<PAGE>
[SB]Smith Barney
[MF]Mutual Funds
Your Serious Money. Professionally Managed.(SM)
P R O S P E C T U S
Smith Barney
Arizona
Municipals
Fund
Class A, B, L and Y Shares
------------------------------------------------------
--------------------------
September 28, 2000
------------------------------------------------------
--------------------------
INVESTMENT PRODUCTS: NOT FDIC INSURED * NO BANK
GUARANTEE * MAY LOSE VALUE
------------------------------------------------------
--------------------------
The Securities and Exchange Commission has not
approved or disapproved these
securities or determined whether this prospectus is
accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Smith Barney Arizona Municipals Fund
Contents
<TABLE>
<S>
<C>
Investments, risks and
performance........................................
2
More on the fund's
investments...........................................
. 6
Management............................................
.................... 7
Choosing a class of shares to
buy......................................... 8
Comparing the fund's
classes..............................................
9
Sales
charges...............................................
.............. 10
More about deferred sales
charges......................................... 12
Buying
shares................................................
............. 13
Exchanging
shares................................................
......... 14
Redeeming
shares................................................
.......... 16
Other things to know about share
transactions............................. 18
Dividends, distributions and
taxes........................................ 20
Share
price.................................................
.............. 21
Financial
highlights............................................
.......... 22
</TABLE>
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
Investment objective
The fund 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.
Principal investment strategies
Key investments The fund invests at least 80% of its
net assets in Arizona
municipal securities. Arizona municipal securities
include securities issued by
the State of Arizona and certain other municipal
issuers, political subdivi-
sions, agencies and public authorities that pay
interest which is exempt from
Arizona personal income taxes.
The fund invests primarily in intermediate-term and
long-term investment grade
municipal securities, which have remaining maturities
at the time of purchase
of from three to more than twenty years. Investment
grade securities are rated
in any of the four highest long-term rating
categories, or if unrated, of com-
parable quality. The fund may invest up to 20% of its
assets in below invest-
ment grade securities or unrated securities of
equivalent quality (commonly
known as "junk bonds").
Selection process The manager selects securities
primarily by identifying
undervalued sectors and individual securities, while
also selecting securities
it believes will benefit from changes in market
conditions. In selecting indi-
vidual securities, the manager:
. Uses fundamental credit analysis to estimate the
relative value and attrac-
tiveness of various securities and sectors and to
exploit opportunities in
the municipal bond market
. May trade between general obligation and revenue
bonds and among various rev-
enue bond sectors, such as housing, hospital and
industrial development,
based on their apparent relative values
. Considers the yield available for securities with
different maturities and a
security's maturity in light of the outlook for the
issuer and its sector and
interest rates
. Identifies individual securities with the most
potential for added value,
such as those involving unusual situations, new
issuers, the potential for
credit upgrades, unique structural characteristics
or innovative features
Smith Barney Arizona Municipals Fund
2
<PAGE>
Principal risks of investing in the fund
Investors could lose money on their investment in the
fund, or the fund may not
perform as well as other investments, if:
. Interest rates rise, causing the value of the fund's
portfolio to decline
. The issuer of a security owned by the fund defaults
on its obligation to pay
principal and/or interest or the security's credit
rating is downgraded
. Arizona municipal securities fall out of favor with
investors. The fund will
suffer more than a national municipal fund from
adverse events affecting Ari-
zona municipal issuers
. Unfavorable legislation affects the tax-exempt
status of municipal bonds
. The manager's judgment about the attractiveness,
value or income potential of
a particular security proves to be incorrect
It is possible that some of the fund's income
distributions may be, and distri-
butions of the fund's gains generally will be, subject
to federal and Arizona
state taxation. The fund may realize taxable gains on
the sale of its securi-
ties or on transactions in futures contracts. Some of
the fund's income may be
subject to the federal alternative minimum tax. In
addition, distributions of
the fund's income and gains will be taxable to
investors in states other than
Arizona.
Who may want to invest The fund may be an appropriate
investment if you are an
Arizona taxpayer and:
. Are in a high federal tax bracket seeking income
exempt from Arizona and fed-
eral taxation
. Currently have exposure to other asset classes and
are seeking to broaden
your investment portfolio
. Are willing to accept the risks of municipal
securities, including the risks
of concentrating in a single state
Smith Barney Mutual Funds
3
<PAGE>
Risk return bar chart
This bar chart indicates the risks of investing in the
fund by showing changes
in the fund's performance from year to year. Past
performance does not neces-
sarily indicate how the fund will perform in the
future. This bar chart shows
the performance of the fund's Class A shares for each
of the past 10 calendar
years. Class B and L shares have different performance
because of differ-
ent expenses. The performance information in the chart
does not reflect sales
charges, which would reduce your return.
Total Return for Class A
Shares
7.52% 9.66% 9.61% 13.10% (6.39)% 17.34% 4.00%
8.97% 5.60% (3.97)%
90 91 92 93 94 95 96
97 98 99
Calendar years ended December 31
Quarterly returns (past 10 years):
Highest: 7.82% in 1st quarter 1995; Lowest: (6.28)% in
1st quarter 1994. Year
to date: (0.25)% through 6/30/00.
Risk return table
This table indicates the risks of investing in the
fund by comparing the aver-
age annual total return of each class for the periods
shown with that of the
Lehman Brothers Municipal Bond Index (the "Lehman
Index"), a broad-based unman-
aged index of municipal bonds and the Lipper Arizona
Municipal Fund Average
(the "Lipper Average"), an average composed of the
fund's peer group of mutual
funds. This table assumes imposition of the maximum
sales charge applicable to
the class, redemption of shares at the end of the
period, and reinvestment of
distributions and dividends.
Average Annual Total Returns
Calendar Years Ended December 31,
1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since
inception Inception date
<S> <C> <C> <C> <C>
<C>
A (7.84)% 5.29% 5.89% 6.23%
06/01/87
B (8.61)% 5.45% n/a 4.92%
11/06/92
L (6.34)% 5.37% n/a 5.56%
12/08/94
Y ** n/a n/a n/a n/a
11/07/94
Lehman Index (2.06)% 6.91% 6.89% 7.53%
*
Lipper Average (4.29)% 5.95% 6.10% 7.07%
*
</TABLE>
*Index comparisons begin on June 1, 1987.
**There were no Class Y shares outstanding for the
calendar year ended December
31, 1999.
Smith Barney Arizona Municipals Fund
4
<PAGE>
Fee table
This table sets forth the fees and expenses you will
pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A
Class B Class L Class Y
<S> <C>
<C> <C> <C>
Maximum sales charge (load) imposed on
purchases
(as a % of offering price) 4.00%
None 1.00% None
Maximum deferred sales charge (load) (as a %
of the lower of net asset value at purchase
or redemption) None*
4.50% 1.00% None
Annual fund operating
expenses
<CAPTION>
(expenses deducted from fund assets) Class A
Class B Class L Class Y**
<S> <C>
<C> <C> <C>
Management fee 0.50%
0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.15%
0.65% 0.70% None
Other expenses 0.23%
0.26% 0.36% 0.23%
-----
----- ----- -----
Total annual fund operating expenses 0.88%
1.41% 1.56% 0.73%
=====
===== ===== =====
</TABLE>
*You may buy Class A shares in amounts of $500,000 or
more at net asset value
(without an initial sales charge) but if you redeem
those shares within 12
months of their purchase, you will pay a deferred
sales charge of 1.00%.
**For Class Y shares, which had not been offered prior
to May 31, 2000, "Other
expenses" have been estimated for the fiscal year
ending May 31, 2001.
Example
This example helps you compare the costs of investing
in the fund with the
costs of investing in other mutual funds. Your actual
costs may be higher or
lower. The example assumes:
. You invest $10,000 in the fund for the period shown
. You redeem all of your shares at the end of the
period
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without
a sales charge
. The fund's operating expenses remain the same
Number of years you own your
shares
<TABLE>
<CAPTION>
1 year 3 years
5 years 10 years
<S> <C> <C>
<C> <C>
Class A (with or without redemption) $486 $669
$868 $1,441
Class B (redemption at end of period) $594 $746
$871 $1,546
Class B (no redemption) $144 $446
$771 $1,546
Class L (with or without redemption) $357 $588
$941 $1,938
Class L (no redemption) $257 $588
$941 $1,938
Class Y (with or without redemption) $ 75 $233
$406 $ 906
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
More on the fund's investments
Arizona municipal securities Arizona municipal
securities include debt obliga-
tions issued by certain non-Arizona governmental
issuers such as Puerto Rico,
the Virgin Islands and Guam. The interest on Arizona
municipal securities is
exempt from federal income tax and Arizona personal
income tax. As a result,
the interest rate on these bonds normally is lower
than it would be if the
bonds were subject to taxation. The Arizona municipal
securities in which the
fund invests include general obligation bonds, revenue
bonds and municipal
leases. These securities may pay interest at fixed,
variable or floating rates.
The fund may also hold zero coupon securities which
pay no interest during the
life of the obligation but trade at prices below their
stated maturity value.
The fund also may invest up to 20% of its net assets
in municipal securities of
non-Arizona issuers. These will generally be exempt
from federal, but not Ari-
zona, income taxes.
Below investment grade securities Below investment
grade securities, also known
as "junk bonds", are considered speculative with
respect to the issuer's abil-
ity to pay interest and principal, involve a high risk
of loss and are suscep-
tible to default or decline in market value because of
adverse economic and
business developments. The market value for these
securities tends to be very
volatile, and they are less liquid than investment
grade debt securities.
Derivative contracts The fund may, but need not, use
derivative contracts, such
as financial futures and options on financial futures,
for any of the following
purposes:
. To hedge against the economic impact of adverse
changes in the market value
of portfolio securities because of changes in
interest rates
. As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund
to deliver or receive an
asset or cash payment based on the change in value of
one or more securities.
Even a small investment in futures can have a big
impact on a fund's interest
rate exposure. Therefore, using futures can
disproportionately increase losses
and reduce opportunities for gains when interest rates
are changing. The fund
may not fully benefit from or may lose money on
futures if changes in their
value do not correspond accurately to changes in the
value of the fund's hold-
ings. The other parties to certain futures present the
same types of default
risk as issuers of fixed income securities. Futures
can also make a fund less
liquid and harder to value, especially in declining
markets.
Smith Barney Arizona Municipals Fund
6
<PAGE>
Defensive investing The fund may depart from its
principal investment strate-
gies in response to adverse market, economic or
political conditions by taking
temporary defensive positions in all types of money
market and short-term debt
securities. If the fund takes a temporary defensive
position, it may be unable
to achieve its investment goal.
Management
Manager The fund's investment adviser and
administrator is SSB Citi Fund Man-
agement LLC ("SSB Citi") (successor to SSBC Fund
Management Inc.), an affiliate
of Salomon Smith Barney Inc. ("Salomon Smith Barney").
The manager's address is
388 Greenwich Street, New York, New York 10013. The
manager selects the fund's
investments and oversees its operations. The manager
and Salomon Smith Barney
are subsidiaries of Citigroup Inc. Citigroup
businesses produce a broad range
of financial services--asset management, banking and
consumer finance, credit
and charge cards, insurance, investments, investment
banking and trading--and
use diverse channels to make them available to
consumer and corporate customers
around the world.
Joseph Deane, investment officer of SSB Citi and
managing director of Salomon
Smith Barney, has been responsible for the day-to-day
management of the fund's
portfolio since February 1999. Mr. Deane has 30 years
of securities business
experience.
Management fees During the fiscal year ended May 31,
2000, SSB Citi received an
advisory fee and an administrative fee equal to 0.30%
and 0.20%, respectively,
of the fund's average daily net assets.
Distribution plan The fund has adopted a Rule 12b-1
distribution plan for its
Class A, B and L shares. Under the plan, the fund pays
distribution and/or
service fees. These fees are an ongoing expense and,
over time, may cost you
more than other types of sales charges.
In addition, the distributor may make payments for
distribution and/or share-
holder servicing activities out of its past profits
and other available sourc-
es. The distributor may also make payments for
marketing, promotional or
related expenses to dealers. The amount of these
payments is determined by the
distributor and may be substantial. SSB Citi or an
affiliate may make similar
payments under similar arrangements.
Transfer agent and shareholder servicing agent Citi
Fiduciary Trust Company
serves as the fund's transfer agent and shareholder
servicing agent (the
"transfer agent"). The transfer agent has entered into
a sub-transfer
Smith Barney Mutual Funds
7
<PAGE>
agency and services agreement with PFPC Global Fund
Services to serve as the
fund's sub-transfer agent (the "sub-transfer agent").
The sub-transfer agent
will perform certain functions including shareholder
record keeping and
accounting services.
Choosing a class of shares to buy
You can choose among four classes of shares: Classes
A, B, L and Y. Each class
has different sales charges and expenses, allowing you
to choose the class that
best meets your needs. Which class is more beneficial
to an investor depends on
the amount and intended length of the time of the
investment.
. If you plan to invest regularly or in large amounts,
buying Class A shares
may help you reduce sales charges and ongoing
expenses.
. For Class B shares, all of your purchase amount and,
for Class L shares, more
of your purchase amount (compared to Class A shares)
will be immediately
invested. This may help offset the higher expenses
of Class B and Class L
shares, but only if the fund performs well.
. Class L shares have a shorter deferred sales charge
period than Class B
shares. However, because Class B shares convert to
Class A shares, and Class
L shares do not, Class B shares may be more
attractive to long-term invest-
ors.
You may buy shares from:
. A broker-dealer, financial intermediary, financial
institution or a distribu-
tor's financial consultants (each called a "Service
Agent")
. The fund, but only if you are investing through
certain Service Agents.
All classes of shares are not available through all
Service Agents. You should
contact your Service Agent for further information.
Investment minimums Minimum initial and additional
investment amounts vary
depending on the class of shares you buy and the
nature of your investment
account.
<TABLE>
<CAPTION>
Initial Additional
Classes A, B, L
Class Y All Classes
<S> <C>
<C> <C>
General $1,000
$15 million $50
Monthly Systematic Investment Plans $25
n/a $25
Quarterly Systematic Investment Plans $50
n/a $50
Uniform Gift to Minors Accounts $250
$15 million $50
</TABLE>
Smith Barney Arizona Municipals Fund
8
<PAGE>
Comparing the fund's classes
Your Service Agent can help you decide which class
meets your goals. The Serv-
ice Agent may receive different compensation depending
upon which class you
choose.
Class A Class B Class L
Class Y
Key
features
. Initial . No ini- . Initial . No
sales tial sales
initial
charge sales charge or
. You may charge is lower
deferred
qualify . Deferred than
sales
for sales Class A
charge
reduction charge . Deferred .
Must
or declines sales
invest
waiver over charge at
least
of ini- time for only
$15
tial . Converts 1 year
million
sales to Class . Does not .
Lower
charge A after convert
annual
. Lower 8 years to Class
expenses
annual . Higher A
than the
expenses annual . Higher
other
than expenses annual
classes
Class B than expenses
and Class A than
Class L Class A
------------------------------------------------------
--------------------------
Initial
sales
charge
Up to None 1.00%
None
4.00%;
reduced
for large
purchases
and waived
for cer-
tain
investors.
No charge
for pur-
chases of
$500,000
or more
------------------------------------------------------
--------------------------
Deferred
sales
charge
Up to 1.00% if
None
1.00% on 4.50% you redeem
purchases charged within 1
of when you year of
$500,000 redeem purchase
or more if shares.
you redeem The charge
within 1 is reduced
year of over time
purchase and there
is no
deferred
sales
charge
after 6
years
------------------------------------------------------
--------------------------
Annual
distri-
bution
and
service
fees
0.15% of 0.65% of 0.70% of
None
average average average
daily net daily net daily net
assets assets assets
------------------------------------------------------
--------------------------
Exchange
privilege*
Class A Class B Class L
Class Y
shares of shares of shares of
shares of
most Smith most Smith most Smith
most Smith
Barney Barney Barney
Barney
funds funds funds
funds
------------------------------------------------------
--------------------------
*Ask your Service Agent for the Smith Barney funds
available for exchange.
Smith Barney Mutual Funds
9
<PAGE>
Sales charges
Class A shares
You buy Class A shares at the offering price, which is
the net asset value plus
a sales charge. You pay a lower sales charge as the
size of your investment
increases to certain levels called breakpoints. You do
not pay a sales charge
on the fund's distributions or dividends you reinvest
in additional Class A
shares.
The table below shows the rate of sales charge you
pay, depending on the amount
you purchase. The table below also shows the amount of
broker/dealer compensa-
tion that is paid out of the sales charge. This
compensation includes commis-
sions and other fees which Service Agents that sell
shares of the fund receive.
The distributor keeps up to approximately 10% of the
sales charge imposed on
Class A shares. Service Agents also will receive the
service fee payable on
Class A shares at an annual rate equal to 0.15% of the
average daily net assets
represented by the Class A shares serviced by them.
<TABLE>
<CAPTION>
Sales Charge as a %
of:
Broker/Dealer
Commission as
Offering Net amount
% of
Amount of purchase price (%) invested
(%) offering price
<S> <C> <C>
<C>
Less than $25,000 4.00 4.17
3.60
$25,000 but less than $50,000 3.50 3.63
3.15
$50,000 but less than $100,000 3.00 3.09
2.70
$100,000 but less than $250,000 2.50 2.56
2.25
$250,000 but less than $500,000 1.50 1.52
1.35
$500,000 or more -0- -0-
-0-
</TABLE>
Investments of $500,000 or more You do not pay an
initial sales charge when you
buy $500,000 or more of Class A shares. However, if
you redeem these Class A
shares within one year of purchase, you will pay a
deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There
are several ways you can
combine multiple purchases of Class A shares of Smith
Barney funds to take
advantage of the breakpoints in the sales charge
schedule.
Smith Barney Arizona Municipals Fund
10
<PAGE>
Accumulation privilege - lets you combine the current
value of Class A shares
owned
. by you, or
. by members of your immediate family,
and for which a sales charge was paid, with the
amount of your next purchase
of Class A shares for purposes of calculating the
initial sales charge. Cer-
tain trustees and fiduciaries may be entitled to
combine accounts in deter-
mining their sales charge.
Letter of intent - lets you purchase Class A shares of
the fund and other Smith
Barney funds over a 13-month period and pay the same
sales charge, if any, as
if all shares had been purchased at once. You may
include purchases on which
you paid a sales charge within 90 days before you
sign the letter.
Waivers for certain Class A investors Class A initial
sales charges are waived
for certain types of investors, including:
. Employees of NASD members
. Investors participating in a fee-based program
sponsored by certain broker-
dealers affiliated with Citigroup
. Investors who redeemed Class A shares of a Smith
Barney fund in the past 60
days, if the investor's Service Agent is notified
If you want to learn about additional waivers of Class
A initial sales charges,
contact your Service Agent or consult the Statement of
Additional Information
("SAI").
Class B shares
You buy Class B shares at net asset value without
paying an initial sales
charge. However, if you redeem your Class B shares
within six years of pur-
chase, you will pay a deferred sales charge. The
deferred sales charge
decreases as the number of years since your purchase
increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th
through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
Service Agents selling Class B shares receive a
commission of up to 4.00% of
the purchase price of the Class B shares they sell.
Service Agents also receive
a service fee at an annual rate equal to 0.15% of the
average daily net assets
represented by the Class B shares they are servicing.
Smith Barney Mutual Funds
11
<PAGE>
Class B conversion After 8 years, Class B shares
automatically convert into
Class A shares. This helps you because Class A shares
have lower annual
expenses. Your Class B shares will convert to Class A
shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued:
Shares issued:
At initial On
reinvestment of Upon exchange from
purchase dividends and
another Smith
distributions
Barney fund
<S> <C>
<C>
Eight years after the date of purchase In same
proportion On the date the
as the number
of shares originally
Class B shares
acquired would
converting is
to have converted
total Class B
into Class A
shares you own
shares
(excluding
shares
issued as a
dividend)
</TABLE>
Class L shares
You buy Class L shares at the offering price, which is
the net asset value plus
a sales charge of 1% (1.01% of the net amount
invested). In addition, if you
redeem your Class L shares within one year of
purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the
fund and/or other Smith
Barney mutual funds on June 12, 1998, you will not pay
an initial sales charge
on Class L shares you buy before June 22, 2001.
Service Agents selling Class L shares receive
commissions of up to 1.75% of the
purchase price of the Class L shares they sell.
Starting in the thirteenth
month Service Agents also receive an annual fee of up
to 1.00% of the average
daily net assets represented by the Class L shares
held by their clients.
Class Y Shares
You buy Class Y shares at net asset value with no
initial sales charge and no
deferred sales charge when you redeem. You must meet
the $15,000,000 initial
investment requirement. You can use a letter of intent
to meet this requirement
by buying Class Y shares of the fund over a 13-month
period. To qualify, you
must initially invest $5,000,000.
More about deferred sales charges
The deferred sales charge is based on the net asset
value at the time of pur-
chase or redemption, whichever is less, and therefore
you do not pay a sales
charge on amounts representing appreciation or
depreciation.
In addition, you do not pay a deferred sales charge
on:
. Shares exchanged for shares of another Smith Barney
fund
. Shares representing reinvested distributions and
dividends
. Shares no longer subject to the deferred sales
charge
Smith Barney Arizona Municipals Fund
12
<PAGE>
Each time you place a request to redeem shares, the
fund will first redeem any
shares in your account that are not subject to a
deferred sales charge and then
the shares in your account that have been held the
longest.
If you redeemed shares of a Smith Barney fund in the
past 60 days and paid a
deferred sales charge, you may buy shares of the fund
at the current net asset
value and be credited with the amount of the deferred
sales charge, if you
notify your Service Agent.
The fund's distributor receives deferred sales charges
as partial compensation
for its expenses in selling shares, including the
payment of compensation to
your Service Agent.
Deferred sales charge waivers
The deferred sales charge for each share class will
generally be waived:
. On payments made through certain systematic
withdrawal plans
. For involuntary redemptions of small account
balances
. For 12 months following the death or disability of a
shareholder
If you want to learn more about additional waivers of
deferred sales charges,
contact your Service Agent or consult the SAI.
Buying shares
Through a You should contact your Service Agent
to open a brokerage
Service Agent account and make arrangements to buy
shares.
If you do not provide the following
information, your order
will be rejected:
. Class of shares being bought
. Dollar amount or number of shares
being bought
Your Service Agent may charge an
annual account maintenance
fee.
------------------------------------------------------
--------------------------
Through the Certain investors who are clients of
certain Service Agents
fund are eligible to buy shares directly
from the fund.
. Write the fund at the following
address:
Smith Barney Arizona Municipals
Fund Inc.
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
Smith Barney Mutual Funds
13
<PAGE>
. Enclose a check to pay for the
shares. For initial
purchases, complete and send an
account application.
. For more information, call the
transfer agent at 1-800-
451-2010.
------------------------------------------------------
--------------------------
Through a
systematic You may authorize your Service Agent
or the sub- transfer
investment agent to transfer funds automatically
from (i) a regular bank
plan account, (ii) cash held in a
brokerage account with a Service
Agent or (iii) certain money market
funds, in order to buy
shares on a regular basis.
. Amounts transferred should be at
least: $25 monthly or $50
quarterly
. If you do not have sufficient funds
in your account on a
transfer date, your Service Agent
or the sub-transfer agent
may charge you a fee
For more information, contact your
Service Agent or the
transfer agent or consult the SAI.
Exchanging shares
Smith Barney
offers a You should contact your Service Agent
to exchange into other
distinctive Smith Barney funds. Be sure to read
the prospectus of the
family of Smith Barney fund you are exchanging
into. An exchange is a
funds taxable transaction.
tailored to
help meet the
varying needs
of both large
and small
investors
. You may exchange shares only for
shares of the same class
of another Smith Barney fund. Not
all Smith Barney funds
offer all classes.
. Not all Smith Barney funds may be
offered in your state of
residence. Contact your Service
Agent or the transfer agent
for further information.
. You must meet the minimum
investment amount for each fund
(except for systematic investment
plan exchanges).
. If you hold share certificates, the
sub-transfer agent must
receive the certificates endorsed
for transfer or with
signed stock powers (documents
transferring ownership of
certificates) before the exchange
is effective.
. The fund may suspend or terminate
your exchange privilege
if you engage in a pattern of
exchanges.
Smith Barney Arizona Municipals Fund
14
<PAGE>
Waiver of Your shares will not be subject to an
initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any)
will continue to be mea-
sured from the date of your original
purchase. If the fund
you exchange into has a higher
deferred sales charge, you
will be subject to that charge. If
you exchange at any time
into a fund with a lower charge, the
sales charge will not be
reduced.
------------------------------------------------------
--------------------------
By telephone
If you do not have a brokerage
account with a Service Agent,
you may be eligible to exchange
shares through the fund. You
must complete an authorization form
to authorize telephone
transfers. If eligible, you may make
telephone exchanges on
any day the New York Stock Exchange
is open. Call the trans-
fer agent at 1-800-451-2010 between
9:00 a.m. and 4:00 p.m.
(Eastern time).
You can make telephone exchanges only
between accounts that
have identical registrations.
------------------------------------------------------
--------------------------
By mail
If you do not have a brokerage
account, contact your Service
Agent or write to the sub-transfer
agent at the address on
the following page.
Smith Barney Mutual Funds
15
<PAGE>
Redeeming shares
Generally
Contact your Service Agent to redeem
shares of the fund.
If you hold share certificates, the
sub-transfer agent must
receive the certificates endorsed for
transfer or with signed
stock powers before the redemption is
effective.
If the shares are held by a fiduciary
or corporation, other
documents may be required.
Your redemption proceeds will be sent
within three business
days after your request is received
in good order. However,
if you recently purchased your shares
by check, your redemp-
tion proceeds will not be sent to you
until your original
check clears, which may take up to 15
days.
If you have a brokerage account with
a Service Agent, your
redemption proceeds will be placed in
your account and not
reinvested without your specific
instruction. In other cases,
unless you direct otherwise, your
redemption proceeds will be
paid by check mailed to your address
of record.
------------------------------------------------------
--------------------------
By mail
For accounts held directly at the
fund, send written requests
to the fund at the following address:
Smith Barney Arizona Municipals
Fund Inc.
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
Your written request must provide the
following:
. The fund and account number
. The class of shares and the dollar
amount or number of
shares to be redeemed
. Signatures of each owner exactly as
the account is regis-
tered
Smith Barney Arizona Municipals Fund
16
<PAGE>
By telephone
If you do not have a brokerage
account with a Service Agent,
you may be eligible to redeem shares
in amounts up to $50,000
per day through the fund. You must
complete an authorization
form to authorize telephone
redemptions. If eligible, you may
request redemptions by telephone on
any day the New York
Stock Exchange is open. Call the
transfer agent at 1-800-451-
2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time).
Your redemption proceeds can be sent
by check to your address
of record or by wire or electronic
transfer (ACH) to a bank
account designated on your
authorization form. You must sub-
mit a new authorization form to
change the bank account des-
ignated to receive wire or electronic
transfers and you may
be asked to provide certain other
documents. The sub-transfer
agent may charge a fee on an
electronic transfer (ACH).
------------------------------------------------------
--------------------------
Automatic You can arrange for the automatic
redemption of a portion of
cash your shares on a monthly or quarterly
basis. To qualify you
withdrawal must own shares of the fund with a
value of at least $10,000
plans and each automatic redemption must be
at least $50. If your
shares are subject to a deferred
sales charge, the sales
charge will be waived if your
automatic payments do not
exceed 1% per month of the value of
your shares subject to a
deferred sales charge.
The following conditions apply:
. Your shares must not be represented
by certificates
. All dividends and distributions
must be reinvested
For more information, contact your
Service Agent or consult
the SAI.
Smith Barney Mutual Funds
17
<PAGE>
Other things to know about share transactions
When you buy, exchange or redeem shares, your request
must be in good order.
This means you have provided the following
information, without which your
request will not be processed:
. Name of the fund
. Account number
. Class of shares being bought, exchanged or redeemed
. Dollar amount or number of shares being bought,
exchanged or redeemed
. Signature of each owner exactly as the account is
registered
The fund will try to confirm that any telephone
exchange or redemption request
is genuine by recording calls, asking the caller to
provide certain personal
identification information, sending you a written
confirmation or requiring
other confirmation procedures from time to time.
Signature guarantees To be in good order, your
redemption request must include
a signature guarantee if you:
. Are redeeming over $50,000
. Are sending signed share certificates or stock
powers to the sub-transfer
agent
. Instruct the sub-transfer agent to mail the check to
an address different
from the one on your account
. Changed your account registration
. Want the check paid to someone other than the
account owner(s)
. Are transferring the redemption proceeds to an
account with a different reg-
istration
You can obtain a signature guarantee from most banks,
dealers, brokers, credit
unions and federal savings and loan institutions, but
not from a notary public.
The fund has the right to:
. Suspend the offering of shares
. Waive or change minimum and additional investment
amounts
. Reject any purchase or exchange order
. Change, revoke or suspend the exchange privilege
. Suspend telephone transactions
Smith Barney Arizona Municipals Fund
18
<PAGE>
. Suspend or postpone redemptions of shares on any day
when trading on the New
York Stock Exchange is restricted, or as otherwise
permitted by the Securi-
ties and Exchange Commission
. Pay redemption proceeds by giving you securities.
You may pay transaction
costs to dispose of the securities
Small account balances If your account falls below
$500 because of a redemption
of fund shares, the fund may ask you to bring your
account up to the applicable
minimum investment amounts. If you choose not to do so
within 60 days, the fund
may close your account and send you the redemption
proceeds.
Excessive exchange transactions The manager may
determine that a pattern of
frequent exchanges is detrimental to the fund's
performance and other share-
holders. If so, the fund may limit additional
purchases and/or exchanges by the
shareholder.
Share certificates The fund does not issue share
certificates unless a written
request signed by all registered owners is made to the
sub-transfer agent. If
you hold share certificates it will take longer to
exchange or redeem shares.
Smith Barney Mutual Funds
19
<PAGE>
Dividends, distributions and taxes
Dividends The fund pays dividends each month from its
net investment income.
The fund generally makes capital gain distributions,
if any, once a year, typi-
cally in December. The fund may pay additional
distributions and dividends at
other times if necessary for the fund to avoid a
federal tax. Unless otherwise
directed, capital gain distributions and dividends are
reinvested in additional
fund shares of the same class you hold. The fund
expects distributions to be
primarily from income.
You do not pay a sales
charge on reinvested distributions or dividends.
Alternatively, you can
instruct your Service Agent, the transfer agent or the
sub-transfer agent to
have your distributions and/or dividends paid in cash.
You can change your
choice at any time to be effective as of the next
distribution or dividend,
except that any change given to your Service Agent,
the transfer agent or the
sub-transfer agent less than five days before the
payment date will not be
effective until the next distribution or dividend.
Taxes In general, redeeming shares, exchanging shares
and receiving distribu-
tions (whether in cash or additional shares) are all
taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status
Arizona tax status
<S> <C>
<C>
Redemption or exchange of shares Usually capital gain
Usually capital gain
or loss; long-term
or loss
only if shares owned
more than one year
Long-term capital gain Taxable gain
Taxable gain
distributions
Short-term capital gain Ordinary income
Ordinary income
distributions
Dividends Excluded from gross
Exempt if from
income if from
interest on Arizona
interest on tax-
exempt municipal
securities,
otherwise securities,
ordinary income
otherwise ordinary
income
</TABLE>
Any taxable dividends and capital gain distributions
are taxable whether
received in cash or reinvested in fund shares. Long-
term capital gain distribu-
tions are taxable to you as long-term capital gain
regardless of how long you
have owned your shares. You may want to avoid buying
shares when the fund is
about to declare a capital gain distribution or a
taxable dividend, because it
will be taxable to you even though it may actually be
a return of a portion of
your investment.
Smith Barney Arizona Municipals Fund
20
<PAGE>
After the end of each year, the fund will provide you
with information about
the distributions and dividends you received and any
redemptions of shares dur-
ing the previous year. If you do not provide the fund
with your correct tax-
payer identification number and any required
certifications, you may be subject
to back-up withholding of 31% of your distributions,
dividends, and redemption
proceeds. Because each shareholder's circumstances are
different and special
tax rules may apply, you should consult your tax
adviser about your investment
in the fund.
Share price
You may buy, exchange or redeem shares at their net
asset value, plus any
applicable sales charge, next determined after receipt
of your request in good
order. The fund's net asset value is the value of its
assets minus its liabili-
ties. Net asset value is calculated separately for
each class of shares. The
fund calculates its net asset value every day the New
York Stock Exchange is
open. The Exchange is closed on certain holidays
listed in the SAI. This calcu-
lation is done when regular trading closes on the
Exchange (normally 4:00 p.m.,
Eastern time).
Generally, the fund's investments are valued by an
independent pricing service.
If a market quotation or a valuation from the pricing
service is not readily
available or if a security's value has been materially
affected by events
occurring after the close of the Exchange or market on
which the security is
principally traded, that security may be valued by
another method that the
fund's board believes accurately reflects fair value.
A fund that uses fair
value to price securities may value those securities
higher or lower than
another fund using market quotations to price the same
securities. A security's
valuation may differ depending on the method used for
determining fair value.
In order to buy, redeem or exchange shares at that
day's price, you must place
your order with your Service Agent or the fund's sub-
transfer agent before the
New York Stock Exchange closes. If the Exchange closes
early, you must place
your order prior to the actual closing time.
Otherwise, you will receive the
next business day's price.
Service Agents must transmit all orders to buy,
exchange or redeem shares to
the fund's sub-transfer agent before the sub-transfer
agent's close of busi-
ness.
Smith Barney Mutual Funds
21
<PAGE>
Financial highlights
The financial highlights tables are intended to help
you understand the perfor-
mance of each class for the past 5 years. Certain
information reflects finan-
cial results for a single share. Total return
represents the rate that a
shareholder would have earned (or lost) on a fund
share assuming reinvestment
of all dividends and distributions. The information in
the following tables was
audited by KPMG LLP, independent accountants, whose
report, along with the
fund's financial statements, is included in the annual
report (available upon
request). No information is present for Class Y shares
because no Class Y
shares were outstanding during these fiscal years.
For a Class A share of capital stock outstanding
throughout each year ended
May 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/)
1998 1997 1996
------------------------------------------------------
-------------------------
<S> <C> <C>
<C> <C> <C>
Net asset value, beginning of
year $ 10.31 $ 10.54
$10.21 $9.95 $10.09
------------------------------------------------------
-------------------------
Income (loss) from
operations:
Net investment income(/2/) 0.50 0.49
0.50 0.53 0.53
Net realized and unrealized
gain (loss) (0.77) (0.10)
0.40 0.26 (0.15)
------------------------------------------------------
-------------------------
Total income (loss) from
operations (0.27) 0.39
0.90 0.79 0.38
------------------------------------------------------
-------------------------
Less distributions from:
Net investment income (0.48) (0.49)
(0.52) (0.53) (0.52)
Net realized gain (0.02) (0.13)
(0.05) -- --
------------------------------------------------------
-------------------------
Total distributions (0.50) (0.62)
(0.57) (0.53) (0.52)
------------------------------------------------------
-------------------------
Net asset value, end of year $ 9.54 $ 10.31
$10.54 $10.21 $9.95
------------------------------------------------------
-------------------------
Total return (2.64)% 3.79%
9.00% 8.06% 3.82%
------------------------------------------------------
-------------------------
Net assets, end of year
(000)'s $36,524 $46,279
$46,183 $37,304 $40,917
------------------------------------------------------
-------------------------
Ratios to average net assets:
Expenses(/2/) 0.88% 0.88%
0.85% 0.88% 0.82%
Net investment income 5.09 4.64
4.87 5.17 5.20
------------------------------------------------------
-------------------------
Portfolio turnover rate 16% 41%
42% 27% 22%
------------------------------------------------------
-------------------------
</TABLE>
(/1/) Per share amounts have been calculated using
the monthly average shares
method.
(/2/) The investment adviser waived all or part of
its fees for the year ended
May 31, 1996. If such fees had not been waived,
the per share decrease
to net investment income and the actual expense
ratio would have been
$0.02 and 0.99%, respectively.
Smith Barney Arizona Municipals Fund
22
<PAGE>
For a Class B share of capital stock outstanding
throughout each year ended
May 31:
<TABLE>
<CAPTION>
2000(/1/) 1999(/1/)
1998 1997 1996
------------------------------------------------------
-------------------------
<S> <C> <C>
<C> <C> <C>
Net asset value, beginning of
year $ 10.30 $ 10.54
$10.21 $9.95 $10.09
------------------------------------------------------
-------------------------
Income (loss) from
operations:
Net investment income(/2/) 0.45 0.43
0.45 0.48 0.48
Net realized and unrealized
gain (loss) (0.77) (0.10)
0.40 0.26 (0.15)
------------------------------------------------------
-------------------------
Total income (loss) from
operations (0.32) 0.33
0.85 0.74 0.33
------------------------------------------------------
-------------------------
Less distributions from:
Net investment income (0.42) (0.44)
(0.47) (0.48) (0.47)
Net realized gain (0.02) (0.13)
(0.05) -- --
------------------------------------------------------
-------------------------
Total distributions (0.44) (0.57)
(0.52) (0.48) (0.47)
------------------------------------------------------
-------------------------
Net asset value, end of year $ 9.54 $ 10.30
$10.54 $ 10.21 $9.95
------------------------------------------------------
-------------------------
Total return (3.11)% 3.15%
8.46% 7.53% 3.30%
------------------------------------------------------
-------------------------
Net assets, end of year
(000)'s $15,860 $19,066
$19,721 $19,886 $22,369
------------------------------------------------------
-------------------------
Ratios to average net assets:
Expenses(/2/) 1.41% 1.42%
1.38% 1.39% 1.33%
Net investment income 4.56 4.11
4.35 4.66 4.69
------------------------------------------------------
-------------------------
Portfolio turnover rate 16% 41%
42% 27% 22%
------------------------------------------------------
-------------------------
</TABLE>
(/1/)Per share amounts have been calculated using the
monthly average shares
method.
(/2/)The investment adviser waived all or part of its
fees for the year ended
May 31, 1996. If such fees had not been waived,
the per share decrease to
net investment income and the actual expense
ratio would have been $0.02
and 1.50%, respectively.
Smith Barney Mutual Funds
23
<PAGE>
For a Class L share of capital stock outstanding
throughout each year ended
May 31:
<TABLE>
<CAPTION>
2000(/1/)
1999(/1/)(/2/) 1998 1997 1996
------------------------------------------------------
--------------------------
<S> <C> <C>
<C> <C> <C>
Net asset value, beginning
of year $10.30 $10.53
$10.21 $9.95 $10.09
------------------------------------------------------
--------------------------
Income (loss) from
operations:
Net investment income(/3/) 0.43 0.42
0.45 0.47 0.48
Net realized and unrealized
gain (loss) (0.76) (0.09)
0.39 0.26 (0.15)
------------------------------------------------------
--------------------------
Total income (loss) from
operations (0.33) 0.33
0.84 0.73 0.33
------------------------------------------------------
--------------------------
Less distributions from:
Net investment income (0.42) (0.43)
(0.47) (0.47) (0.47)
Net realized gain (0.02) (0.13)
(0.05) -- --
------------------------------------------------------
--------------------------
Total distributions (0.44) (0.56)
(0.52) (0.47) (0.47)
------------------------------------------------------
--------------------------
Net asset value, end of
year $ 9.53 $10.30
$10.53 $10.21 $9.95
------------------------------------------------------
--------------------------
Total return (3.24)% 3.21%
8.30% 7.49% 3.26%
------------------------------------------------------
--------------------------
Net assets, end of year
(000)'s $ 988 $1,652
$875 $822 $554
------------------------------------------------------
--------------------------
Ratios to average net
assets:
Expenses(/3/) 1.56% 1.44%
1.42% 1.42% 1.39%
Net investment income 4.38 4.09
4.30 4.63 4.63
------------------------------------------------------
--------------------------
Portfolio turnover rate 16% 41%
42% 27% 22%
------------------------------------------------------
--------------------------
</TABLE>
(/1/) Per share amounts have been calculated using the
monthly average shares
method.
(/2/) On June 12, 1998, Class C shares were renamed
Class L shares.
(/3/) The investment adviser waived all or part of its
fees for the year ended
May 31, 1996. If such fees had not been waived,
the per share decrease to
net investment income and the actual expense
ratio would have been $0.02
and 1.56%, respectively.
Smith Barney Arizona Municipals Fund
24
<PAGE>
(This page is intentionally left
blank.)
<PAGE>
[LOGO OF SALOMON SMITH BARNEY MUTUAL FUNDS]
Smith Barney Arizona
Municipals Fund
Shareholder reports Annual and semiannual reports to
shareholders provide addi-
tional information about the fund's investments. These
reports discuss the mar-
ket conditions and investment strategies that
significantly affected the fund's
performance during its last fiscal year or period.
The fund sends only one report to a household if more
than one account has the
same address. Contact your Service Agent or the
transfer agent if you do not
want this policy to apply to you.
Statement of additional information The statement of
additional information
provides more detailed information about the fund and
is incorporated by refer-
ence into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain
shareholder reports or the
statement of additional information (without charge)
by contacting your Service
Agent, by calling the fund at 1-800-451-2010, or by
writing to the fund at
Smith Barney Mutual Funds, 388 Greenwich Street, MF2,
New York, New York 10013.
Visit our web site Our web site is located at
www.smithbarney.com
Information about the fund (including the SAI) can be
reviewed and copied at
the Securities and Exchange Commission's (the
"Commission") Public Reference
Room in Washington, D.C. In addition, information on
the operation of the
Public Reference Room may be obtained by calling the
Commission at 1-202-942-
8090. Reports and other information about the funds
are available on the EDGAR
Database on the Commission's Internet site at
http://www.sec.gov. Copies of
this information may be obtained for a duplicating fee
by electronic request at
the following E-mail address: [email protected], or
by writing the Commis-
sion's Public Reference Section, Washington, D.C.
20549-0102.
If someone makes a statement about the fund that is
not in this prospectus, you
should not rely upon that information. Neither the
fund nor the distributor is
offering to sell shares of the fund to any person to
whom the fund may not law-
fully sell its shares.
SMYour Serious Money. Professionally Managed. is a
service mark of Salomon
Smith Barney Inc.
(Investment Company Act
file no. 811-5066)
FD0238 9/00
September 28, 2000
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is
not
a prospectus and is meant to be read in conjunction
with
the Prospectus of the Smith Barney Arizona Municipals
Fund Inc. (the "fund") dated September 28, 2000, as
amended or supplemented from time to time (the
"prospectus"), and is incorporated by reference in its
entirety into the prospectus. Additional information
about the fund's investments is available in the
fund's
annual and semi-annual reports to shareholders that
are
incorporated herein by reference. The prospectus and
copies of the reports may be obtained free of charge
by
contacting a Service Agent, a broker-dealer, financial
intermediary, financial institution or a distributor's
financial consultants (each called a "Service Agent"),
or by writing or calling Salomon Smith Barney Inc.
("Salomon Smith Barney") at the address or telephone
number above.
TABLE OF CONTENTS
Directors and Executive Officers of the Fund 2
Investment Objective and Management Policies 6
Investment
Restrictions.......................16
Risk Factors and Special Considerations Relating
to Municipal Securities...................18
Special Considerations Relating to Arizona
Municipal Securities .....................19
Special Considerations Regarding Puerto
Rico..................21
Portfolio
Transactions............................22
Portfolio
Turnover.........................................23
Purchase of Shares...............24
Determination of Net Asset
Value.................................................................29
Redemption of Shares 30
Investment Management and Other Services 33
Valuation of Shares 38
Exchange Privilege 38
Performance Information 40
Dividends, Distributions and Taxes 44
Additional Information 48
Financial Statements.....................49
Other
Information.............................49
Appendix A....................................51
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The names of the directors of the fund and executive
officers of the fund, together with information as to
their principal business occupations, are set forth
below. The executive officers of the fund are
employees
of organizations that provide services to the fund.
Each director who is an "interested person" of the
fund,
as defined in the Investment Company Act of 1940, as
amended (the"1940 Act"), is indicated by an asterisk.
The address of the "non-interested" directors and
certain executive officers of the fund is 388
Greenwich
Street, New York, New York 10013.
Herbert Barg (Age 77). Director
Private Investor. Director or trustee of 16
investment
companies associated with Citigroup Inc.
("Citigroup").
His address is 273 Montgomery Avenue, Bala Cynwyd,
Pennsylvania 19004.
*Alfred J. Bianchetti (Age 76). Director
Retired; formerly Senior Consultant to Dean Witter
Reynolds Inc. Director or trustee of 11 investment
companies associated with Citigroup. His address is
19
Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody (Age 78). Director
Consultant, HMK Associates; Retired Vice Chairman of
the
Board of Restaurant Associates Corp. Director or
trustee
of 20 investment companies associated with Citigroup.
His address is c/o HMK Associates, 30 Columbia
Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane (Age 62). Director
Professor, Harvard Business School. Director or
trustee
of 23 investment companies associated with Citigroup.
His address is c/o Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163.
Burt N. Dorsett (Age 69). Director
Managing Partner of Dorsett McCabe Management. Inc.,
an
investment counseling firm; Director of Research
Corporation Technologies, Inc., a nonprofit patent
clearing and licensing firm. Director or trustee of
11
investment companies associated with Citigroup. His
address is 201 East 62nd Street, New York, New York
10021.
Elliot S. Jaffe (Age 74). Director
Chairman of the Board and President of The Dress Barn,
Inc. Director or trustee of 11 investment companies
associated with Citigroup. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 68). Director
Attorney. Director or trustee of 13 investment
companies
associated with Citigroup. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann (Age 69). Director
Financial Consultant; Retired Financial Executive,
Ryan
Homes, Inc. Director or trustee of 11 investment
companies associated with Citigroup. His address is
200
Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon (Age 67). Chairman of the Board,
President and Chief Executive Officer
Managing Director of Salomon Smith Barney.; President
of
SSB Citi Fund Management LLC ("SSB Citi" or the
"manager") and Travelers Investment Adviser, Inc.
("TIA"); Chairman or Co-Chairman of the Board and
director or trustee of 78 investment companies
associated with Citigroup. His address is 7 World
Trade
Center, New York, New York 10048.
Cornelius C. Rose, Jr. (Age 66). Director
President, Cornelius C. Rose Associates, Inc.,
financial
consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. Director
or trustee of 11 investment companies associated with
Citigroup. His address is Meadowbrook Village,
Building
4, Apt 6, West Lebanon, New Hampshire 03784.
Lewis E. Daidone (Age 43). Senior Vice President and
Treasurer
Managing Director of Salomon Smith Barney; Senior Vice
President or Executive Vice President and Treasurer of
61 investment companies associated with Citigroup, and
Director and Senior Vice President of the manger and
TIA. His address is 125 Broad Street, New York, New
York 10004.
Joseph P. Deane (Age 51). Vice President and
Investment
Officer
Investment Officer of SSB Citi; Managing Director of
Salomon Smith Barney; Investment Officer of 9 Smith
Barney mutual funds. His address is 7 World Trade
Center, New York, New York 10048.
Paul Brook (Age 47). Controller
Director of Salomon Smith Barney; from 1997-1998
Managing Director of AMT Capital Services Inc.; prior
to
1997 Partner with Ernst & Young LLP. Controller or
Assistant Treasurer of 43 investment companies
affiliated with Citigroup. His address is 125 Broad
Street, New York, New York 10004.
Christina T. Sydor (Age 49). Secretary
Managing Director of Salomon Smith Barney and
Secretary
of 61 investment companies affiliated with Citigroup;
Secretary and General Counsel of the Manager and TIA.
Her address is 388 Greenwich Street, New York, New
York
10013
As of September 6, 2000, the directors and officers of
the funds, as a group, owned less than 1% of the
outstanding shares of beneficial interest of the fund.
To the best knowledge of the directors, as of
September
6, 2000, the following shareholders or "groups" (as
such
term is defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended) owned beneficially
or
of record more than 5% of the shares of the following
classes:
Shareholder
Class
Shares Held
Thomas Adelson
4744 East Exeter
Phoenix, AZ 85018-2819
L
Owned 15,377.328
14.70% of shares
Rachel Fritch Harris & Richard
Franklin Harris Co-Ttees
FBO Rachel Fritch Harris Trust
U/A/D 05/01/89
6234 East Sage Drive
Scottsdale, AZ 85253-6961
L
Owned 13,123.199
12.55% of shares
Boynton Family Ltd Partnership
Henny Boynton President
8620 N. 84th Place
Scottsdale, AZ 85258-2492
L
Owned 10,272.073
9.8244% of shares
Robert A. Nichol Ttee
FBO The Robert A. Nichol Trust
U/A/D 03/30/00
2381 Stroke Drive
Lake Havasu City, AZ 86406-7625
L
Owned 7,737.139
7.39% of shares
G.T. Kearney Ttee
FBO Glenn T. Kearney Trust
U/A/D 08/11/93
101 S. Yucca St. #156
Chandler, AZ 85224-8177
L
Owned 7,524,113
7.19% of shares
Sally J. Adelson
1914 E. Orange Dr.
Phoenix, AZ 85016-4115
L
Owned 7,511.466
7.18% of shares
Nancy Hoard Glenn
Sole & Separate Property
P.O. Box 5029
Carefree, Arizona 85377-5029
L
Owned 6,134.320
5.86% of shares
Thomas & Jane Gill Ttee
FBO Gill Living Trust
U/A/D 06/17/97
11 East Orange Grove Rd
Apt 3016
Tucson, AZ 85704-5535
L
Owned 5,530.476
5.09% of shares
No officer, director or employee of Salomon Smith
Barney
or any of its affiliates receives any compensation
from
the fund for serving as an officer of the funds or
director of the fund. The fund pays each director who
is not an officer, director or employee of Salomon
Smith
Barney or any of its affiliates a fee of $1,000 per
annum plus $100 per in-person meeting and $100 per
telephonic meeting. Each director emeritus who is not
an officer, director or employee of Salomon Smith
Barney
or its affiliates receives a fee of $500 per annum
plus
$50 per in-person meeting and $50 per telephonic
meeting. All directors are reimbursed for travel and
out-of-pocket expenses incurred to attend such
meetings.
For the fiscal year ended May 31, 2000, such expenses
totaled $14,437. For the fiscal year ended May 31,
2000, the directors of the fund were paid the
following
compensation:
Name of Person
Aggregate
Compensati
on
from Fund
Total
Pension or
Retirement
Benefits
Accrued
As part of
Fund
Expenses
Compensati
on
From Fund
And Fund
Complex
Paid to
Directors
Number of
Funds for
Which
Directors
Serve Within
Fund Complex
Herbert Barg **
$1,500
$0
$114,288
16
Alfred
Bianchetti *
1,400
0
53,900
11
Martin Brody **
1,200
0
138,600
20
Dwight B. Crane
**
1,400
0
155,363
23
Burt N. Dorsett
**
1,500
0
57,950
11
Elliot S. Jaffe
**
1,400
0
45,100
11
Stephen E.
Kaufman **
1,500
0
110,650
13
Joseph J. McCann
**
1,500
0
58,050
11
Heath B.
McLendon *
0
0
0
78
Cornelius C.
Rose, Jr. **
1,500
0
53,500
11
* Designates an "interested" director.
** Designates member of Audit Committee.
Upon attainment of age 80, fund directors are
required to change to emeritus status. Directors
emeritus are entitled to serve in emeritus status
for a maximum of 10 years. A director emeritus
may attend meetings but has no voting rights.
During the fund's last fiscal year, aggregate
compensation paid by the fund to directors
achieving emeritus status totaled $700.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the fund's investment
objective
and the policies it employs to achieve that objective.
The following discussion supplements the description
of
the fund's investment policies in the prospectus.
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. 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.
Diversified Classification
The fund is classified as a diversified fund under the
1940 Act. In order to be classified as a diversified
investment company under the 1940 Act, the fund may
not,
with respect to 75% of its assets, invest more than 5%
of its total assets in the securities of any one
issuer
(except U.S. government securities) or own more than
10%
of the outstanding voting securities of any one
issuer.
For the purposes of diversification under the 1940
Act,
the identification of the issuer of Municipal Bonds
depends upon the terms and conditions of the security.
When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are
separate from those of the government creating the
issuing entity and the security is backed only by the
assets and revenues of such entity, such entity is
deemed to be the sole issuer. Similarly, in the case
of
a private activity bond, if that bond is backed only
by
the assets and revenues of the nongovernmental user,
then such nongovernmental user is deemed to be the
sole
issuer. If, however, in either case, the creating
government or some other entity guarantees a security,
such a guarantee would be considered a separate
security
and is to be treated as an issue of such government or
other entity.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's Ratings
Services
("S&P") and other nationally recognized statistical
ratings organizations ("NRSROs") represent the
opinions
of those agencies as to the quality of the Municipal
Bonds and short-term investments which they rate. It
should be emphasized, however, that such ratings are
relative and subjective, are not absolute standards of
quality and do not evaluate the market risk of
securities. These ratings will be used by the fund as
initial criteria for the selection of portfolio
securities, but the fund also will rely upon the
independent advice of the manager to evaluate
potential
investments. Among the factors that will be considered
are the long-term ability of the issuer to pay
principal
and interest 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 the manager's
credit
analysis of such securities than would be the case for
a portfolio consisting entirely of higher-rated
securities. The Appendix contains further information
concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the fund, an issue of
Municipal Bonds may cease to be rated or its rating
may
be reduced below the rating given at the time the
securities were acquired by the fund. Neither event
will
require the sale of such Municipal Bonds by the fund,
but the manager will consider such event in its
determination of whether the fund should continue to
hold such Municipal Bonds. In addition, to the extent
the ratings change as a result of changes in such
organizations, in their rating systems or because of a
corporate restructuring of Moody's, S&P or any NRSRO,
the fund will attempt to use comparable ratings as
standards for its investments in accordance with its
investment objective and policies.
The fund generally will invest at least 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 have the equivalent rating by any
NRSRO or in unrated obligations of comparable quality.
Unrated obligations will be considered to be of
investment grade if deemed by the manager to be
comparable in quality to instruments so rated, or if
other outstanding obligations of the issuers thereof
are
rated Baa or better by Moody's or BBB or better by
S&P.
The balance of the fund's assets may be invested in
securities rated as low as C by Moody's or D by S&P or
have the equivalent rating by any NRSRO, or deemed by
the manager to be comparable unrated securities, which
are sometimes referred to as "junk bonds." Securities
in the fourth highest rating category, though
considered
to be investment grade, have speculative
characteristics. Securities rated as low as D are
extremely speculative and are in actual default of
interest and/or principal payments.
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 or the
equivalent from any other NRSRO. 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.
Low and Comparable Unrated Securities. While the
market
values of low-rated and comparable unrated securities
tend to react less to fluctuations in interest rate
levels than the market values of higher rated
securities, the market values of certain low-rated and
comparable unrated municipal securities also tend to
be
more sensitive than higher-rated securities to short-
term corporate and industry developments and changes
in
economic conditions (including recession) in specific
regions or localities or among specific types of
issuers, In addition, low-rated securities and
comparable unrated securities generally present a
higher
degree of credit risk. During an economic downturn or
a prolonged period of rising interest rates, the
ability
of issuers of low-rated and comparable unrated
securities to service their payment obligations, meet
projected goals or obtain additional financing may be
impaired. The risk of loss because of 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. Municipal Bonds generally are
understood to include debt obligations issued to
obtain
funds for various public purposes, including
construction of a wide range of public facilities,
refunding of outstanding obligations, payment of
general
operating expenses and extensions of loans to public
institutions and facilities. Private activity bonds
issued by or on behalf of public authorities to
finance
various privately operated facilities are included
within the term Municipal Bonds if the interest paid
thereon qualifies as excluded from gross income (but
not
necessarily from alternative minimum taxable income)
for
federal income tax purposes in the opinion of bond
counsel to the issuer.
The yield on Municipal Bonds is dependent on a variety
of factors, including general economic and monetary
conditions, general money market factors, general
conditions of the Municipal Bond market, the financial
condition of the issuer, the size of a particular
offering, maturity of the obligation offered and the
rating of the issue.
Municipal Bonds also may be 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, which may be
enacted
by Congress or state legislatures extending the time
for
payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations
or upon the ability of municipalities to levy taxes.
The possibility also exists that, as a result of
litigation or other conditions, the power or ability
of
any one or more issuers to pay, when due, the
principal
of and interest on its or their Municipal Bonds may be
materially and adversely affected.
Municipal Leases. The fund may invest without limit in
"municipal leases", which are obligations issued by
state and local governments or authorities to finance
the acquisition of equipment or facilities. The
interest on such obligations is, in the opinion of
counsel to the issuers, excluded from gross income for
federal income tax purposes. 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. There is no limitation on the percentage of
the fund's assets that may be invested in municipal
lease obligations. In evaluating municipal lease
obligations, the manager will consider such factors as
it deems appropriate, which may include: (a) whether
the lease can be canceled; (b) the ability of the
lease
obligee to direct the sale of the underlying assets;
(c)
the general creditworthiness of the lease obligor; (d)
the likelihood that the municipality will discontinue
appropriating funding for the leased property in the
event such property is no longer considered essential
by
the municipality; (e) the legal recourse of the lease
obligee in the event of such a failure to appropriate
funding; (f) whether the security is backed by a
credit
enhancement such as insurance; and (g) any limitations
which are imposed on the lease obligor's ability to
utilize substitute property or services rather than
those covered by the lease obligation.
The fund may invest without limit in debt obligations
which are repayable out of revenue streams generated
from economically-related projects or facilities or
debt
obligations whose issuers are located in the same
state.
Sizeable investments in such obligations could
involve
an increased risk to the fund should any of the
related
projects or facilities experience financial
difficulties.
Private Activity Bonds. The fund may invest without
limit in private activity bonds. Interest income on
certain types of private activity bonds issued after
August 7, 1986 to finance non-governmental activities
is
a specific tax preference item for purposes of the
federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be
subject to a federal alternative minimum tax to the
extent the fund's dividends are derived from interest
on
those bonds. Dividends derived from interest income on
Municipal Securities are a component of the "current
earnings" adjustment item for purposes of the federal
corporate alternative minimum tax.
Zero Coupon Bonds. The fund may also invest in zero
coupon bonds. Zero coupon securities are debt
obligations which do not entitle the holder to any
periodic payments of interest prior to maturity on a
specified cash payment date when the securities begin
paying current interest (the "cash payment date") and
therefore are issued and traded at a discount from
their
face amounts or par values. The discount varies
depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the
issuer. The discount, in the absence of financial
difficulties of the issuer, decreases as the final
maturity or cash payment date of the security
approaches. The market prices of zero coupon
securities
generally are more volatile than the market prices of
other debt securities that pay interest periodically
and
are likely to respond to changes in interest rates to
a
greater degree than do debt securities having similar
maturities and credit quality. The credit risk
factors
pertaining to low-rated securities also apply to low-
rated zero coupon bonds. Such zero coupon bonds carry
an additional risk in that, unlike bonds which pay
interest throughout the period to maturity, the fund
will realize no cash until the cash payment date
unless
a portion of such securities is sold and, if the
issuer
defaults, the fund may obtain no return at all on its
investment.
When-Issued Securities. The fund may purchase
Municipal
Bonds on a "when-issued" basis (i.e., for delivery
beyond the normal settlement date at a stated price
and
yield). The payment obligation and the interest rate
that will be received on the Municipal Bonds purchased
on a when-issued basis are each fixed at the time the
buyer enters into the commitment. Although the fund
will
purchase Municipal Bonds on a when-issued basis only
with the intention of actually acquiring the
securities,
the fund may sell these securities before the
settlement
date if it is deemed advisable as a matter of
investment
strategy.
Municipal Bonds are subject to changes in value based
upon the public's perception of the creditworthiness
of
the issuers and changes, real or anticipated, in the
level of interest rates. In general, Municipal Bonds
tend to appreciate when interest rates decline and
depreciate when interest rates rise. Purchasing
Municipal Bonds on a when-issued basis, therefore, can
involve the risk that the yields available in the
market
when the delivery takes place may actually be higher
than those obtained in the transaction itself. To
account for this risk, a separate account of the fund
consisting of cash or liquid securities equal to the
amount of the when-issued commitments will be
established on the fund's books. For the purpose of
determining the adequacy of the securities in the
account, the deposited securities will be valued at
market or fair value. If the market or fair value of
such securities declines, additional cash or
securities
will be placed in the account on a daily basis so the
value of the account will equal the amount of such
commitments by the fund. Placing securities rather
than
cash in the segregated account may have a leveraging
effect on the fund's net assets. That is, to the
extent
the fund remains substantially fully invested in
securities at the same time it has committed to
purchase
securities on a when-issued basis, there will be
greater
fluctuations in its net assets than if it had set
aside
cash to satisfy its purchase commitments. Upon the
settlement date of the when-issued securities, the
fund
will meet obligations from then-available cash flow,
sale of securities held in the segregated account,
sale
of other securities or, although it normally would not
expect to do so, from the sale of the when-issued
securities themselves (which may have a value greater
or
less than the fund's payment obligations). Sales of
securities to meet such obligations may involve the
realization of capital gains, which are not exempt
from
federal income tax.
When the fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure
of
the seller to do so may result in the fund's incurring
a loss or missing an opportunity to obtain a price
considered advantageous.
Repurchase Agreements. The fund may agree to purchase
securities from a bank or recognized securities dealer
and simultaneously commit to resell the securities to
the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities
("repurchase agreements"). The fund would maintain
custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to
would
be, in effect, secured by such securities. If the
value
of such securities were less than the repurchase
price,
plus interest, the other party to the agreement would
be
required to provide additional collateral so that at
all
times the collateral is at least 102% of the
repurchase
price plus accrued interest. Default by or bankruptcy
of a seller would expose the fund to possible loss
because of adverse market action, expenses and/or
delays
in connection with the disposition of the underlying
obligations. The financial institutions with which
the
fund may enter into repurchase agreements will be
banks
and non-bank dealers of U.S. Government securities
that
are on the Federal Reserve Bank of New York's list of
reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the fund's manager. In
addition, the manager will require that the value of
this collateral, after transaction costs (including
loss
of interest) reasonably expected to be incurred on a
default, be equal to 102% or greater than the
repurchase
price (including accrued premium) provided in the
repurchase agreement or the daily amortization of the
difference between the purchase price and the
repurchase
price specified in the repurchase agreement. The
manager will mark-to-market daily the value of the
securities.
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, S&P or another
NRSRO or, if not rated, having an issue of outstanding
municipal bonds of Arizona issuers rated within the
three highest grades by Moody's S&P or the equivalent
from another NRSRO 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.
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 or the equivalent from another NRSRO,
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.
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.
The fund also may purchase and write call and put
options on financial futures contracts. An option on
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 liquid securities 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.
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 on the manager's ability to
predict changes in interest rates. Furthermore, there
may be an imperfect correlation (or no correlation)
between the price movements of the futures contracts
and
price movements of the fund's portfolio securities
being
hedged. This lack of correlation could result from
differences between the securities being hedged and
the
securities underlying the futures contracts in
interest
rate levels, maturities and creditworthiness of
issuers,
as well as from variations in speculative market
demand
for futures contracts and debt securities. Where
futures contracts are purchased to hedge against an
increase in the price of long-term securities, but the
long-term market declines and the fund does not invest
in long-term securities, the fund would realize a loss
on the futures contracts, which would not be offset by
a reduction in the price of the securities purchased.
Where futures contracts are sold to hedge against a
decline in the value of long-term securities in the
fund's portfolio, but the long-term market advances,
the
fund would lose part or all of the benefit of the
advance due to offsetting losses in its futures
positions. Options on futures contracts and index
options involve risks similar to those risks relating
to
transactions in financial futures contracts, described
above. The use of futures contracts and related
options
may be expected to result in taxable income to the
fund
and its shareholders.
Options on Debt Securities. In connection with its
hedging activities, the fund may purchase and sell put
and call options on debt securities on national
securities exchanges. The fund proposes to purchase
put
options as a defensive measure to minimize the impact
of
market price declines on the value of certain of the
securities in the fund's portfolio. The fund may
write
listed call options only if the calls are "covered"
throughout the life of the option. A call is
"covered"
if the fund owns the optioned securities or maintains
in
a segregated account with the fund's custodian cash,
cash equivalents, U.S. government securities or debt
securities of any grade (provided such assets are
liquid, unencumbered and market to market daily) with
a
value sufficient to meet its obligations under the
call.
When the fund writes a call, it receives a premium
and
gives the purchaser the right to buy the underlying
security at any time during the call period (usually
not
more than fifteen months) at a fixed exercise price
regardless of market price changes during the call
period. If the call is exercised, the fund would
forego
any gain from an increase in the market price of the
underlying security over the exercise price. The fund
may purchase a call on securities only to effect a
"closing purchase transaction," which is the purchase
of
a call covering the same underlying security, and
having
the same exercise price and expiration date as a call
previously written by the fund on which it wishes to
terminate its obligations.
The fund also may write and purchase put options
("puts"). When the fund writes a put, it receives a
premium and gives the purchaser of the put the right
to
sell the underlying security to the fund at the
exercise
price at any time during the option period. When the
fund purchases a put, it pays a premium in return for
the right to sell the underlying security at the
exercise price at any time during the option period.
If
any put is not exercised or sold, it will become
worthless on its expiration date. The fund will not
purchase puts if more than 10% of its net assets would
be invested in premiums on puts.
The fund may write puts only if the puts are
"secured."
A put is "secured" if the fund maintains cash, cash
equivalents, U.S. government securities or debt
securities of any grade (provided such assets are
liquid, unencumbered and 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.
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 on the funds' books. The
segregated assets may consist of cash or liquid
securities having a value equal to or greater than the
fund's purchase commitments, provided such securities
have been determined by SSB Citi 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 or debt
obligations of any grade so long as such assets are
liquid, unencumbered and marked to market daily.
Puts or Stand-by Commitments. 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.
INVESTMENT RESTRICTIONS
The fund has adopted the following investment
restrictions for the protection of shareholders.
Restrictions 1 through 7 cannot be changed without
approval by 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 Board of Directors
at
any time. The fund may not:
1. Invest in a manner that would cause it to
fail to be a "diversified company" under
the 1940 Act and the rules, regulations and
orders thereunder.
2. Issue "senior securities" as defined in
the
1940 Act and the rules, regulations and
orders thereunder, except as permitted
under the 1940 Act and the rules,
regulations and orders thereunder.
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 (a) the fund may
borrow from banks for temporary or
emergency (not leveraging) purposes,
including the meeting of redemption
requests which might otherwise require the
untimely disposition of securities, and (b)
the fund may, to the extent consistent with
its investment policies, enter into reverse
repurchase agreements, forward roll
transactions and similar investment
strategies and techniques. To the extent
that it engages in transactions described
in (a) and (b), the fund will be limited so
that no more than 33 1/3% of the value of
its total assets (including the amount
borrowed), valued at the lesser of cost or
market, less liabilities (not including the
amount borrowed) is derived from such
transactions.
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 objectives and policies; (b)
repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent
permitted under the 1940 Act.
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
1933 Act, in disposing of portfolio
securities.
7. Purchase or sell real estate, real estate
mortgages, commodities or commodity
contracts, but this restriction shall not
prevent the fund from (a) investing in
securities of issuers engaged in the real
estate business or the business of
investing in real estate (including
interests in limited partnerships owning or
otherwise engaging in the real estate
business or the business of investing in
real estate) and securities which are
secured by real estate or interests
therein; (b) holding or selling real estate
received in connection with securities it
holds or held; (c) trading in futures
contracts and options on futures contracts
(including options on currencies to the
extent consistent with the fund's
investment objective and policies); or (d)
investing in real estate investment trust
securities.
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
underlying securities and other assets in
escrow and collateral agreements with
respect to initial or maintenance margin in
connection with futures contracts and
related options and options on securities,
indexes or similar items is not considered
to be the purchase of a security on margin.
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.
Certain restrictions listed above permit the fund to
engage in investment practices the fund does not
currently pursue. The fund has no present intention
of
altering its current investment practices as otherwise
described in the prospectus and this SAI and any
future
change in those practices would require Board approval
and appropriate notice to shareholders. If a
percentage
restriction is complied with at the time of an
investment, a later increase or decrease in the
percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the
fund's assets will not constitute a violation of such
restriction.
RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO
MUNICIPAL SECURITIES
Alternative Minimum Tax
Under current federal income tax law, (1) interest on
tax-exempt municipal securities issued after August 7,
1986 which are "specified private activity bonds," and
the proportionate share of any exempt-interest
dividend
paid by a regulated investment company which receives
interest from such specified private activity bonds,
will be treated as an item of tax preference for
purposes of the alternative minimum tax ("AMT")
imposed
on individuals and corporations, though for regular
Federal income tax purposes such interest will remain
fully tax-exempt, and (2) interest on all tax-exempt
obligations will be included in "adjusted current
earnings" of corporations for AMT purposes. Such
private
activity bonds ("AMT-Subject bonds"), which include
industrial development bonds and bonds issued to
finance
such projects as airports, housing projects, solid
waste
disposal facilities, student loan programs and water
and
sewage projects, have provided, and may continue to
provide, somewhat higher yields than other comparable
municipal securities.
Investors should consider that, in most instances, no
state, municipality or other governmental unit with
taxing power will be obligated with respect to AMT-
Subject bonds. AMT-Subject bonds are in most cases
revenue bonds and do not generally have the pledge of
the credit or the taxing power, if any, of the issuer
of
such bonds. AMT-Subject bonds are generally limited
obligations of the issuer supported by payments from
private business entities and not by the full faith
and
credit of a state or any governmental subdivision.
Typically the obligation of the issuer of AMT-Subject
bonds is to make payments to bond holders only out of
and to the extent of, payments made by the private
business entity for whose benefit the AMT-Subject
bonds
were issued. Payment of the principal and interest on
such revenue bonds depends solely on the ability of
the
user of the facilities financed by the bonds to meet
its
financial obligations and the pledge, if any, of real
and personal property so financed as security for such
payment. It is not possible to provide specific
detail
on each of these obligations in which fund assets may
be
invested.
Municipal Market Volatility. Municipal securities can
be significantly affected by political changes as well
as uncertainties in the municipal market related to
taxation, legislative changes, or the rights of
municipal security holders. Because many municipal
securities are issued to finance similar projects,
especially those relating to education, health care,
transportation and utilities, conditions in those
sectors can affect the overall municipal market. In
addition, changes in the financial condition of an
individual municipal insurer can affect the overall
municipal market.
Interest Rate Changes. Debt securities have varying
levels of sensitivity to changes in interest rates.
In
general, the price of a debt security can fall when
interest rates rise and can rise when interest rates
fall. Securities with longer maturities can be more
sensitive to interest rate changes. In other words,
the
longer the maturity of a security, the greater the
impact a change in interest rates could have on the
security's price. In addition, short-term and long-
term
interest rates do not necessarily move in the same
amount or the same direction. Short-term securities
tend to react to changes in short-term interest rates,
and long-term securities tend to react to changes in
long-term interest rates.
Issuer-Specific Changes. Changes in the financial
condition of an issuer, changes in specific economic
or
political conditions that affect a particular type of
security or issuer, and changes in general economic or
political conditions can affect the credit quality or
value of an issuer's securities. Lower-quality debt
securities (those of less than investment-grade
quality)
tend to be more sensitive to these changes than
higher-
quality debt securities. Entities providing credit
support or a maturity-shortening structure also can be
affected by these types of changes. Municipal
securities backed by current or anticipated revenues
from a specific project or specific assets can be
negatively affected by the discontinuance of the
taxation supporting the project or assets or the
inability to collect revenues for the project or from
the assets. If the Internal Revenue Service
determines
an issuer of a municipal security has not complied
with
applicable tax requirements, interest from the
security
could become taxable and the security could decline
significantly in value. In addition, if the structure
of a security fails to function as intended, interest
from the security could become taxable or the security
could decline in value.
SPECIAL CONSIDERATIONS RELATING TO ARIZONA MUNICIPAL
SECURITIES
RISK FACTORS The fund will invest principally in
securities of political subdivisions and other
issuers of the State of Arizona the interest on which
is
exempt from federal and Arizona income taxes. As a
result, the ability of such Arizona issuers to meet
their obligations with respect to such securities
generally will be influenced by the political,
economic
and regulatory developments affecting the state of
Arizona and the particular revenue streams supporting
such issuers' obligations, the income derived by the
fund, the ability to preserve or realize appreciation
of
the fund's capital, and the liquidity of the fund
could
be adversely affected. The following summary
respecting
the State of Arizona is only general in nature and
does
not purport to be a description of the investment
considerations and factors which may have an effect on
the obligations of a particular issuer in which the
fund
may invest.
Arizona's economy continues on a path of strong
growth,
although economists at Arizona State University expect
the growth rate to slow. There are, however, no signs
of any serious imbalances. Arizona's economy is among
the fastest growing in the country. The state's
population increased by more than 100,000 each year
during the 7-year period from 1991 to 1999. During
1999, Arizona's population was estimated at
approximately 4.84 million. As a result, homebuilding
and commercial construction are extremely strong,
although construction is expected to slow somewhat in
2000. This growth in population will require
corresponding increases in revenue of Arizona
issuers to meet increased demands for infrastructure
development and various services, and the performance
of Arizona's economy will be critical to providing
such increased revenue.
The state's principal economic sectors include
services,
construction, manufacturing dominated by electrical,
transportation and military equipment, high
technology,
government, tourism, and the military. State
unemployment rates have remained generally comparable
to
the national average in recent years, while the
Arizona
economy has generally performed above the national
average in recent years. Arizona has held a steady
position among the top five states in employment
growth
since May 1993. In 1999, the Arizona rate of non-
agricultural job creation ranked second in the nation.
Furthermore, from the third quarter of 1998 to the
third
quarter of 1999, Arizona's personal income increased
by
approximately 7.65 percent.
Arizona is required by law to maintain a balanced
budget. To achieve this objective, Arizona has, in
the
past, utilized a combination of spending reductions
and
tax increases. The condition of the national economy
will continue to be a significant factor influencing
Arizona's budget during the upcoming fiscal year.
With respect to issuers of the securities in which the
fund will invest, Arizona's state constitution
limits
the amount of debt payable from general tax revenue
that may be contracted by the State to $350,000.
However, certain other issuers have the power to issue
obligations payable from a source of revenue that
affects the whole or large portions of the State. For
example, the Transportation Board of the State of
Arizona Department of Transportation may issue
obligations for highways that are paid from revenues
generated from, among other sources, 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 electrical system that 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 obligations payable from a
number of sources.
Arizona's state constitution also restricts the debt
payable from general tax revenues of certain of the
State's political subdivisions and municipal
corporations. 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 approval of a
majority of the qualified electors thereof voting at
an
election provided by law to be held for that purpose;
provided, however, that (i) under no circumstances
may
any county or school district of the State become
indebted in an amount exceeding 15% (or 30% in the
case
of a unified school district) of such taxable
property,
and (ii) any incorporated city or town of the State
with
such approval may be allowed to become indebted up to
an
additional 20% for (a) supplying such city or town
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,
and (b) the acquisition and development by the
incorporated city or town of land or interests
therein for open space preserves, parks,
playgrounds, and recreational facilities.
Irrigation, power, electrical, agricultural
improvements, drainage, flood control, and tax
levying public improvement districts are, however,
exempt from the restrictions of the Arizona
Constitution. There are also restrictions relating to
such entities implemented by statute.
Annual property tax levies for the payment of general
obligation bonded indebtedness of political
subdivisions
and municipal corporations are unlimited as to rate or
amount (other than for purposes of refunding when
there
are certain limits). 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 political subdivisions and municipal
corporations are subject to certain other limitations
on
their ability to assess taxes and levies that 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 proceeding year by more than
two
percent. Certain taxes are specifically exempt from
this limit, including taxes levied for debt service
payments.
SPECIAL CONSIDERATIONS REGARDING PUERTO RICO
The following highlights some of the more significant
financial trends and problems affecting the
Commonwealth
of Puerto Rico (the "Commonwealth" or "Puerto Rico"),
and is based on information drawn from official
statements and prospectuses relating to the securities
offerings of Puerto Rico, its agencies and
instrumentalities, as available on the date of this
SAI.
SSB Citi has not independently verified any of the
information contained in such official statements,
prospectuses, and other publicly available documents,
but is not aware of any fact that would render such
information materially inaccurate.
Puerto Rico has a diversified economy dominated by the
manufacturing and service sectors. The North American
Free Trade Agreement ("NAFTA"), which became effective
January 1, 1994, has led to loss of lower wage jobs
such
as textiles, but economic growth in other areas,
particularly tourism, construction and the high
technology areas have compensated for that loss.
Puerto
Rico's economy expanded in the 1990's in step with the
U.S. economy.
The Commonwealth of Puerto Rico differs from the
states
in its relationship with the federal government. Most
federal taxes, except those such as social security
taxes that are imposed by mutual consent, are not
levied
in Puerto Rico. Moreover, Under Section 936 of the
Internal Revenue Code 1986, as amended (the "Code")
U.S.
companies enjoyed an effective 100% federal tax
exemption for operating and qualifying investment
income
from Puerto Rico sources. However, in conjunction
with
the 1993 U.S. budget plan, Section 936 was amended and
provided for two alternative limitations to the
Section
936 credit. The first option limited the credit
against
such income to 40% of the credit allowable under then
current law, with a five year phase-in period starting
at 60% of the allowable credit. The second option was
a
wage and depreciation based credit. Additional
amendments to Section 936 in 1996 imposed caps on
these
credits, beginning in 1998 for the first option and
beginning in 2002 for the second option. More
importantly, the 1996 amendments eliminated both
options
for taxable years beginning in 2006.
Also in 1996, a new Section 30A was added to the Code.
Section 30A permits a "qualifying domestic
corporation"
that meets certain gross income tests to claim a
credit
against the federal income tax imposed on taxable
income
derived from sources outside the United States from
the
active conduct of a trade or business in Puerto Rico
or
from the sale of substantially all the assets used in
such a business. Section 30A will be phased out by
January 1, 2006. The Governor of Puerto Rico has
proposed that Congress permanently extend Section 30A
until the Puerto Rican economy achieves certain
economic
improvements. Similarly, President Clinton proposed
permanent extension of the Section 30A in both his
1998
and 1999 budgets. To date, however, no action has been
taken.
The eventual elimination of tax benefits to those U.S.
companies with operations in Puerto Rico may lead to
slower growth in the future. There can be no assurance
that this will not lead to a weakened economy, a lower
rating on Puerto Rico's debt or lower prices for
Puerto
Rican bonds that may be held by the fund in the long-
term. The government of Puerto Rico has enacted its
own
tax incentive programs for both industrial and tourist
activities.
Puerto Ricans have periodically considered conversion
to
statehood and such a vote is likely again in the
future.
The statehood proposal was defeated in December, 1998.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased
directly
from the issuer or from an underwriter acting as
principal. Other purchases and sales usually are
placed
with those dealers from which it appears that the best
price or execution will be obtained; those dealers may
be acting as either agents or principals. The
purchase
price paid by the fund to underwriters of newly issued
securities usually includes a concession paid by the
issuer to the underwriter, and purchases of after-
market
securities from dealers normally are executed at a
price
between the bid and asked prices. For the 1998, 1999
and 2000 fiscal years, the fund has paid no brokerage
commissions.
Allocation of transactions, including their frequency,
to various dealers is determined by the manager in its
best judgment and in a manner deemed fair and
reasonable
to shareholders. The primary considerations are
availability of the desired security and the prompt
execution of orders in an effective manner at the most
favorable prices. Subject to these considerations,
dealers that provide supplemental investment research
and statistical or other services to the manager may
receive orders for portfolio transactions by the fund.
Information so received is in addition to, and not in
lieu of, services required to be performed by the
manager, and the fees of the manager are not reduced
as
a consequence of its use of such supplemental
information. Such information may be useful to the
manager in serving both the fund and other clients
and,
conversely, supplemental information obtained by the
placement of business of other clients may be useful
to
the manager in carrying out its obligations to the
fund.
The fund will not purchase Municipal Obligations
during
the existence of any underwriting or selling group
relating thereto of which Salomon Smith Barney is a
member, except to the extent permitted by the
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. The fund
also
may execute portfolio transactions through Salomon
Smith
Barney and its affiliates in accordance with rules
promulgated by the SEC.
While investment decisions for the fund are made
independently from those of the other accounts managed
by the manager, investments of the type the fund may
make also may be made by those other accounts. When
the
fund and one or more other accounts managed by the
manager are prepared to invest in, or desire to
dispose
of, the same security, available investments or
opportunities for sales will be allocated in a manner
believed by the manager to be equitable to each. In
some
cases, this procedure may adversely affect the price
paid or received by the fund or the size of the
position
obtained or disposed of by the fund.
PORTFOLIO TURNOVER
The fund's portfolio turnover rate (the lesser of
purchases or sales of portfolio securities during the
year, excluding purchases or sales of short-term
securities, divided by the monthly average value of
portfolio securities) will not be a limiting factor
whenever the fund deems it desirable to sell or
purchase
securities. Securities may be sold in anticipation of
a
rise in interest rates (market decline) or purchased
in
anticipation of a decline in interest rates (market
rise) and later sold. In addition, a security may be
sold and another security of comparable quality may be
purchased at approximately the same time in order to
take advantage of what the fund believes to be a
temporary disparity in the normal yield relationship
between the two securities. These yield disparities
may
occur for reasons not directly related to the
investment
quality of particular issues or the general movement
of
interest rates, such as changes in the overall demand
for or supply of various types of tax-exempt
securities.
For the 1999 and 2000 fiscal years, the fund's
portfolio
turnover rates were 41% and 16%, respectively.
THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for
purchase. See the prospectus for a discussion of
factors to consider in selecting which Class of shares
to purchase.
Class A Shares. Class A shares are sold to investors
at
the public offering price, which is the net asset
value
plus an initial sales charge as follows:
Amount of
Investment
Sales Charge as
a %
Of Transaction
Sales Charge as
a %
Of Amount
Invested
Dealers'
Reallowance as %
Of Offering Price
Less than $25,000
4.00%
4.17%
3.60%
$ 25,000 - 49,999
3.50
3.63
3.15
50,000 - 99,999
3.00
3.09
2.70
100,000 - 249,999
2.50
2.56
2.25
250,000 - 499,999
1.50
1.52
1.35
500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more
will
be made at net asset value without any initial sales
charge, but will be subject to a deferred sales charge
of 1.00% on redemptions made within 12 months of
purchase. The deferred sales charge on Class A shares
is payable to Salomon Smith Barney, which compensates
Service Agents whose clients make
purchases of $500,000 or more. The deferred sales
charge is waived in the same circumstances in which
the deferred sales charge applicable to Class B and
Class L shares is waived. See "Purchase of Shares-
Deferred Sales Charge Alternatives" and "Purchase of
Shares-Waivers of Deferred Sales Charge."
Members of the selling group may receive up to 90% of
the sales charge and may be deemed to be underwriters
of
the fund as defined in the Securities Act of 1933.
The
reduced sales charges shown above apply to the
aggregate
of purchases of Class A shares of the fund made at one
time by "any person," which includes an individual and
his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary
account.
Class B Shares. Class B shares are sold without an
initial sales charge but are subject to a deferred
sales
charge payable upon certain redemptions. See
"Deferred
Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an
initial
sales charge of 1.00% (which is equal to 1.01% of the
amount invested) and are subject to a deferred sales
charge payable upon certain redemptions. See
"Deferred
Sales Charge Provisions" below. Until June 22, 2001
purchases of Class L shares by investors who were
holders of Class C shares of the fund and/or other
Smith
Barney mutual funds on June 12, 1998 will not be
subject
to the 1% initial sales charge.
Class Y Shares. Class Y shares are sold without an
initial sales charge or deferred sales charge and are
available only to investors investing a minimum of
$15,000,000 (except purchases of Class Y shares by
Smith
Barney Allocation Series Inc., for which there is no
minimum purchase amount).
General
Investors may purchase shares from a Service Agent.
In
addition, certain investors may purchase shares
directly
from the fund. When purchasing shares of the fund,
investors must specify whether the purchase is for
Class
A, Class B, Class L or Class Y shares. Salomon Smith
Barney and Service Agents may charge their customers
an
annual account maintenance fee in connection with a
brokerage account through which an investor purchases
or
holds shares. Accounts held directly at PFPC Global
Fund Services, ("PFPC" or "sub-transfer agent") are
not
subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may
open an account in the fund by making an initial
investment of at least $1,000 for each account.
Investors in Class Y shares may open an account by
making an initial investment of $15,000,000.
Subsequent
investments of at least $50 may be made for all
Classes.
For shareholders purchasing shares of the fund
through
the Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A,
Class B and Class L shares and subsequent investment
requirement for all Classes is $25. For shareholders
purchasing shares of the fund through the Systematic
Investment Plan on a quarterly basis, the minimum
initial investment required for Class A, Class B and
Class L shares and the subsequent investment
requirement
for all Classes is $50. There are no minimum
investment
requirements for Class A shares for employees of
Citigroup and its subsidiaries, including Salomon
Smith
Barney, unitholders who invest distributions from a
unit
investment trust ("UIT") sponsored by Salomon Smith
Barney, and Directors/trustees of any of the Smith
Barney mutual funds, and their spouses and children.
The fund reserves the right to waive or change
minimums,
to decline any order to purchase its shares and to
suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's
account by the sub-transfer agent. Share certificates
are issued only upon a shareholder's written request
to
the sub-transfer agent. It is not recommended that
the
fund be used as a vehicle for Keogh, IRA or other
qualified retirement plans.
Purchase orders received by the fund or a Service
Agent
prior to the close of regular trading on the NYSE, on
any day the fund calculates its net asset value, are
priced according to the net asset value determined on
that day (the ''trade date''). Orders received by a
Service Agent prior to the close of regular trading on
the NYSE on any day the fund calculates its net asset
value, are priced according to the net asset value
determined on that day, provided the order is received
by the fund or the fund's agent prior to its close of
business. For shares purchased through Salomon Smith
Barney or a Service Agent purchasing through Salomon
Smith Barney, payment for shares of the fund is due on
the third business day after the trade date. In all
other cases, payment must be made with the purchase
order.
Systematic Investment Plan. Shareholders may make
additions to their accounts at any time by purchasing
shares through a service known as the Systematic
Investment Plan. Under the Systematic Investment
Plan,
Salomon Smith Barney or the sub-transfer agent is
authorized through preauthorized transfers of at least
$25 on a monthly basis or at least $50 on a quarterly
basis to charge the shareholder's account held with a
bank or other financial institution on a monthly or
quarterly basis as indicated by the shareholder, to
provide for systematic additions to the shareholder's
fund account. A shareholder who has insufficient
funds
to complete the transfer will be charged a fee of up
to
$25 by Salomon Smith Barney or the sub-transfer agent.
The Systematic Investment Plan also authorizes
Salomon
Smith Barney to apply cash held in the shareholder's
Salomon Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market
fund
to make additions to the account. Additional
information is available from the fund, Salomon Smith Barney
or a Service Agent.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A
shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to
(i)
Board Members and employees of Citigroup and its
subsidiaries and any Citigroup affiliated funds
including the Smith Barney mutual funds (including
retired Board Members and employees); the immediate
families of such persons (including the surviving
spouse
of a deceased Board Member or employee); and to a
pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such
sales are made upon the assurance of the purchaser
that
the purchase is made for investment purposes and that
the securities will not be resold except through
redemption or repurchase; (b) offers of Class A shares
to any other investment company to effect the
combination of such company with the fund by merger,
acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed a
Service Agent (for a period up to 90 days from the
commencement of the Financial Consultant's employment
with Salomon Smith Barney), on the condition the
purchase of Class A shares is made with the proceeds
of
the redemption of shares of a mutual fund which (i)
was
sponsored by the Financial Consultant's prior
employer,
(ii) was sold to the client by the Financial
Consultant
and (iii) was subject to a sales charge; (d) purchases
by shareholders who have redeemed Class A shares in
the
fund (or Class A shares of another Smith Barney mutual
fund that is offered with a sales charge) and who wish
to reinvest their redemption proceeds in the fund,
provided the reinvestment is made within 60 calendar
days of the redemption; (e) purchases by accounts
managed by registered investment advisory subsidiaries
of Citigroup; (f) investments of distributions from a
UIT sponsored by Salomon Smith Barney; and (g)
purchases
by investors participating in a Salomon Smith Barney
fee-based arrangement. In order to obtain such
discounts, the purchaser must provide sufficient
information at the time of purchase to permit
verification that the purchase would qualify for the
elimination of the sales charge.
Right of Accumulation. Class A shares of the fund may
be purchased by ''any person'' (as defined above) at a
reduced sales charge or at net asset value determined
by
aggregating the dollar amount of the new purchase and
the total net asset value of all Class A shares of the
fund and of other Smith Barney mutual funds that are
offered with a sales charge as currently listed under
''Exchange Privilege'' then held by such person and
applying the sales charge applicable to such
aggregate.
In order to obtain such discount, the purchaser must
provide sufficient information at the time of purchase
to permit verification that the purchase qualifies for
the reduced sales charge. The right of accumulation
is
subject to modification or discontinuance at any time
with respect to all shares purchased thereafter.
Letter of Intent - Class A Shares. A Letter of Intent
for an amount of $50,000 or more provides an
opportunity
for an investor to obtain a reduced sales charge by
aggregating investments over a 13 month period,
provided
the investor refers to such Letter when placing
orders.
For purposes of a Letter of Intent, the ''Amount of
Investment'' as referred to in the preceding sales
charge table includes (i) all Class A shares of the
fund
and other Smith Barney mutual funds offered with a
sales
charge acquired during the term of the letter plus
(ii)
the value of all Class A shares previously purchased
and
still owned. Each investment made during the period
receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is
not
achieved within the period, the investor must pay the
difference between the sales charges applicable to the
purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be
redeemed.
The term of the Letter will commence upon the date
the
Letter is signed, or at the option of the investor, up
to 90 days before such date. Please contact a Service
Agent or Citi Fiduciary Trust Company (the "transfer
agent") to obtain a Letter of Intent application.
Letter of Intent - Class Y Shares. A Letter of Intent
may also be used as a way for investors to meet the
minimum investment requirement for Class Y shares
(except purchases of Class Y shares by Smith Barney
Allocation Series Inc., for which there is no minimum
purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of
the
fund and agree to purchase a total of $15,000,000 of
Class Y shares of the fund within 13 months from the
date of the Letter. If a total investment of
$15,000,000 is not made within the 13-month period,
all
Class Y shares purchased to date will be transferred
to
Class A shares, where they will be subject to all fees
(including a service fee of 0.15%) and expenses
applicable to the fund's Class A shares, which may
include a deferred sales charge of 1.00%. Please
contact a Service Agent or the transfer agent for
further information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are applicable to:
(a)
Class B shares; (b) Class L shares; and (c) Class A
shares purchased without an initial sales charge but
subject to a deferred sales charge. A deferred sales
charge may be imposed on certain redemptions of these
shares.
Any applicable deferred sales charge will be assessed
on
an amount equal to the lesser of the original cost of
the shares being redeemed or their net asset value at
the time of redemption. Deferred Sales Charge Shares
that are redeemed will not be subject to a deferred
sales charge to the extent the value of such shares
represents: (a) capital appreciation of fund assets;
(b)
reinvestment of dividends or capital gain
distributions;
(c) with respect to Class B shares, shares redeemed
more
than five years after their purchase; or (d) with
respect to Class L shares and Class A shares that are
Deferred Sales Charge Shares, shares redeemed more
than
12 months after their purchase.
Class L shares and Class A shares that are Deferred
Sales Charge Shares are subject to a 1.00% deferred
sales charge if redeemed within 12 months of purchase.
In circumstances in which the deferred sales charge
is
imposed on Class B shares, the amount of the charge
will
depend on the number of years since the shareholder
made
the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the
number
of years since a purchase payment, all purchase
payments
made during a month will be aggregated and deemed to
have been made on the last day of the preceding
Salomon
Smith Barney statement month. The following table
sets
forth the rates of the charge for redemptions of Class
B shares by shareholders.
Year Since Purchase Payment Was Made
Deferred sales charge
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A
shares eight years after the date on which they were
purchased and thereafter will no longer be subject to
any distribution fees. There will also be converted
at
that time such proportion of Class B Dividend Shares
owned by the shareholders as the total number of his
or
her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder.
In determining the applicability of any deferred sales
charge, it will be assumed that a redemption is made
first of shares representing capital appreciation,
next
of shares representing the reinvestment of dividends
and
capital gain distributions and finally of other shares
held by the shareholder for the longest period of
time.
The length of time Deferred Sales Charge Shares
acquired
through an exchange have been held will be calculated
from the date the shares exchanged were initially
acquired in one of the other Smith Barney mutual
funds,
and fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments
in
such other funds. For Federal income tax purposes,
the
amount of the deferred sales charge will reduce the
gain
or increase the loss, as the case may be, on the
amount
realized on redemption. The amount of any deferred
sales charge will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased
100
Class B shares of the fund at $10 per share for a cost
of $1,000. Subsequently, the investor acquired 5
additional shares of the fund through dividend
reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his
or
her investment. Assuming at the time of the
redemption
the net asset value had appreciated to $12 per share,
the value of the investor's shares would be $1,260
(105
shares at $12 per share). The deferred sales charge
would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested
dividend shares ($60). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged
at a rate of 4.00% (the applicable rate for Class B
shares) for a total deferred sales charge of $9.60.
Waivers of Deferred Sales Charge
The deferred sales charge will be waived on: (a)
exchanges (see ''Exchange Privilege''); (b) automatic
cash withdrawals in amounts equal to or less than
1.00%
per month of the value of the shareholder's shares at
the time the withdrawal plan commences (see
''Automatic
Cash Withdrawal Plan'') (however, automatic cash
withdrawals in amounts equal to or less than 2.00% per
month of the value of the shareholder's shares will be
permitted for withdrawal plans established prior to
November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the
shareholder; (d) involuntary redemptions; and (e)
redemptions of shares to effect a combination of the
fund with any investment company by merger,
acquisition
of assets or otherwise. In addition, a shareholder
who
has redeemed shares from other Smith Barney mutual
funds
may, under certain circumstances, reinvest all or part
of the redemption proceeds within 60 days and receive
pro rata credit for any deferred sales charge imposed
on
the prior redemption.
Deferred sales charge waivers will be granted subject
to
confirmation (by Salomon Smith Barney in the case of
shareholders who are also Salomon Smith Barney clients
or by the transfer agent in the case of all other
shareholders) of the shareholder's status or holdings,
as the case may be.
Volume Discounts
The schedule of sales charges on Class A shares
described in the prospectus applies to purchases made
by
any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual's
spouse
and his or her children purchasing shares for their
own
account; (c) a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary
account; and (d) a trustee or other professional
fiduciary (including a bank, or an investment adviser
registered with the SEC under the Investment Advisers
Act of 1940, 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 on Class A shares should
contact a Service Agent.
DETERMINATION OF NET ASSET VALUE
Each class' net asset value per share is calculated on
each day, Monday through Friday, except days on which
the NYSE is closed. The NYSE currently is scheduled
to
be closed on New Year's Day, Martin Luther King, Jr'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.
Generally, the fund's investments are valued at market
value or, in the absence of a market value with
respect
to any securities, at fair value as determined by or
under the direction of the Board of Directors. A
security that is primarily traded on a domestic or
foreign exchange is valued at the last sale price on
that exchange or, if there were no sales during the
day,
at the mean between the bid and asked price. Over-
the-
counter securities are valued at the mean between the
bid and asked price. If market quotations for those
securities are not readily available, they are valued
at
fair value, as determined in good faith by the fund's
Board of Directors. An option is generally valued at
the last sale price or, in the absence of a last sale
price, the last offer price.
U.S. government securities will be valued at the mean
between the closing bid and asked prices on each day,
or, if market quotations for those securities are not
readily available, at fair value, as determined in
good
faith by the fund's Board of Directors.
Short-term investments maturing in 60 days or less are
valued at amortized cost whenever the Board of
Directors
determines that amortized cost reflects fair value of
those investments. Amortized cost valuation involves
valuing an instrument at its cost initially and
thereafter assuming a constant amortization to
maturity
of any discount or premium, regardless of the effect
of
fluctuating interest rates on the market value of the
instrument.
All other securities and other assets of the fund will
be valued at fair value as determined in good faith by
the fund's Board of Directors.
Determination of Public Offering Price
The fund offers its shares to the public on a
continuous
basis. The public offering price per Class A and
Class
Y share of the fund is equal to the net asset value
per
share at the time of purchase plus, for Class A
shares,
an initial sales charge based on the aggregate amount
of
the investment. The public offering price per Class B
and Class L share (and Class A share purchases,
including applicable rights of accumulation, equaling
or
exceeding $500,000) is equal to the net asset value
per
share at the time of purchase and no sales charge is
imposed at the time of purchase. The method of
computing the public offering price is shown in the
fund's financial statements, incorporated by reference
in their entirety into this SAI.
REDEMPTION OF SHARES
The fund is required to redeem the shares of the fund
tendered to it, as described below, at a redemption
price equal to their net asset value per share next
determined after receipt of a written request in
proper
form at no charge other than any applicable deferred
sales charge. Redemption requests received after the
close of regular trading on the NYSE are priced at the
net asset value next determined.
If a shareholder holds shares in more than one Class,
any request for redemption must specify the Class
being
redeemed. In the event of a failure to specify which
Class, or if the investor owns fewer shares of the
Class
than specified, the redemption request will be delayed
until the transfer agent receives further instructions
from Salomon Smith Barney, or if the shareholder's
account is not with Salomon Smith Barney, from the
shareholder directly. The redemption proceeds will be
remitted on or before the third business day following
receipt of proper tender, except on any days on which
the NYSE is closed or as permitted under the 1940 Act
in
extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Salomon Smith
Barney brokerage account, these funds will not be
invested for the shareholder's benefit without
specific
instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted
upon
clearance of the check, which may take up to fifteen
days.
Shares held by Salomon Smith Barney as custodian must
be
redeemed by submitting a written request to a Service
Agent. Shares other than those held by Salomon Smith
Barney as custodian may be redeemed through an
investor's Financial Consultant, Service Agent or by
submitting a written request for redemption to:
Smith Barney Arizona Municipals Fund Inc.
Class A, B, L or Y (please specify)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
A written redemption request must (a) state the Class
and number or dollar amount of shares to be redeemed,
(b) identify the shareholder's account number and (c)
be
signed by each registered owner exactly as the shares
are registered. If the shares to be redeemed were
issued in certificate form, the certificates must be
endorsed for transfer (or be accompanied by an
endorsed
stock power) and must be submitted to the transfer
agent
together with the redemption request. Any signature
appearing on a share certificate, stock power or
written
redemption request in excess of $50,000 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 $50,000 or less do not
require a signature guarantee unless more than one
such
redemption request is made in any 10-day period.
Redemption proceeds will be mailed to an investor's
address of record. The transfer agent may require
additional supporting documents for redemptions made
by
corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed
properly received until the transfer agent 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. Retirement plan
accounts are eligible for automatic cash withdrawal
plans only where the shareholder is eligible to
receive
qualified distributions and has an account value of at
least $5,000. The withdrawal plan will be carried
over
on exchanges between Classes of a fund. Any
applicable
deferred sales charge will not be waived on amounts
withdrawn by a shareholder that exceed 1.00% per month
of the value of the shareholder's shares subject to
the
deferred sales charge at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect
prior to November 7, 1994, any applicable deferred
sales
charge will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of the
shareholder's
shares subject to the deferred sales charge.) For
further information regarding the automatic cash
withdrawal plan, shareholders should contact a Service
Agent.
Telephone Redemption and Exchange Program.
Shareholders
who do not have a brokerage account may be eligible to
redeem and exchange shares by telephone. To determine
if a shareholder is entitled to participate in this
program, he or she should contact the transfer agent
at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire
Authorization Form, along with a signature guarantee,
that will be provided by the transfer agent upon
request. (Alternatively, an investor may authorize
telephone redemptions on the new account application
with the applicant's signature guarantee when making
his/her initial investment in a fund.)
Redemptions. Redemption requests of up to $50,000 of
any class or classes of shares of a fund may be made
by
eligible shareholders by calling the transfer agent at
1-800-451-2010. Such requests may be made between
9:00
a.m. and 4:00 p.m. (Eastern time) on any day the NYSE
is
open. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the
redemption proceeds mailed to his/her address of
record
or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be
mailed or wired, as the case may be, on the next
business day following the redemption request. In
order
to use the wire procedures, the bank receiving the
proceeds must be a member of the Federal Reserve
System
or have a correspondent relationship with a member
bank.
The fund reserves the right to charge shareholders a
nominal fee for each wire redemption. Such charges,
if
any, will be assessed against the shareholder's
account
from which shares were redeemed. In order to change
the
bank account designated to receive redemption
proceeds,
a shareholder must complete a new Telephone/Wire
Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a
signature guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges
by
telephone if the account registration of the shares of
the fund being acquired is identical to the
registration
of the shares of the fund exchanged. Such exchange
requests may be made by calling the transfer agent at
1-
800-451-2010 between 9:00 a.m. and 4:00 p.m. (Eastern
time) on any day on which the NYSE is open.
Additional Information Regarding Telephone Redemption
and Exchange Program. Neither the fund nor its agents
will be liable for following instructions communicated
by telephone that are reasonably believed to be
genuine.
The fund and its agents will employ procedures
designed
to verify the identity of the caller and legitimacy of
instructions (for example, a shareholder's name and
account number will be required and phone calls may be
recorded). The fund reserves the right to suspend,
modify or discontinue the telephone redemption and
exchange program or to impose a charge for this
service
at any time following at least seven (7) days' prior
notice to shareholders.
Redemptions in Kind. In conformity with applicable
rules of the SEC, redemptions may be paid in portfolio
securities, in cash or any combination of both, as the
Board of Directors may deem advisable; however,
payments
shall be made wholly in cash unless the Board of
Directors believes economic conditions exist that
would
make such a practice detrimental to the best interests
of the fund and its remaining shareholders. If a
redemption is paid in portfolio securities, such
securities will be valued in accordance with the
procedures described under "Determination of Net Asset
Value" in the Prospectus and a shareholder would incur
brokerage expenses if these securities were then
converted to cash.
Distributions in Kind
If the fund's Board of Directors determines that it
would be detrimental to the best interests of the
remaining shareholders of the fund to make a
redemption
payment wholly in cash, the fund may pay, in
accordance
with SEC rules, any portion of a redemption in excess
of
the lesser of $250,000 or 1.00% of the fund's net
assets
by a distribution in kind of portfolio securities in
lieu of cash. Securities issued as a distribution in
kind may incur brokerage commissions when shareholders
subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal
Plan") is available to shareholders who own shares
with
a value of at least $10,000 and who wish to receive
specific amounts of cash monthly or quarterly.
Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the
fund
as may be necessary to cover the stipulated withdrawal
payment. Any applicable deferred sales charge will
not
be waived on amounts withdrawn by shareholders that
exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences.
(With
respect to Withdrawal Plans in effect prior to
November
7, 1994, any applicable deferred sales charge will be
waived on amounts withdrawn that do not exceed 2.00%
per
month of the value of a shareholder's shares at the
time
the Withdrawal Plan commences.) To the extent
withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the
fund,
there will be a reduction in the value of the
shareholder's investment, and continued withdrawal
payments will reduce the shareholder's investment and
may ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in the
fund.
Furthermore, as it generally would not be
advantageous
to a shareholder to make additional investments in the
fund at the same time he or she is participating in
the
Withdrawal Plan, purchases by such shareholder in
amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal
Plan and who hold their shares in certificate form
must
deposit their share certificates with the sub-transfer
agent as agent for Withdrawal Plan members. All
dividends and distributions on shares in the
Withdrawal
Plan are reinvested automatically at net asset value
in
additional shares of the fund. For additional
information, shareholders should contact a Service
Agent. Withdrawal Plans should be set up with a
Service
Agent. A shareholder who purchases shares directly
through the sub-transfer agent may continue to do so
and
applications for participation in the Withdrawal Plan
must be received by the sub-transfer agent no later
than
the eighth day of the month to be eligible for
participation beginning with that month's withdrawals.
For additional information, shareholders should
contact
a Service Agent.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser and Administrator - SSB Citi
(Manager)
SSB Citi (successor to SSBC Fund Management Inc.)
serves
as investment adviser to the fund pursuant to an
investment advisory agreement (the "Investment
Advisory
Agreement") with the fund which was approved by the
Board of Directors, including a majority of directors
who are not "interested persons" of the fund or the
manager. The manager is a wholly owned subsidiary of
Salomon Smith Barney Holdings Inc. ("Holdings"), which
in turn, is a wholly owned subsidiary of Citigroup.
Subject to the supervision and direction of the fund's
Board of Directors, the manager 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. The manager pays the salary of
any
officer and employee who is employed by both it and
the
fund. The manager bears all expenses in connection
with
the performance of its services. SSB Citi (through
its
predecessor entities) has been in the investment
counseling business since 1968 and renders investment
advice to a wide variety of individual, institutional
and investment company clients that had aggregate
assets
under management as of August 30, 2000 in excess of
$204
billion.
The fund pays the manager a fee for investment
advisory
services at the annual rate of 0.30% of the value of
its
daily net assets. For the fiscal years ended May 31,
1998, 1999 and 2000, the fund incurred $185,780,
$206,144 and $182,295 respectively, in investment
advisory fees.
SSB Citi also serves as administrator to the fund
pursuant to a written agreement (the "Administration
Agreement"). As administrator SSB Citi: (a) assists
in
supervising all aspects of the fund's operations; (b)
supplies the fund with office facilities (which may be
in SSB Citi's own offices), statistical and research
data, data processing services, clerical, accounting
and
bookkeeping services, including, but not limited to,
the
calculation of (i) the net asset value of shares of
the
fund, (ii) applicable contingent deferred sales
charges
and similar fees and charges and (iii) distribution
fees, (c) internal auditing and legal services,
internal
executive and administrative services, and stationary
and office supplies; and (d) prepares reports to
shareholders of the fund, tax returns and reports to
and
filings with the SEC and state blue sky authorities.
As compensation for administrative services rendered
to
the fund, the manager receives a fee computed daily
and
payable monthly at the following annual rates of
average
daily net assets: 0.20% up to $500 million; and 0.18%
thereafter. For the fiscal years ended May 31, 1998,
1999 and 2000, the fund paid the manager $123,853,
$137,430 and $121,530, respectively, in administration
fees.
The fund bears expenses incurred in its operations
including: taxes, interest, brokerage fees and
commissions, if any; fees of directors of the fund who
are not officers, directors, shareholders or employees
of Salomon Smith Barney or the manager; SEC fees and
state Blue Sky notice fees; charges of custodians;
transfer and dividend disbursing agent's fees; certain
insurance premiums; outside auditing and legal
expenses;
costs of maintaining corporate existence; costs of
investor services (including allocated telephone and
personnel expenses); costs of preparing and printing
of
prospectuses for regulatory purposes and for
distribution to existing shareholders; costs of
shareholders' reports and shareholder meetings; and
meetings of the officers or Board of Directors of the
fund.
Auditors
KPMG LLP, independent auditors, 757 Third Avenue, New
York, New York 10017, have been selected to serve as
auditors of the fund and to render an opinion on the
fund's financial statements for the fiscal year ended
May 31, 2001.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New
York,
New York 10019, serves as counsel to the fund.
Stroock, Stroock & Lavan, 180 Maiden Lane, New York,
New
York, 10038 serves as counsel to the directors who are
not "interested persons" of the fund.
Custodian, Transfer Agent and Sub-Transfer Agent
PFPC Trust Company, located at 17th and
Chestnut Streets, Philadelphia, Pennsylvania 19103,
serves as the fund's custodian. Under the custody
agreement, PNC holds the fund's portfolio securities
and
keeps all necessary accounts and records. For its
services, PNC receives a monthly fee based upon the
month-end market value of securities held in custody
and
also receives securities transaction charges. The
assets of the fund are held under bank custodianship
in
compliance with the 1940 Act.
Citi Fiduciary Trust Company, located at 125 Broad
Street, New York, New York 10004, serves as the
fund's
transfer agent. Under the transfer agency agreement,
the transfer agent maintains the shareholder account
records for the fund, handles certain communications
between shareholders and the fund, and distributes
dividends and distributions payable by the fund. For
these services, the transfer agent receives a monthly
fee computed on the basis of the number of shareholder
accounts it maintains for the fund during the month,
and
is reimbursed for out-of-pocket expenses.
PFPC Global Fund Services, located at P.O. Box 9699
Providence, R.I. 02940-9699 serves as the fund's sub-
transfer agent to render certain shareholder record
keeping and accounting services functions. Under the
transfer agency agreement, PFPC maintains the
shareholder account records for the fund, handles
certain communications between shareholders and the
fund, and distributes dividends and distributions
payable by the fund. For these services, PFPC
receives
a monthly fee computed on the basis of the number of
shareholder accounts it maintains for the fund during
the month, and is reimbursed for out-of-pocket
expenses.
Distributor
Effective June 5, 2000, Salomon Smith Barney replaced
CFBDS, Inc. as the fund's distributor. Prior to June
5,
2000, CFBDS, Inc., located at 20 Milk Street, Boston,
Massachusetts 02109-5408 served as the fund's
distributor pursuant to a written agreement dated
October 8, 1998 (the "Distribution Agreement") which
was
approved by the fund's Board of Directors, including a
majority of the independent directors on July 15,
1998.
Prior to the merger of Travelers Group, Inc. and
Citicorp Inc. on October 8, 1998, Salomon Smith Barney
served as the fund's distributor.
For the 1997 and 1998 fiscal years, Salomon Smith
Barney, received $32,000 and $120,000, respectively,
in
sales charges from the sale of Class A shares, and did
not reallow any portion thereof to dealers. For the
period May 31, 1998 through October 7, 1998 the
aggregate dollar amount of sales charges on Class A
shares was $26,000 all of which was paid to Salomon
Smith Barney. For the period October 8, 1998 through
May 31, 1999 the aggregate dollar amount of sales
charges on Class A shares was $60,000, $54,000 of
which
was paid to Salomon Smith Barney. For the fiscal year
ended May 31, 2000, the aggregate dollar amount of
initial sales charges on Class A shares was $42,000,
$37,800 of which was paid to Salomon Smith Barney.
For the period June 12, 1998 through October 7, 1998
the
aggregate dollar amount of sales charges on Class L
shares was $4,000, all of which was paid to Salomon
Smith Barney. For the period October 8, 1998 through
May 31, 1999 the aggregate dollar amount of sales
charges on Class L shares was $5,000, $4,500 of which
was paid to Salomon Smith Barney. For the fiscal year
ended May 31, 2000, the aggregate dollar amount of
initial sales charges on Class L shares was $3,000,
$2,700 of which was paid to Salomon Smith Barney.
For the fiscal year ended May 31, 1999, Salomon Smith
Barney or its predecessor received from shareholders
$15,000, in deferred sales charges on the redemption
of
Class A shares. For the fiscal years ended May 31,
1998, 1999 and 2000, Salomon Smith Barney or its
predecessor received from shareholders $35,000, $6,000
and $21,000, respectively, in deferred sales charges
on
the redemption of Class B shares. For the fiscal
years
ended May 31, 1998, 1999 and 2000, respectively,
Salomon
Smith Barney or its predecessor received from
shareholders $0, $0 and $3,000 in deferred sales
charges
on the redemption of Class L shares.
When payment is made by the investor before the
settlement date, unless otherwise noted by the
investor,
the funds will be held as a free credit balance in the
investor's brokerage account and Salomon Smith Barney
may benefit from the temporary use of the funds. The
fund's Board of Directors has been advised of the
benefits to Salomon Smith Barney resulting from these
settlement procedures and will take such benefits into
consideration when reviewing the Investment Advisory
Agreement for continuance.
Distribution Arrangements. To compensate Salomon
Smith
Barney for the service it provides and for the expense
it bears, the fund has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the fund pays
Salomon Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of 0.15%
of
the value of the fund's average daily net assets
attributable to the Class A, Class B and Class L
shares.
In addition, the fund pays Salomon Smith Barney a
distribution fee with respect to Class B and Class L
shares primarily intended to compensate Salomon Smith
Barney for its initial expense of paying Financial
Consultants a commission upon sales of those shares.
The Class B and Class L distribution fee is calculated
at the annual rate of 0.50% and 0.55%, respectively,
of
the value of the fund's average net assets
attributable
to the shares of each Class.
For the fiscal year ended May 31, 2000, Salomon Smith
Barney incurred distribution expenses totaling
$202,168
consisting of $12,692 for advertising, $1,351 for
printing and mailing of prospectuses, $81,699 for
support services, $103,631 to Salomon Smith Barney
Financial Consultants, and $2,795 in accruals for
interest on the excess of Salomon Smith Barney
expenses
incurred in distributing the fund's shares over the
sum
of the distribution fees and deferred sales charges
received by Salomon Smith Barney from the fund.
The following service and distribution fees were
incurred pursuant to a Distribution Plan during the
years indicated:
Distribution Plan Fees
Fiscal Year
Ended 5/31/00
Fiscal Year
Ended 5/31/99
Fiscal Year
Ended 5/31/98
Class A
$ 62,977
$ 71,707
$ 61,866
Class B
$113,358
$127,508
$128,784
Class L*
$ 9,385
$ 9,054
$ 6,087
Class L shares were called Class C shares until
June 12, 1998.
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote
of the Board of Directors, including a majority of the
independent directors. The Plan may not be amended to
increase the amount of the service and distribution
fees
without shareholder approval, and all material
amendments of the Plan also must be approved by the
directors and independent directors in the manner
described above. The Plan may be terminated with
respect to a Class of the fund at any time, without
penalty, by vote of a majority of the independent
directors or by a vote of a majority of the
outstanding
voting securities of the Class (as defined in the 1940
Act). Pursuant to the Plan, Salomon Smith Barney will
provide the fund's Board of Directors with periodic
reports of amounts expended under the Plan and the
purpose for which such expenditures were made.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, the fund, its
investment adviser and principal underwriter has
adopted
a code of ethics that permits personnel to invest in
securities for their own accounts, including
securities
that may be purchased or held by the fund. All
personnel must place the interests of clients first
and
avoid activities, interests and relationships that
might
interfere with the duty to make decisions in the best
interests of the clients. All personal securities
transactions by employees must adhere to the
requirements of the code and must be conducted in such
a manner as to avoid any actual or potential conflict
of
interest, the appearance of such a conflict, or the
abuse of an employee's position of trust and
responsibility.
A copy of the fund's code of ethics is on file with
the
Securities and Exchange Commission.
VALUATION OF SHARES
The fund's net asset value per share is determined as
of
close of regular trading on the NYSE, on each day that
the NYSE is open, by dividing value of the fund's net
assets attributable to each Class by the total number
of
shares of that Class outstanding.
When, in the judgment of the pricing service, quoted
bid
prices for investments are readily available and are
representative of the bid side of the market, these
investments are valued at the mean between the quoted
bid and asked prices. Investments for which, in the
judgment of the pricing service, there is no readily
obtainable market quotation (which may constitute a
majority of the portfolio securities) are carried at
fair value of securities of similar type, yield and
maturity. Pricing services generally determine value
by
reference to transactions in municipal obligations,
quotations from municipal bond dealers, market
transactions in comparable securities and various
relationships between securities. Short-term
investments that mature in 60 days or less are valued
at
amortized cost whenever the Board of Directors
determines that amortized cost is fair value.
Amortized
cost valuation involves valuing an instrument at its
cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates
on the market value of the instrument. Securities and
other assets that are not priced by a pricing service
and for which market quotations are not available will
be valued in good faith at fair value by or under the
direction of the fund's Board of Directors.
EXCHANGE PRIVILEGE
Shares of each Class of the fund may be exchanged for
shares of the same Class of certain Smith Barney
mutual
funds, to the extent shares are offered for sale in
the
shareholder's state of residence. Exchanges of Class
A,
Class B and Class L shares are subject to minimum
investment requirements and all shares are subject to
the other requirements of the fund into which
exchanges
are made.
Class B Exchanges. If a Class B shareholder wishes to
exchange all or a portion of his or her shares in any
of
the funds imposing a higher deferred sales charge than
that imposed by the fund, the exchanged Class B shares
will be subject to the higher applicable deferred
sales
charge. Upon an exchange, the new Class B shares will
be deemed to have been purchased on the same date as
the
Class B shares of the fund that have been exchanged.
Class L Exchanges. Upon an exchange, the new Class L
shares will be deemed to have been purchased on the
same
date as the Class L shares of the fund that have been
exchanged.
Class A and Class Y Exchanges. Class A and Class Y
shareholders of the fund who wish to exchange all or a
portion of their shares for shares of the respective
Class in any of the funds identified above may do so
without imposition of any charge.
Additional Information Regarding the Exchange
Privilege.
Although the exchange privilege is an important
benefit, excessive exchange transactions can be
detrimental to the fund's performance and its
shareholders. The manager may determine that a
pattern
of frequent exchanges is excessive and contrary to the
best interests of the fund's other shareholders. In
this event, the fund may, at its discretion, decide to
limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, the fund will
provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the
shareholder will be required to (a) redeem his or her
shares in the fund or (b) remain invested in the fund
or
exchange into any of the funds of the Smith Barney
mutual funds ordinarily available, which position the
shareholder would be expected to maintain for a
significant period of time. All relevant factors will
be considered in determining what constitutes an
abusive
pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See ''Redemption of Shares-Telephone
Redemptions and Exchange Program.'' Exchanges will be
processed at the net asset value next determined.
Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will
be
made upon receipt of all supporting documents in
proper
form. If the account registration of the shares of
the
fund being acquired is identical to the registration
of
the shares of the fund exchanged, no signature
guarantee
is required. An exchange involves a taxable
redemption
of shares, subject to the tax treatment described in
"Dividends, Distributions and Taxes" below, followed
by
a purchase of shares of a different fund. Before
exchanging shares, investors should read the current
prospectus describing the shares to be acquired. The
fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to
shareholders.
Additional Information Regarding Telephone Redemption
and Exchange Program
Neither the fund nor its agents will be liable for
instructions communicated by telephone that are
reasonably believed to be genuine. The fund or its
agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions
(for example, a shareholder's name and account number
will be required and phone calls may be recorded).
The
fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange
program or to impose a charge for this service at any
time following at least seven (7) days' prior notice
to
shareholders.
THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
PERFORMANCE INFORMATION
From time to time, the fund may quote total return of
a
class in advertisements or in reports and other
communications to shareholders. The fund may include
comparative performance information in advertising or
marketing the fund's shares. Such performance
information may include data from the following
industry
and financial publications: Barron's, Business Week,
CDA
Investment Technologies, Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investor's Business
Daily, Money, Morningstar Mutual Fund Values, The New
York Times, USA Today and The Wall Street Journal.
Yield and Equivalent Taxable Yield
A Class' 30-day yield figure described below is
calculated according to a formula prescribed by the
SEC.
The formula can be expressed as follows:
YIELD =2 [(a-b +1)6-1]
cd
Where: a = dividends and interest earned
during the period.
b = expenses accrued for the
period
(net of reimbursement).
c = the average daily number of
shares outstanding during the
period that were entitled to
receive dividends.
d = the maximum offering price per
share on the last day of the period.
For the purpose of determining the interest earned
(variable "a'' in the formula) on debt obligations
that
were purchased by the fund at a discount or premium,
the
formula generally calls for amortization of the
discount
or premium. The amortization schedule will be
adjusted
monthly to reflect changes in the market values of the
debt obligations.
The fund's equivalent taxable 30-day yield for a Class
of shares is computed by dividing that portion of the
Class' 30-day yield which is tax-exempt by one minus a
stated income tax rate and adding the product to that
portion, if any, of the Class' yield that is not tax-
exempt.
The yields on municipal securities are dependent upon
a
variety of factors, including general economic and
monetary conditions, conditions of the municipal
securities market, size of a particular offering,
maturity of the obligation offered and rating of the
issue. Investors should recognize that in periods of
declining interest rates the fund's yield for each
Class
of shares will tend to be somewhat higher than
prevailing market rates, and in periods of rising
interest rates the fund's yield for each Class of
shares
will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to the
fund from the continuous sale of its shares will
likely
be invested in portfolio instruments producing lower
yields than the balance of the fund's portfolio,
thereby
reducing the current yield of the fund. In periods of
rising interest rates, the opposite can be expected to
occur.
The fund's yield for Class A, Class B and Class L
shares
for the 30-day period ended May 31, 2000 was 4.71%,
4.18% and 3.66%, respectively. The equivalent taxable
yield for Class A, Class B and Class L shares for that
same period was 8.22%, 7.29% and 6.39%, respectively,
assuming the payment of Federal income taxes at a rate
of 39.6% and Arizona taxes at a rate of 5.1%.
There is no performance information for Class Y shares
because none were outstanding for the periods
presented.
Average Annual Total Return
"Average annual total return," as described below, is
computed according to a formula prescribed by the SEC.
The formula can be expressed as follows:
P (1+T)n = ERV
Where: P = a hypothetical
initial payment of $1,000.
T = average annual total
return.
N = number of years.
ERV = Ending Redeemable Value
of a hypothetical $1,000
investment made at the
beginning of a 1-, 5-,
or 10-year period at the
end of a 1-, 5-, or 10-
year period (or
fractional portion
thereof), assuming
reinvestment of all
dividends and
distributions.
The fund's average annual total return for Class A
shares assuming the maximum applicable sales charge
was
as follows for the periods indicated (reflecting the
waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
(6.54)% for the one-year period ended May 31,
2000.
3.48% for the five-year period ended May 31,
2000.
5.91% for the ten-year period ended May 31,
2000.
6.17% per annum during the period from the
fund's commencement of operations on
June 1, 1987 through May 31, 2000.
A Class' average annual total return assumes that the
maximum applicable sales charge or deferred sales
charge
assessed by the fund has been deducted from the
hypothetical investment. If the maximum 4.00% sales
charge had not been deducted, Class A's average annual
total return would have been (2.64)%, 4.32%, 6.35% and
6.50%, respectively, for those same periods.
The fund's average annual total return for Class B
shares assuming the deduction of the maximum
applicable
deferred sales charge was as follows for the periods
indicated (reflecting the waiver of the fund's
investment advisory and administration fees and
reimbursement of expenses):
(7.27)% for the one-year period ended May 31,
2000.
3.62% for the five-year period ended May 31,
2000.
4.84% per annum during the period from the
fund's commencement of operations on
November 6, 1992 through May 31, 2000.
If the maximum applicable deferred sales charge had
not
been deducted at the time of redemption, Class B's
average annual total return would have been (3.11)%,
3.78% and 4.84%, respectively, for the same periods.
The fund's average annual total return for Class L
shares assuming the maximum applicable deferred sales
charge was as follows for the periods indicated
(reflecting the waiver of the fund's investment
advisory
and administration fees and reimbursement of
expenses):
(5.09)% for the one-year period ended May 31,
2000.
3.52% for the five-year period ended May 31,
2000.
5.38% per annum during the period from the
fund's commencement of operations on
December 8, 1994 through May 31, 2000.
If the maximum applicable deferred sales charge had
not
been deducted at the time of redemption, Class L's
average annual total return for the same periods ended
May 31, 2000 would have been (3.24)%, 3.72% and 5.56%.
There is no performance information for Class Y shares
because none were outstanding for the periods
presented.
Aggregate Total Return
"Aggregate total return" represents the cumulative
change in the value of an investment in the Class for
the specified period and is computed by the following
formula:
ERV-P
P
Where: P = a hypothetical initial payment
of $10,000.
ERV = Ending Redeemable Value of a
hypothetical $10,000 investment
made at the beginning of a 1-,
5-, or 10-year period at the
end of a 1-, 5-, or 10-year
period (or fractional portion
thereof), assuming reinvestment
of all dividends and
distributions.
The fund's aggregate total return for Class A shares
was
as follows for the periods indicated (reflecting the
waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
(6.54)% for the one-year period ended May 31,
2000.
18.64% for the five-year period ended May 31,
2000.
77.57% for the ten-year period ended May 31,
2000.
117.76% for the period from the fund's
commencement of operations on June 1, 1987
through May 31, 2000.
Class A's aggregate total return assumes that the
maximum applicable sales charge or maximum applicable
deferred sales charge has been deducted from the
investment. If the maximum sales charge had not been
deducted at the time of purchase, Class A's aggregate
total return for the same periods would have been
(2.64)%, 23.58%, 85.05% and 126.84%, respectively.
The fund's aggregate total return for Class B shares
was
as follows for the periods indicated (reflecting the
waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
(7.27)% for the one-year period ended May 31,
2000.
19.47% for the five-year period ended May 31,
2000.
41.22% for the period from commencement of
operations on November 6, 1992 through May 31,
2000.
If the maximum applicable deferred sales charge had
not
been deducted at the time of redemption, Class B's
aggregate total return for the same periods would have
been (3.11)%, 20.41% and 43.04%, respectively.
The fund's aggregate total return for Class L shares
was
as follows for the period indicated (reflecting the
waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
(5.09)% for the one-year period ended May 31,
2000.
18.86% for the five-year period ended May 31,
2000.
33.26% for the period from commencement of
operations on December 8, 1994 through May 31,
2000.
If the maximum applicable deferred sales charge had
not
been deducted at the time of redemption, Class L's
aggregate total return for the same periods ended May
31, 2000 would have been (3.24)%, 20.04% and 34.56%.
There is no performance information for Class Y shares
because none were outstanding for the periods
presented.
Performance will vary from time to time depending on
market conditions, the composition of the fund's
portfolio and operating expenses and the expenses
exclusively attributable to the Class. Consequently,
any
given performance quotation should not be considered
as
representative of the Class' performance for any
specified period in the future. Because performance
will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or
other investments that pay a fixed yield for a stated
period of time. Investors comparing a Class'
performance with that of other mutual funds should
give
consideration to the quality and maturity of the
respective investment companies' portfolio securities.
It is important to note that the total return figures
set forth above are based on historical earnings and
are
not intended to indicate future performance. Each
Class' net investment income changes in response to
fluctuations in interest rates and the expenses of the
fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. The fund's policy is to
declare and pay exempt-interest dividends monthly.
Dividends from net realized capital gains, if any,
will
be distributed annually. The fund may also pay
additional dividends shortly before December 31 from
certain amounts of undistributed ordinary income and
capital gains, in order to avoid a Federal excise tax
liability. If a shareholder does not otherwise
instruct, exempt-interest dividends and capital gain
distributions will be reinvested automatically in
additional shares of the same Class at net asset
value,
with no additional sales charge or deferred sales
charge.
The per share amounts of the exempt-interest dividends
on Class B and Class L shares may be lower than on
Class
A and Class Y shares, mainly as a result of the
distribution fees applicable to Class B and Class L
shares. Similarly, the per share amounts of exempt-
interest dividends on Class A shares may be lower than
on Class Y shares, as a result of the service fee
attributable to Class A shares. Capital gain
distributions, if any, will be the same across all
Classes of fund shares (A, B, L and Y).
Taxes. The following is a summary of the material
United
States federal income tax considerations regarding the
purchase, ownership and disposition of shares of the
fund. Each prospective shareholder is urged to
consult
his own tax adviser with respect to the specific
federal, state and local consequences of investing in
the fund. The summary is based on the laws in effect
on
the date of this SAI, which are subject to change.
The fund and its investments
As described in the fund's prospectus, the fund is
designed to provide shareholders with current income
which is excluded from gross income for federal income
tax purposes. The fund is not intended to constitute
a
balanced investment program and is not designed for
investors seeking capital gains or maximum tax-exempt
income irrespective of fluctuations in principal.
Investment in the fund would not be suitable for tax-
exempt institutions, qualified retirement plans, H.R.
10
plans and individual retirement accounts because such
investors would not gain any additional tax benefit
from
the receipt of tax-exempt income.
The fund intends to continue to qualify to be treated
as
a regulated investment company each taxable year under
the Code. To so qualify, the fund must, among other
things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the
sale or other disposition of stock or securities or
foreign currencies, or other income (including, but
not
limited to, gains from options, futures or forward
contracts) derived with respect to its business of
investing in such stock, securities or currencies; and
(b) diversify its holdings so that, at the end of each
quarter of the fund's taxable year, (i) at least 50%
of
the market value of the fund's assets is represented
by
cash, securities of other regulated investment
companies, United States government securities and
other
securities, with such other securities limited, in
respect of any one issuer, to an amount not greater
than
5% of the fund's assets and not greater than 10% of
the
outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is
invested
in the securities (other than United States government
securities or securities of other regulated investment
companies) of any one issuer or any two or more
issuers
that the fund controls and which are determined to be
engaged in the same or similar trades or businesses or
related trades or businesses.
As a regulated investment company, the fund will not
be
subject to United States federal income tax on its net
investment income (i.e., income other than its net
realized long-term and short-term capital gains) and
its
net realized long-term and short-term capital gains,
if
any, that it distributes to its shareholders, provided
an amount equal to at least 90% of its investment
company taxable income (i.e., 90% of its taxable
income
minus the excess, if any, of its net realized long-
term
capital gains over its net realized short-term capital
losses (including any capital loss carryovers), plus
or
minus certain other adjustments as specified in the
Code) and 90% of its net tax-exempt income for the
taxable year is distributed in compliance with the
Code's timing and other requirements but will be
subject
to tax at regular corporate rates on any taxable
income
or gains it does not distribute.
At May 31, 2000, the unused capital loss carryovers of
the fund were approximately $363,000. For federal
income tax purposes, these amounts are available to be
applied against future realized capital gains, if any.
The carryovers expire as follows:
May 31, 2008
Carryforward Amount $363,000
The Code imposes a 4% nondeductible excise tax on the
fund to the extent it does not distribute by the end
of
any calendar year at least 98% of its net investment
income for that year and 98% of the net amount of its
capital gains (both long-term and short-term) for the
one-year period ending, as a general rule, on October
31
of that year. For this purpose, however, any income
or
gain retained by the fund that is subject to corporate
income tax will be considered to have been distributed
by year-end. In addition, the minimum amounts that
must
be distributed in any year to avoid the excise tax
will
be increased or decreased to reflect any
underdistribution or overdistribution, as the case may
be, from the previous year. The fund anticipates it
will pay such dividends and will make such
distributions
as are necessary in order to avoid the application of
this tax.
If, in any taxable year, the fund fails to qualify as
a
regulated investment company under the Code or fails
to
meet the distribution requirement, it would be taxed
in
the same manner as an ordinary corporation and
distributions to its shareholders would not be
deductible by the fund in computing its taxable
income.
In addition, in the event of a failure to qualify,
the
fund's distributions, to the extent derived from the
fund's current or accumulated earnings and profits
would
constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to
shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have
been treated in the shareholders' hands as tax-exempt
interest. If the fund fails to qualify as a regulated
investment company in any year, it must pay out its
earnings and profits accumulated in that year in order
to qualify again as a regulated investment company.
In
addition, if the fund failed to qualify as a regulated
investment company for a period greater than one
taxable
year, the fund may be required to recognize any net
built-in gains with respect to certain of its assets
(the excess of the aggregate gains, including items of
income, over aggregate losses that would have been
realized if it had been liquidated) in order to
qualify
as a regulated investment company in a subsequent
year.
The fund's transactions in municipal bond index and
interest rate futures contracts and options on these
futures contracts (collectively "section 1256
contracts") will be subject to special provisions of
the
Code (including provisions relating to "hedging
transactions" and "straddles") that, among other
things,
may affect the character of gains and losses realized
by
the fund (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income
to the fund and defer fund losses. These rules could
therefore affect the character, amount and timing of
distributions to shareholders. These provisions also
(a) will require the fund to mark-to-market certain
types of positions in its portfolio (i.e., treat them
as
if they were closed out) and (b) may cause the fund to
recognize income without receiving cash with which to
pay dividends or make distributions in amounts
necessary
to satisfy the distribution requirements for avoiding
income and excise taxes. The fund will monitor its
transactions, will make the appropriate tax elections
and will make the appropriate entries in its books and
records when it engages in these transactions in order
to mitigate the effect of these rules and prevent
disqualification of the fund as a regulated investment
company.
All section 1256 contracts held by the fund at the end
of its taxable year are required to be marked to their
market value, and any unrealized gain or loss on those
positions will be included in the fund's income as if
each position had been sold for its fair market value
at
the end of the taxable year. The resulting gain or
loss
will be combined with any gain or loss realized by the
fund from positions in section 1256 contracts closed
during the taxable year. Provided such positions were
held as capital assets and were not part of a "hedging
transaction" nor part of a "straddle," 60% of the
resulting net gain or loss will be treated as long-
term
capital gain or loss, and 40% of such net gain or loss
will be treated as short-term capital gain or loss,
regardless of the period of time the positions were
actually held by the fund.
Taxation of Shareholders
Because the fund will distribute exempt-interest
dividends, interest on indebtedness incurred by a
shareholder to purchase or carry fund shares is not
deductible for Federal income tax purposes. If a
shareholder receives exempt-interest dividends with
respect to any share and if such share is held by the
shareholder for six months or less, then, for Federal
income tax purposes, any loss on the sale or exchange
of
such share may, to the extent of exempt-interest
dividends, be disallowed. In addition, the Code may
require a shareholder, if he or she receives exempt-
interest dividends, to treat as Federal taxable income
a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments.
Furthermore, that portion of any exempt-interest
dividend paid by the fund which represents income
derived from private activity bonds held by the fund
may
not retain its Federal tax-exempt status in the hands
of
a shareholder who is a "substantial user" of a
facility
financed by such bonds or a "related person" thereof.
Moreover, some or all of the fund's dividends may be
a
specific preference item, or a component of an
adjustment item, for purposes of the Federal
individual
and corporate alternative minimum taxes. In addition,
the receipt of the fund's dividends and distributions
may affect a foreign corporate shareholder's Federal
"branch profits" tax liability and Federal "excess net
passive income" tax liability of a shareholder of a
Subchapter S corporation. Shareholders should consult
their own tax advisors to determine whether they are
(a)
substantial users with respect to a facility or
related
to such users within the meaning of the Code or (b)
subject to a federal alternative minimum tax, the
Federal branch profits tax or the Federal "excess net
passive income" tax.
The fund does not expect to realize a significant
amount
of capital gains. Net realized short-term capital
gains
are taxable to a United States shareholder as ordinary
income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any,
that the fund designates as capital gains dividends
are
taxable as long-term capital gains, whether paid in
cash
or in shares and regardless of how long a shareholder
has held shares of the fund.
Upon the sale or exchange of his shares, a shareholder
will realize a taxable gain or loss equal to the
difference between the amount realized and his basis
in
his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets
in the shareholder's hands, and will be long-term
capital gain or loss if the shares are held for more
than one year and short-term capital gain or loss if
the
shares are held for one year or less. Any loss
realized
on a sale or exchange will be disallowed to the extent
the shares disposed of are replaced, including
replacement through the reinvesting of dividends and
capital gains distributions in the fund, within a 61-
day
period beginning 30 days before and ending 30 days
after
the disposition of the shares. In such a case, the
basis of the shares acquired will be increased to
reflect the disallowed loss. Any loss realized by a
shareholder on the sale of a fund share held by the
shareholder for six months or less (to the extent not
disallowed pursuant to the six-month rule described
above relating to exempt-interest dividends) will be
treated for United States federal income tax purposes
as
a long-term capital loss to the extent of any
distributions or deemed distributions of long-term
capital gains received by the shareholder with respect
to such share.
If a shareholder incurs a sales charge in acquiring
shares of the fund, disposes of those shares within 90
days and then acquires shares in a mutual fund for
which
the otherwise applicable sales charge is reduced by
reason of a reinvestment right (e.g., an exchange
privilege), the original sales charge will not be
taken
into account in computing gain or loss on the original
shares to the extent the subsequent sales charge is
reduced. Instead, the disregarded portion of the
original sales charge will be added to the tax basis
in
the newly acquired shares. Furthermore, the same rule
also applies to a disposition of the newly acquired
shares made within 90 days of the second acquisition.
This provision prevents a shareholder from
immediately
deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Backup Withholding. The fund may be required to
withhold, for United States federal income tax
purposes,
31% of (a) taxable dividends and distributions and (b)
redemption proceeds payable to shareholders who fail
to
provide the fund with their correct taxpayer
identification number or to make required
certifications, or who have been notified by the IRS
that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding.
Backup
withholding is not an additional tax and any amount
withheld may be credited against a shareholder's
United
States federal income tax liabilities.
Notices. Shareholders will be notified annually by
the
fund as to the United States federal income tax and
Arizona personal income tax status of the dividends
and
distributions made by the fund to its shareholders.
These statements also will designate the amount of
exempt-interest dividends that is a preference item
for
purposes of the Federal individual and corporate
alternative minimum taxes. The dollar amount of
dividends excluded or exempt from Federal income
taxation and the dollar amount of dividends subject to
Federal income taxation, if any, will vary for each
shareholder depending upon the size and duration of
each
shareholder's investment in the fund. To the extent
the
fund earns taxable net investment income, it intends
to
designate as taxable dividends the same percentage of
each day's dividend as its taxable net investment
income
bears to its total net investment income earned on
that
day.
The foregoing is only a summary of certain material
tax
consequences affecting the fund and its shareholders.
Shareholders are advised to consult their own tax
advisers with respect to the particular tax
consequences
to them of an investment in the fund.
ADDITIONAL INFORMATION
The fund was incorporated under the laws of the State
of
Maryland on May 4, 1987 and commenced operations on
June
1, 1987 under the name Hutton Municipal Series Inc.
On
October 14, 1994, the fund changed its name to Smith
Barney Arizona Municipals Fund Inc.
Each Class of the fund's shares represents an
identical
interest in the fund's investment portfolio. As a
result, the Classes have the same rights, privileges
and
preferences, except with respect to: (a) the
designation of each Class; (b) the effect of the
respective sales charges for each Class; (c) the
distribution and/or service fees borne by each Class;
(d) the expenses allowable exclusively to each Class;
(e) voting rights on matters exclusively affecting a
single class; (f) the exchange privilege of each
Class;
and (g) the conversion feature of the Class B shares.
The Board of Directors does not anticipate that there
will be any conflicts among the interests of the
holders
of the different Classes. The directors, on an ongoing
basis, will consider whether any such conflict exists
and, if so, take appropriate action.
The fund does not hold annual shareholder meetings.
There normally will be no meetings of shareholders for
the purpose of electing directors unless and until
such
time as less than a majority of the directors holding
office have been elected by shareholders. The
directors
will call a meeting for any purpose upon written
request
of shareholders holding at least 10% of the fund's
outstanding shares and the fund will assist
shareholders
in calling such a meeting as required by the 1940 Act.
When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each
full share owned and a proportionate, fractional vote
for any fractional share held of that Class.
Generally,
shares of the fund will be voted on a fund-wide basis
on
all matters except matters affecting only the
interests
of one Class.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended May
31, 2000 is incorporated herein by reference in its
entirety. The annual report was filed on August 2,
2000, Accession Number 950130-00-4177.
OTHER INFORMATION
In an industry where the average portfolio manager has
seven years of experience (source: ICI, 1998), the
portfolio managers of Smith Barney mutual funds
average
21 years in the industry and 15 years with the firm.
Smith Barney mutual funds offers more than 60 mutual
funds. We understand that many investors prefer an
active role in allocating the mix of funds in their
portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management
that can be tailored to suit each investor's unique
financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested
within their asset class and investment style,
enabling investors to make asset allocation
decisions in conjunction with their Service
Agent.
Classic Investor Series
Our Classic Investor Series funds offer a range
of equity and fixed income strategies that seek
to capture opportunities across asset classes and
investment styles using disciplined investment
approaches.
The Smith Barney Allocation Series
As a fund of funds, investors can select a
Portfolio that may help their investment needs.
As needs change, investors can easily choose
another long-term, diversified investment from
our fund family.
Special Discipline Series
Our Special Discipline Series funds are designed
for investors who are looking beyond more
traditional market categories: from natural
resources to a roster of state-specific municipal
funds.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of
states
and political subdivisions. Ratings are assigned to
general obligation and revenue bonds. General
obligation bonds are usually secured by all resources
available to the municipality and the factors outlined
in the rating definitions below are weighed in
determining the rating. Because revenue bonds in
general are payable from specifically pledged
revenues,
the essential element in the security for a revenue
bond
is the quantity and quality of the pledged revenues
available to pay debt service.
Although an appraisal of most of the same factors that
bear on the quality of general obligation bond credit
is
usually appropriate in the rating analysis of a
revenue
bond, other factors are important, including
particularly the competitive position of the municipal
enterprise under review and the basic security
covenants. Although a rating reflects S&P's judgment
as
to the issuer's capacity for the timely payment of
debt
service, in certain instances it may also reflect a
mechanism or procedure for an assured and prompt cure
of
a default, should one occur, i.e., an insurance
program,
Federal or state guarantee or the automatic
withholding
and use of state aid to pay the defaulted debt
service.
AAA
Prime - These are obligations of the highest quality.
They have the strongest capacity for timely payment
of
debt service.
General Obligation Bonds - In a period of economic
stress, the issuers will suffer the smallest declines
in
income and will be least susceptible to autonomous
decline. Debt burden is moderate. A strong revenue
structure appears more than adequate to meet future
expenditure requirements. Quality of management
appears
superior.
Revenue Bonds - Debt service coverage has been, and is
expected to remain, substantial. Stability of the
pledged revenues is also exceptionally strong, due to
the competitive position of the municipal enterprise
or
to the nature of the revenues. Basic security
provisions (including rate covenant, earnings test for
issuance of additional bonds, and debt service reserve
requirements) are rigorous. There is evidence of
superior management.
AA
High Grade - The investment characteristics of general
obligation and revenue bonds in this group are only
slightly less marked than those of the prime quality
issues. Bonds rated "AA'' have the second strongest
capacity for payment of debt service.
A
Good Grade - Principal and interest payments on bonds
in
this category are regarded as safe. This rating
describes the third strongest capacity for payment of
debt service. It differs from the two higher ratings
because:
General Obligation Bonds - There is some weakness,
either in the local economic base, in debt burden, in
the balance between revenues and expenditures, or in
quality of management. Under certain adverse
circumstances, any one such weakness might impair the
ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could
show some variations because of increased competition
or
economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent.
Management performance appears adequate.
BBB
Medium Grade - Of the investment grade ratings, this
is
the lowest.
General Obligation Bonds - Under certain adverse
conditions, several of the above factors could
contribute to a lesser capacity for payment of debt
service. The difference between "A'' and "BBB"
ratings
is that the latter shows more than one fundamental
weakness, or one very substantial fundamental
weakness,
whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds - Debt coverage is only fair. Stability
of the pledged revenues could show substantial
variations, with the revenue flow possibly being
subject
to erosion over time. Basic security provisions are
no
more than adequate. Management performance could be
stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on
balance,
as predominately speculative with respect to capacity
to
pay interest and repay principal in accordance with
the
terms of the obligation. BB indicates the lowest
degree
of speculation and CC the highest degree of
speculation.
While such bonds will likely have some quality and
protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no
interest is being paid.
D
Bonds rated D are in default, and payment of interest
and/or repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition
of
a plus or a minus sign, which is used to show relative
standing within the major rating categories, except in
the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less
are usually given note ratings (designated SP-1, -2 or
-3) by S&P to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated
SP-1
have a very strong or strong capacity to pay principal
and interest. Those issues determined to possess
overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have a
satisfactory capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best
quality.
They carry the smallest degree of investment risk and
are generally referred to as "gilt edge.'' Interest
payments are protected by a large or by an
exceptionally
stable margin and principal is secure. While the
various protective elements are likely to change, such
changes as can be visualized are most unlikely to
impair
the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high
quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may
be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds that are rated A possess many favorable
investment
attributes and are to be considered as upper medium-
grade obligations. Factors giving security to
principal
and interest are considered adequate, but elements may
be present which suggest a susceptibility to
impairment
sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-
grade
obligations, i.e., they are neither highly protected
nor
poorly secured; interest payments and principal
security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in
fact
have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and
principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds
in
this class.
B
Bonds that are rated B generally lack characteristics
of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be
small.
Caa
Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger
may exist with respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are
speculative in a high degree. These issues are often
in
default or have other marked short-comings.
C
Bonds that are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and
other
short-term loans are designated Moody's Investment
Grade
(MIG) and for variable rate demand obligations are
designated Variable Moody's Investment Grade (VMIG).
This distinction is in recognition of the differences
between short- and long-term credit risk. Loans
bearing
the designation MIG 1 or VMIG 1 are of the best
quality,
enjoying strong protection by established cash flows
of
funds for their servicing, from established and broad-
based access to the market for refinancing, or both.
Loans bearing the designation MIG 2 or VMIG 2 are of
high quality, with margins of protection ample
although
not as large as the preceding group. Loans bearing
the
designation MIG 3 or VMIG 3 are of favorable quality,
with all security elements accounted for but lacking
the
undeniable strength of the preceding grades.
Liquidity
and cash flow may be narrow and market access for
refinancing is likely to be less well established.
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: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's
industry
or industries and an appraisal of speculative-type
risks
which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition
and
customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over
a
period of ten years; (7) financial strength of a
parent
company and the relationships which exist with the
issuer; and (8) recognition by the management of
obligations which may be present or may arise as a
result of public interest questions and preparations
to
meet such obligations.
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
Statement of
Additional
Information
September 28, 2000
Smith Barney Arizona Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
SALOMON
SMITH BARNEY
A Member
of Citigroup [Symbol]
6
