fund is capped at 15% of general fund
revenue and is funded by a formula comparing real net personal income
growth to a seven year trend.
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 has no general obligation debt. Revenue bonds have been
issued by the Arizona Depaartment of Transportation ("ADOT"), three
state universities, the Arizona Power Authority and the University
Medical Center. The total par value of outstanding revenue bonds is
approximately $2.2 billion.
Outstanding ADOT issues total approximately $1.5 billion and
include highway revenue bonds secured by a pledge of motor vehicle
related fuel fees of the state highway fund and by transportation excise
taxes collected by the Arizona Department of Revenue on behalf of
Maricopa County. Virtually all of the numerous ADOT issues are insured
and carry underlying ratings by S&P ranging from "A-" on subordinate
excise tax issues to "AA-" on senior lien issues.
Arizona has issued certificates of participation ("COPs")
currently outstanding in the amount of $429 million, to finance
construction or improvements to office buildings, higher education
facilities and prisons. The lease payments are subject to annual
appropriation by the State Legislature. Nearly all of the outstanding
COPs are insured and carry S&P's underlying ratings ranging from "A-"
to "A+", depending on a particular project.
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 16,
1997. For the fiscal years ended May 31, 1995, 1996 and 1997, Smith
Barney received, approximately $51,000, $62,000 and $32,000,
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, 1995, 1996 and 1997, Smith Barney, received
approximately $29,000, $55,000 and $79,000, 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, 1997, Smith Barney incurred
distribution expenses totaling approximately $154,293, consisting of
approximately $13,846 for advertising, $2,309 for printing and mailing
of prospectuses, $88,214 for support services, $49,862 to Smith Barney
Financial Consultants, and $62, 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 1995, 1996 and 1997 fiscal years, Class A shares incurred
$64,130, $65,532 and $59,503, respectively, in services fees. For the
1995, 1996 and 1997 fiscal years, the Class B shares incurred $131,259,
$149,271 and $136,271, respectively, in service and distribution fees.
For the period from November 14, 1994 through May 31, 1995, and for the
fiscal years ended May 31, 1996 and 1997, Class C shares incurred $645,
$3,655 and $4,702 in services fees and 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 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.
B. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B shares
of another fund will be subject to the higher applicable CDSC of
the two funds and, for purposes of calculating CDSC rates and
conversion periods, will be deemed to have been held since the
date the shares being exchanged were deemed to be purchased.
C. Class Y and Class A shareholders of the Fund who wish to exchange
all or a portion of their shares of the respective Class in any of
the Smith Barney Mutual Funds listed in the "Exchange Privilege"
section of the Fund's Prospectus may do so without the imposition
of any charge.
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 A 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, 1997 was 4.74%, 4.42% and 4.39%, respectively.
The equivalent taxable yield for Class A, Class B and Class C shares for
that same period was 8.65%, 8.07% and 8.01%, 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:
3.78% for the one-year period beginning June 1, 1996 through May
31, 1997.
6.15% per annum during the five-year period beginning June 1, 1992
through May 31, 1997.
7.05% per annum during the period from the Fund's commencement of
operations on June 1, 1987 through May 31, 1997.
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 8.06%, 7.02% and 7.49%,
respectively, for those same periods.
The average annual total return for Class B shares was as follows for
the periods indicated:
3.03% for the one-year period beginning June 1, 1996 through May
31, 1997.
6.08% per annum for the period beginning November 6, 1992 through
May 31, 1997.
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
7.53% and 6.26%, respectively, for those same periods.
The average annual total return for Class C shares was as follows for
the periods indicated:
6.49% for the one-year period beginning June 1, 1996 through May
31, 1997.
9.21% per annum for the period beginning December 8, 1994 through
May 31, 1997.
These average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment. If the CDSC had
not been deducted, the average annual total return on the Fund's Class C
shares would have been 7.49% and 9.21%, respectively for those same
periods.
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 represent 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, 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 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 "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, that will
separately identify the portion of capital gains dividends eligible for
the reduced maximum 20% capital gains tax rate (generally gains on
assets other than section 1256 contracts held by the Fund for more than
18 months). 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, 1997,
accompanies this Statement of Additional Information and is incorporated
herein by reference in its entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue
bonds. General obligation bonds are usually secured by all resources
available to the municipality and the factors outlined in the rating
definitions below are weighed in determining the rating. Because revenue
bonds in general are payable from specifically pledged revenues, the
essential element in the security for a revenue bond is the quantity and
quality of the pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the
quality of general obligation bond credit is usually appropriate in the
rating analysis of a revenue bond, other factors are important,
including particularly the competitive position of the municipal
enterprise under review and the basic security covenants. Although a
rating reflects S&P's judgment as to the issuer's capacity for the
timely payment of debt service, in certain instances it may also reflect
a mechanism or procedure for an assured and prompt cure of a default,
should one occur, i.e., an insurance program, Federal or state guarantee
or the automatic withholding and use of state aid to pay the defaulted
debt service.
AAA
Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least
susceptible to autonomous decline. Debt burden is moderate. A strong
revenue structure appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to
remain, substantial. Stability of the pledged revenues is also
exceptionally strong, due to the competitive position of the municipal
enterprise or to the nature of the revenues. Basic security provisions
(including rate covenant, earnings test for issuance of additional
bonds, and debt service reserve requirements) are rigorous. There is
evidence of superior management.
AA
High Grade -- The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of
the prime quality issues. Bonds rated AA have the second strongest
capacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe. This rating describes the third strongest capacity
for payment of debt service. It differs from the two higher ratings
because:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the
issuer to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management
performance appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between "A'' and "BBB'' ratings is that the
latter shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among
the factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow
possibly being subject to erosion over time. Basic security provisions
are no more than adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major
rating categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) by S&P to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated
SP-1 have a very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics are given the designation of SP-1+. Notes rated SP-2
have a satisfactory capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A
Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B. The modifier 1 indicates that
the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to
principal or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a
high degree. These issues are often in default or have other marked
short comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and for variable rate
demand obligations are designated Variable Moody's Investment Grade
("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term credit risk. Loans bearing the
designation MIG 1 or VMIG 1 are of the best quality, enjoying strong
protection by established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing,
or both. Loans bearing the designation MIG 2 or VMIG 2 are of high
quality, with ample margins of protection although not as large as the
preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of
favorable quality, with all security elements accounted for, but lacking
the undeniable strength of the preceding grades. Liquidity and cash flow
may be tight and market access for refinancing, in particular, is likely
to be less well established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the
direct credit support of an issuer or guarantor that possesses excellent
long-term operating and financial strengths combined with strong
liquidity characteristics (typically, such issuers or guarantors would
display credit quality characteristics which would warrant a senior bond
rating of AA- or higher), or the direct credit support of an issuer or
guarantor that possesses above average long-term fundamental operating
and financing capabilities combined with ongoing excellent liquidity
characteristics. Paper rated A-1 by S&P has the following
characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated A or better; the issuer has
access to at least two additional channels of borrowing; basic earnings
and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and
the issuer has a strong position within the industry; and the
reliability and quality of management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings
are the following: (a) evaluation of the management of the issuer; (b)
economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain
areas; (c) evaluation of the issuer's products in relation to
competition and customer acceptance; (d) liquidity; (e) amount and
quality of long-term debt; (f) trend of earnings over a period of ten
years; (g) financial strength of a parent company and the relationships
which exist with the issuer; and (h) recognition by the management of
obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations.
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, 1997 and the report of Independent
Auditors dated July 14, 1997, are incorporated by
reference to the Definitive 30b2-1 filed on July 29, 1997 as
Accession #0000091155-97-336.
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 Auditors (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 filed herewith.
(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 September 5, 1997
Common Stock
par value
$.001 per share
Class A - 690
Class B - 490
Class C - 14
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. ("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., which in turn is a wholly owned subsidiary of Travelers Group
Inc. ("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).
Item 29. Principal Underwriters
(a) Smith Barney Inc. ("Smith Barney") also acts as principal
underwriter for Consulting Group Capital Markets Funds;
Global Horizons Investment Series (Cayman Islands);
Greenwich Street California Municipal Fund Inc.; Greenwich Street
Municipal Fund Inc.;
High Income Opportunity Fund Inc.; The Italy Fund Inc.;
Managed High Income Portfolio Inc.;
Managed Municipals Portfolio II Inc.; Managed Municipals Portfolio
Inc.;
Municipal High Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.;
Smith Barney Adjustable Rate Government Income Fund;
Smith Barney Aggressive Growth Fund Inc.; Smith Barney Appreciation Fund
Inc.;
Smith Barney Arizona Municipals Fund Inc.;
Smith Barney California Municipals Fund Inc.;
Smith Barney Concert Allocation Series Inc.;
Smith Barney Disciplined Small Cap Fund, Inc.;
Smith Barney Equity Funds; Smith Barney Fundamental Value Fund Inc.;
Smith Barney Funds, Inc.; Smith Barney Income Funds; Smith Barney Income
Trust;
Smith Barney Institutional Cash Management Fund, Inc.;
Smith Barney Intermediate Municipal Fund, Inc.; Smith Barney Investment
Funds Inc.;
Smith Barney Investment Trust; Smith Barney Managed Governments Fund
Inc.;
Smith Barney Managed Municipals Fund Inc.;
Smith Barney Massachusetts Municipals Fund;
Smith Barney Money Funds, Inc.; Smith Barney Muni Funds;
Smith Barney Municipal Fund, Inc.;
Smith Barney Municipal Money Market Fund, Inc.;
Smith Barney Natural Resources Fund Inc.;
Smith Barney New Jersey Municipals Fund Inc.;
Smith Barney Oregon Municipals Fund ;
Smith Barney Principal Return Fund; Greenwich Street Series Fund;
Smith Barney Telecommunications Trust; Smith Barney Variable Account
Funds;
Smith Barney World Funds, Inc.; Smith Barney Worldwide Special Fund N.V.
(Netherlands Antilles); Travelers Series Fund Inc.; The USA High Yield
Fund N.V.; Worldwide Securities Limited (Bermuda); Zenix Income Fund
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
The Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report
to
shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended 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 24th
day of September, 1997.
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
By:/s/Heath B. McLendon
Health B. McLendon
Chairman of the Board
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 (Chief Executive
Officer)
September 24, 1997
Heath B. McLendon
/s/ Lewis E. Daidone
Senior Vice
President and
Treasurer (Chief
Financial
and Accounting
Officer)
September 24, 1997
Lewis E. Daidone
/s/ Herbert Barg*
Director
September 24, 1997
Herbert Barg
/s/Alfred J.
Bianchetti*
Director
September 24, 1997
Alfred J. Bianchetti
/s/Martin Brody*
Director
September 24, 1997
Martin Brody
/s/Dwight B. Crane*
Director
September 24, 1997
Dwight B. Crane
/s/Burt N. Dorsett*
Director
September 24, 1997
Burt N. Dorsett
/s/Elliot S. Jaffe*
Director
September 24, 1997
Elliot S. Jaffe
/s/Stephen E. Kaufman*
Director
September 24, 1997
Stephen E. Kaufman
/s/Joseph J. McCann*
Director
September 24, 1997
Joseph J. McCann
/s/Cornelius C. Rose,Jr.*
Director
September 24, 1997
Cornelius C. Rose, Jr.
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney dated September 30, 1996.
/s/ Heath B. McLendon
Heath B. McLEndon
Exhibit Index
Exhibit No. Exhibit
11 Auditors' Consent
Independent Auditors' Consent
To the Board of Directors and Shareholders
Smith Barney Arizona Municipals Fund Inc.:
We consent to the use of our report dated July 14, 1997, with respect
to the Smith Barney Arizona Municipals Fund Inc., 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 24, 1997
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</TABLE>
