UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5066
Smith Barney Arizona Municipals Fund Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Christina T. Sydor, Esq.
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code:
(800) 451-2010
Date of fiscal year end: May 31
Date of reporting period: May 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
SMITH BARNEY
ARIZONA MUNICIPALS FUND INC.
CLASSIC SERIES | ANNUAL REPORT | MAY 31, 2003
[LOGO] Smith Barney
Mutual Funds
Your Serious Money. Professionally Managed.(R)
Your Serious Money. Professionally Managed.(R) is a registered service mark of
Citigroup Global Markets Inc.
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
WHAT'S INSIDE
Letter From the Chairman.................................... 1
Manager Overview............................................ 2
Fund Performance............................................ 4
Historical Performance...................................... 5
Schedule of Investments..................................... 6
Statement of Assets and Liabilities......................... 12
Statement of Operations..................................... 13
Statements of Changes in Net Assets......................... 14
Notes to Financial Statements............................... 15
Financial Highlights........................................ 21
Independent Auditors' Report................................ 24
Additional Information...................................... 25
Tax Information............................................. 28
[PHOTO]
R. JAY
GERKEN, CFA
Chairman, President and Chief Executive Officer
LETTER FROM THE CHAIRMAN
Dear Shareholder,
The philosopher Bertrand Russell famously remarked that, "Change is one thing,
progress is another." You will notice in the following pages that we have begun
to implement some changes to your shareholder report and we will be reflecting
other changes in future reports. Our aim is to make meaningful improvements in
reporting on the management of your Fund and its performance, not just to enact
change for change's sake. Please bear with us during this transition period.
We know that you have questions about fund managers' decisions and plans, and
we want to be sure that you have
easy access to the information you need. Keeping investors informed is, and
always will be, one of my top priorities as Chairman of your Fund. To that end,
we encourage you to go to our website: www.smithbarneymutualfunds.com/1/ where
you can find additional insight on your Fund.
I invite you to read this report in full. Please take the opportunity to talk
to your financial adviser about this report or any other questions or concerns
you have about your Fund and your financial future. As always, thank you for
entrusting your assets to us. We look forward to helping you continue to meet
your financial goals. Please read on to learn more about your Fund's
performance and the Manager's strategy.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
June 18, 2003
- --------
/1/Matters referenced are not incorporated by reference unless otherwise stated.
1 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
MANAGER OVERVIEW
[PHOTO]
JOSEPH P. DEANE
Vice President and Investment Officer
Performance Review
For the 12 months ended May 31, 2003, Class A shares of the Smith Barney
Arizona Municipals Fund Inc. ("Fund"), without sales charges, returned 4.07%.
The Fund performed worse than its unmanaged benchmark, the Lehman Brothers
Municipal Bond Index,/i/ which returned 10.36% for the same period. It also
underperformed its Lipper peer group of Arizona municipal debt funds, which
returned 8.61% for the same period./2/ Certain investors may be subject to the
federal Alternative Minimum Tax, and state and local taxes may apply. Capital
gains, if any, are fully taxable. Please consult your personal tax adviser.
Past performance is not indicative of future results.
During the period we reduced the Fund's duration (its sensitivity to interest
rate movements). Although no one can say for sure where interest rates are
headed, considering that interest rates are hovering at historic lows, we
reduced the Fund's duration to position the portfolio for a possible rise in
interest rates. While this strategy hampered the Fund's short-term performance
and contributed to its underperformance versus its benchmark index, our goal
has been to prudently position the Fund for the long term.
Market Review
Municipal bonds collectively generated strong results over the reporting
period, although the market vacillated throughout the year due to swings in
investor sentiment. When the period began, concerns about the health of the
economy and corporate accounting practices prompted many investors to shift
money from riskier assets into higher-rated fixed-income securities,
specifically U.S. Treasuries, as well as into investment-grade municipal bonds.
Bonds lost a little ground to equities when the Fed cut short-term interest
rates to their lowest levels in over 40 years last November. However, as
concerns regarding the prospects of war in Iraq and the U.S. economy became
more pronounced, many investors again shifted assets into higher-rated debt
issues.
Our Approach to Securities Selection
The recession and stock market's retreat last year negatively impacted the tax
collections of many municipalities, and Arizona was no exception. Therefore, we
remained particularly attentive to diligently evaluating investment candidates
on a risk/reward basis. Given the relatively lower yields offered by
higher-rated
- --------
/2/Lipper is a major independent mutual-fund tracking organization. Average
annual returns are based on the 12-month period ended May 31, 2003,
calculated among 36 funds in the Arizona municipal debt funds category with
reinvestment of dividends and capital gains excluding sales charges.
2 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
state-backed general obligation bonds during the period, the Fund maintained
significant exposure to essential services revenue bonds, such as those in the
water-and-sewer and utilities sectors to a modest extent. (Revenue bonds are
supported directly by the operating revenues of the projects of their issuers.)
The Fund was concentrated primarily in the hospital (which offered relatively
higher tax-exempt yields than many other sectors), industrial development and
multi-family housing industries. Rather than target specific sectors, the Fund
invested in issues that appeared competitively priced to us in a broad range of
sectors.
We reduced the Fund's duration by targeting issues with higher coupons, which
is the fixed rate that the issuer promises to pay the bondholder until
maturity, and selling bonds with lower coupons. Furthermore, we continued to
use U.S. Treasury futures to help hedge the Fund to an extent against the
possibility of rising rates. While this strategy detracted from the Fund's
returns, we opted to pursue this more conservative course in terms of managing
interest rate risk while seeking bonds that offered reasonable levels of
tax-exempt income.
The Fund's focus on high-quality, investment-grade issues is also indicative of
our conservative approach. As of the period's close, over 43% of the Fund was
invested in issues rated AAA by Standard and Poor's Ratings Service, and over
78% of the Fund was invested in issues rated A or better.
Thank you for your investment in the Smith Barney Arizona Municipals Fund Inc.
We appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ Joseph P. Deane
Joseph P. Deane
Vice President
and Investment Officer
June 18, 2003
The information provided in this letter by the Manager is not intended to be a
forecast of future events, a guarantee of future results or investment advice.
Views expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of May 31, 2003 and are subject to
change. Please refer to pages 6 through 9 for a list and percentage breakdown
of the Fund's holdings.
3 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
- --------
/i/The Lehman Brothers Municipal Bond Index is a broad measure of the municipal
bond market with maturities of at least one year. Please note that an
investor cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURNS+
Without Sales Charges/(1)/
-------------------------
Class A Class B Class L
- ------------------------------------------------------
Twelve Months Ended 5/31/03 4.07% 3.38% 3.35%
- ------------------------------------------------------
Five Years Ended 5/31/03 4.05 3.47 3.44
- ------------------------------------------------------
Ten Years Ended 5/31/03 5.15 4.60 N/A
- ------------------------------------------------------
Inception* through 5/31/03 6.50 5.14 5.66
- ------------------------------------------------------
With Sales Charges/(2)/
------------------------
Class A Class B Class L
- -----------------------------------------------------
Twelve Months Ended 5/31/03 (0.11)% (1.09)% 1.35%
- -----------------------------------------------------
Five Years Ended 5/31/03 3.20 3.31 3.22
- -----------------------------------------------------
Ten Years Ended 5/31/03 4.73 4.60 N/A
- -----------------------------------------------------
Inception* through 5/31/03 6.23 5.14 5.54
- -----------------------------------------------------
CUMULATIVE TOTAL RETURNS+
Without Sales Charges/(1)/
- ---------------------------------------------------------------
Class A (5/31/93 through 5/31/03) 65.28%
- --------------------------------------------------------------
Class B (5/31/93 through 5/31/03) 56.72
- --------------------------------------------------------------
Class L (Inception* through 5/31/03) 59.53
- --------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 4.00% and 1.00%,
respectively. Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from purchase payment. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within one
year from purchase payment.
+ The returns shown do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
* Inception dates for Class A, B and L shares are June 1, 1987, November 6,
1992 and December 8, 1994, respectively.
4 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
HISTORICAL PERFORMANCE (UNAUDITED)
Value of $10,000 Invested in Class A Shares of
Smith Barney Arizona Municipals Fund Inc. vs.
Lehman Brothers Municipal Bond Index and
Lipper Arizona Municipal Debt Funds Average+
- --------------------------------------------------------------------------------
May 1993 -- May 2003
[CHART]
Smith Barney Arizona
Municipals Fund Inc. Lehman Brothers Lipper Arizona Municipal
-- Class A Shares Municipal Bond Index Debt Funds Average
--------------------- -------------------- ------------------------
5/93 $ 9,603 $10,000 $10,000
5/94 9,730 10,247 10,161
5/95 10,643 11,181 11,075
5/96 11,049 11,692 11,467
5/97 11,940 12,660 12,359
5/98 13,015 13,848 13,438
5/99 13,509 14,496 13,926
5/00 13,152 14,487 13,514
5/01 14,470 16,247 14,900
5/02 15,252 17,303 15,761
5/03 15,872 19,097 17,116
+Hypothetical illustration of $10,000 invested in Class A shares on May 31,
1993, assuming deduction of the maximum 4.00% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through May 31, 2003. The Lehman Brothers Municipal Bond Index is
a broad based, total return index comprised of investment-grade, fixed rate
municipal bonds selected from issues larger than $50 million issued since
January 1991. The Index is unmanaged and is not subject to the same management
and trading expenses as a mutual fund. Please note that an investor cannot
invest directly in an index. The Lipper Arizona Municipal Debt Funds Average
is composed of the Fund's peer group of mutual funds (36 funds as of May 31,
2003). The performance of the Fund's other classes may be greater or less than
the Class A shares' performance indicated on this chart, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in the other classes. The returns shown do not reflect the deduction
of taxes that a shareholder would pay on fund distributions or the redemption
of fund shares.
All figures represent past performance and are not a guarantee of future
results. The performance data represents past performance including the
investment return and principal value of an investment, which will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
5 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
SCHEDULE OF INVESTMENTS MAY 31, 2003
FACE
AMOUNT RATING(a) SECURITY VALUE
- -----------------------------------------------------------------------------------------------------
General Obligation -- 23.9%
Maricopa County GO:
Elementary School District No. 8, Osborne Elementary
School District:
$1,000,000 A1* 7.500% due 7/1/09+ $ 1,275,620
210,000 AAA Series A, FGIC-Insured, 5.875% due 7/1/14 236,863
650,000 AAA Elementary School District No. 14, (Creighton School
Improvement Project 1990), Series C, FGIC-Insured, (Partially
escrowed to maturity with U.S. government securities),
6.500% due 7/1/08 785,590
1,000,000 AAA Elementary School District No. 40, (Glendale School
Improvement), AMBAC-Insured, 6.300% due 7/1/11 (b)+ 1,106,080
390,000 AAA School District No. 008, FGIC-Insured, (Pre-Refunded --
Escrowed with U.S. government securities to 7/1/06
Call @ 101), 5.875% due 7/1/14 446,460
635,000 AAA School District No. 80, Chandler Unified School District,
FGIC-Insured, 5.800% due 7/1/12+ 670,249
1,000,000 AA Unified High School District No. 210, (Phoenix Project of 1995),
Series B, (Partially Pre-Refunded -- Escrowed with U.S.
government securities to 7/1/06 Call @ 101),
5.375% due 7/1/13 (c) 1,129,770
Phoenix GO:
1,400,000 AA+ Refunding, Series A, 6.250% due 7/1/17 1,814,050
Series B:
400,000 AA+ 5.000% due 7/1/22 429,236
575,000 AA+ 5.000% due 7/1/23 615,221
400,000 A+ Phoenix Special Assignment, Central Avenue Improvement District,
7.000% due 1/1/06 401,776
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,306,470
500,000 AAA Pinal County Unified School District No. 43, GO, Apache Junction,
Series A, FGIC-Insured, 5.850% due 7/1/15 572,010
500,000 NR Scottsdale Mountain Communication Facilities District GO,
District No. 3, Series A, 6.200% due 7/1/17 511,910
Tempe Union High School District No. 213, GO, FGIC-Insured: 301,427
285,000 AAA 6.000% due 7/1/10
715,000 AAA Pre-Refunded -- Escrowed with state and local government
securities to 7/1/04 Call @ 101, 6.000% due 7/1/10 760,195
- ----------------------------------------------------------------------------------------------------
12,362,927
- ----------------------------------------------------------------------------------------------------
Hospitals -- 15.1%
1,500,000 Ba2* Arizona Health Facilities Authority, Hospital Systems Revenue,
Phoenix Children's Hospital, Series A, 6.125% due 11/15/22+ 1,116,000
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 Baa1* 5.900% due 4/1/09+ 1,633,680
1,000,000 Baa1* 6.125% due 4/1/18 1,047,420
See Notes to Financial Statements.
6 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 2003
FACE
AMOUNT RATING(a) SECURITY VALUE
- -------------------------------------------------------------------------------------------------
Hospitals -- 15.1% (continued)
$ 500,000 AAA Maricopa County IDA, Hospital Revenue, Samaritan Health
Services, Series A, MBIA-Insured, (Escrowed to maturity with
U.S. government securities), 7.000% due 12/1/16 $ 671,465
3,000,000 AAA Mesa IDA, Discovery Health Systems, Series A, MBIA-Insured,
5.625% due 1/1/29+ 3,333,660
- -------------------------------------------------------------------------------------------------
7,802,225
- -------------------------------------------------------------------------------------------------
Housing: Multi-Family -- 8.8%
Maricopa County IDA, MFH Revenue:
500,000 AAA Metro Gardens -- Mesa Ridge Project, Series A, MBIA-Insured,
5.650% due 7/1/19+ 544,300
1,740,000 AAA Mortgage Loan, Series A, FHA-Insured, 5.900% due 7/1/24 1,773,130
Phoenix IDA, MFH Revenue:
Ventana Palms Apartments Project, Series A, MBIA-Insured:
150,000 Aaa* 6.100% due 10/1/19 164,292
950,000 Aaa* 6.150% due 10/1/29 1,034,341
1,000,000 AA Woodstone & Silver Springs, Radian-Insured,
6.250% due 4/1/23 1,024,930
- -------------------------------------------------------------------------------------------------
4,540,993
- -------------------------------------------------------------------------------------------------
Housing: Single-Family -- 0.9%
125,000 AAA Phoenix IDA, Single-Family Mortgage Revenue, GNMA/FNMA/
FHLMC-Collateralized, 6.300% due 12/1/12 (d) 132,044
310,000 AAA Pima County IDA, Single-Family Mortgage Revenue,
GNMA-Collateralized, 6.750% due 11/1/27 (d) 320,639
- -------------------------------------------------------------------------------------------------
452,683
- -------------------------------------------------------------------------------------------------
Industrial Development -- 13.1%
750,000 NR Navajo County IDA, IDR, (Stone Container Corp. Project),
7.400% due 4/1/26 (d) 755,310
700,000 A-1+ Phoenix IDA, MFH Revenue, (Del Mar Terrace Apartments Project),
Series A, 1.350% due 1/1/31 (e) 700,000
Pima County IDA, Industrial Revenue Refunding:
505,000 AAA FSA-Insured, 7.250% due 7/15/10 521,155
35,000 AAA Series A, GNMA/FNMA/FHLMC-Collateralized,
6.250% due 11/1/30 (d) 37,098
1,000,000 Ba3* Tucson Electric Power Co. Project, Series B,
6.000% due 9/1/29 954,230
2,125,000 NR Stanford Court Apartments, Series B, 6.250% due 7/1/18+ 2,116,670
Tempe IDA, IDR, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 351,302
250,000 NR 6.250% due 12/1/04 252,578
1,000,000 AAA Tucson IDA, Lease Revenue, University of Arizona/Marshall
Foundation, Series A, AMBAC-Insured, 5.000% due 7/15/22 1,068,610
- -------------------------------------------------------------------------------------------------
6,756,953
- -------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
7 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 2003
FACE
AMOUNT RATING(a) SECURITY VALUE
- -------------------------------------------------------------------------------------------------
Life Care Systems -- 1.6%
$ 960,000 NR Flagstaff IDA, Living Community Revenue, (Northern Community
Project), 6.200% due 9/1/28 $ 827,117
- -------------------------------------------------------------------------------------------------
Miscellaneous -- 17.7%
250,000 AAA Arizona State Municipal Financing Program COP, Series 20,
BIG-Insured, (Escrowed to maturity with U.S. government
securities), 7.625% due 8/1/06 281,980
750,000 Aa1* Arizona Student Loan Revenue Acquisition Authority, Series B,
Guaranteed Student Loan, 6.600% due 5/1/10 (d) 792,232
500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
6.200% due 4/1/15 541,570
Phoenix Civic Improvement Corp., Excise Tax Revenue, Sr. Lien:
2,630,000 AAA Adams Street Garage Project B, 5.375% due 7/1/29+ 2,833,588
2,350,000 AAA Municipal Courthouse Project A, 5.375% due 7/1/10+ 2,531,914
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 382,889
500,000 AAA 6.150% due 1/1/15 539,620
200,000 VMIG 1* Tempe Arizona Excise Tax Revenue, (Tempe Center for the Arts
Project), 1.350% due 7/1/20 (e)+ 200,000
1,000,000 AA Tucson COP, (Pre-Refunded -- Escrowed with state and local
government securities to 7/1/04 Call @ 100),
6.375% due 7/1/09 1,057,320
- -------------------------------------------------------------------------------------------------
9,161,113
- -------------------------------------------------------------------------------------------------
Pollution Control -- 5.4%
Coconino County Pollution Control Corp., Revenue Refunding:
1,000,000 A- Arizona Public Service Co., Series A, 5.875% due 8/15/28 1,018,950
1,000,000 B- Nevada Power Co. Project, 6.375% due 10/1/36 (d) 932,950
850,000 A- Navajo County PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28+ 865,929
- -------------------------------------------------------------------------------------------------
2,817,829
- -------------------------------------------------------------------------------------------------
Transportation -- 5.0%
Phoenix Civic Improvement Corp., Airport Revenue:
1,000,000 AAA FGIC-Insured, 5.375% due 7/1/29 (d) 1,034,470
1,500,000 AAA Series A, FSA-Insured, 5.000% due 7/1/25+ 1,562,250
- -------------------------------------------------------------------------------------------------
2,596,720
- -------------------------------------------------------------------------------------------------
Utilities -- 4.3%
1,000,000 AA Agricultural Improvement and Power District, Electric Systems
Revenue, (Salt River Project), Series A, 5.000% due 1/1/23+ 1,069,020
250,000 BBB- Prescott Valley Improvement District, Special Assessment, Sewer
Collection System, Roadway Repair, 7.900% due 1/1/12 256,103
1,000,000 BBB Yavapai County IDA, IDR, (Citizens Utilities Co. Project),
5.450% due 6/1/33 (d) 877,310
- -------------------------------------------------------------------------------------------------
2,202,433
- -------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
8 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 2003
FACE
AMOUNT RATING(a) SECURITY VALUE
- -------------------------------------------------------------------------------------------
Water and Sewer -- 4.2%
$1,000,000 Aaa* Arizona Water Infrastructure Finance Authority, Series A,
5.000% due 10/1/19+ $ 1,093,860
1,000,000 AAA Phoenix Civic Improvement Corp. Wastewater System Revenue,
FGIC-Insured, 5.000% due 7/1/24 1,053,570
- -------------------------------------------------------------------------------------------
2,147,430
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $48,839,136**) $51,668,423
- -------------------------------------------------------------------------------------------
(a) All ratings are by Standard & Poor's Ratings Service, except for those
identified by an asterisk (*), which are rated by Moody's Investors Service.
(b) All or a portion of this security is held as collateral for open futures
contracts commitments (See Note 6).
(c) Pre-Refunded bonds escrowed with U.S. government securities and bonds
escrowed to maturity with U.S. government securities are considered by the
investment adviser to be triple-A rated even if issuer has not applied for
new ratings.
(d) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(e) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
+ All or a portion of this security is segregated for open futures contracts
commitments (See Note 6).
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 10 and 11 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
9 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to Shareholders
BOND RATINGS (UNAUDITED)
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"B" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse busi- ness, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments.
B -- Bonds rated "B" have a greater vulnerability to default but
currently have the capacity to meet interest payments and
principal payments. Adverse business, finan- cial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
Moody's Investors Service ("Moody's") -- Numerical modifiers 1, 2 and 3 may be
applied to each generic rating from "Aa" to "Ba," where 1 is the highest and 3
the lowest ranking within its generic category.
Aaa -- Bonds rated "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 pay- ments 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 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 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 some- what larger than in Aaa
securities.
A -- Bonds rated "A" possess many favorable investment attributes and
are to be consid- ered 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 some time in the future.
Baa -- Bonds 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 out- standing investment characteristics and in fact
have speculative characteristics as well.
Ba -- Bonds 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 in this class.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
10 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
SHORT-TERM SECURITY RATINGS (UNAUDITED)
SP-1 -- Standard & Poor's highest rating indicating very strong capacity
to pay principal and interest; those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+)
sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of
safety regarding timely payment is either overwhelming or very
strong; those issues determined to possess over- whelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having a demand feature -- VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to
the advent of the VMIG 1 rating.
SECURITY DESCRIPTIONS (UNAUDITED)
ABAG --Association of Bay Area Governments
AIG --American International Guaranty
AMBAC --AMBAC Indemnity Corporation
BAN --Bond Anticipation Notes
BIG --Bond Investors Guaranty
CGIC --Capital Guaranty Insurance
CHFCLI --California Health Facility Construction Loan Insurance
CONNIE --College Construction Loan Insurance Association
LEE
COP --Certificate of Participation
EDA --Economic Development Authority
FGIC --Financial Guaranty Insurance Company
FHA --Federal Housing Administration
FHLMC --Federal Home Loan Mortgage Corporation
FLAIRS --Floating Adjustable Interest Rate Securities
FNMA --Federal National Mortgage Association
FRTC --Floating Rate Trust Certificates
FSA --Financial Security Assurance
GIC --Guaranteed Investment Contract
GNMA --Government National Mortgage Association
GO --General Obligation
HDC --Housing Development Corporation
HFA --Housing Finance Authority
IDA --Industrial Development Authority
IDB --Industrial Development Board
IDR --Industrial Development Revenue
INFLOS --Inverse Floaters Company
ISD --Independent School District
LOC --Letter of Credit
MBIA --Municipal Bond Investors Assurance Corporation
MFH --Multi-Family Housing
MVRICS --Municipal Variable Rate Inverse Coupon Security
PCR --Pollution Control Revenue
PSF --Permanent School Fund
RAN --Revenue Anticipation Notes
RIBS --Residual Interest Bonds
RITES --Residual Interest Tax-Exempt Securities
SYCC --Structured Yield Curve Certificate
TAN --Tax Anticipation Notes
TECP --Tax-Exempt Commercial Paper
TOB --Tender Option Bonds
TRAN --Tax and Revenue Anticipation Notes
VA --Veterans Administration
VRDD --Variable Rate Daily Demand
VRWE --Variable Rate Wednesday Demand
11 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2003
ASSETS:
Investments, at value (Cost -- $48,839,136) $51,668,423
Receivable for securities sold 1,040,000
Interest receivable 1,015,496
Receivable for Fund shares sold 24,204
Receivable from broker -- variation margin 15,938
- --------------------------------------------------------------------------------
Total Assets 53,764,061
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 104,414
Bank overdraft 62,583
Investment advisory fee payable 23,343
Administration fee payable 14,928
Distribution plan fees payable 6,231
Accrued expenses 45,787
- --------------------------------------------------------------------------------
Total Liabilities 257,286
- --------------------------------------------------------------------------------
Total Net Assets $53,506,775
- --------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 5,363
Capital paid in excess of par value 53,749,993
Undistributed net investment income 15,956
Accumulated net realized loss from investment transactions (2,173,629)
Net unrealized appreciation of investments and futures contracts 1,909,092
- --------------------------------------------------------------------------------
Total Net Assets $53,506,775
- --------------------------------------------------------------------------------
Shares Outstanding:
Class A 4,041,625
Class B 971,085
Class L 350,348
Net Asset Value:
Class A (and redemption price) $9.98
Class B * $9.98
Class L * $9.97
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value per share) $10.40
Class L (net asset value plus 1.01% of net asset value per share) $10.07
- --------------------------------------------------------------------------------
* Redemption price is NAV of Class B and L shares reduced by a 4.50% and 1.00%
CDSC, respectively, if shares are redeemed within one year from purchase
payment (See Note 4).
See Notes to Financial Statements.
12 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2003
INVESTMENT INCOME:
Interest $ 3,021,381
- -----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 4) 165,535
Distribution plan fees (Note 7) 154,286
Administration fee (Note 4) 110,357
Shareholder communications (Note 7) 54,912
Audit and legal 52,144
Custody 30,450
Registration fees 20,749
Shareholder servicing fees (Note 7) 19,529
Directors' fees 11,934
Other 6,895
- -----------------------------------------------------------------------------------------
Total Expenses 626,791
- -----------------------------------------------------------------------------------------
Net Investment Income 2,394,590
- -----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 5 AND 6):
Realized Gain (Loss) From:
Investment transactions 309,166
Futures contracts (1,026,147)
- -----------------------------------------------------------------------------------------
Net Realized Loss (716,981)
- -----------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments and Futures Contracts:
Beginning of year 1,489,028
End of year 1,909,092
- -----------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 420,064
- -----------------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (296,917)
- -----------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,097,673
- -----------------------------------------------------------------------------------------
See Notes to Financial Statements.
13 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED MAY 31,
2003 2002
--------------------------------------------------------------
OPERATIONS:
Net investment income $ 2,394,590 $ 2,459,230
Net realized gain (loss) (716,981) 31,563
Increase in net unrealized
appreciation 420,064 182,217
-------------------------------------------------------------
Increase in Net Assets From
Operations 2,097,673 2,673,010
-------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTES 3 AND 8):
Net investment income (2,443,835) (2,503,536)
-------------------------------------------------------------
Decrease in Net Assets
From Distributions to
Shareholders (2,443,835) (2,503,536)
-------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 9,101,785 11,738,132
Net asset value of shares issued
for reinvestment of dividends 1,220,521 1,260,128
Cost of shares reacquired (11,130,032) (9,193,834)
-------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions (807,726) 3,804,426
-------------------------------------------------------------
Increase (Decrease) in Net Assets (1,153,888) 3,973,900
NET ASSETS:
Beginning of year 54,660,663 50,686,763
-------------------------------------------------------------
End of year* $ 53,506,775 $54,660,663
-------------------------------------------------------------
* Includes undistributed net
investment income of: $15,956 $65,201
-------------------------------------------------------------
See Notes to Financial Statements.
14 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Smith Barney Arizona Municipals Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities are
valued at the mean between the quoted bid and asked prices provided by an
independent pricing service that are based on transactions in municipal
obligations, quotations from municipal bond dealers, market transactions in
comparable securities and various relationships between securities. Investments
in securities for which market quotations are not available are valued at fair
value as determined in good faith by or with the direction of the Board of
Directors; (c) securities maturing within 60 days are valued at cost plus
accreted discount or minus amortized premium, which approximates value; (d)
gains or losses on the sale of securities are calculated by using the specific
identification method; (e) interest income, adjusted for amortization of
premium and accretion of discount, is recorded on an accrual basis; (f )
dividends and distributions to shareholders are recorded on the ex-dividend
date; (g) direct expenses are charged to each class; management fees and
general fund expenses are allocated on the basis of relative net assets; (h)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from accounting principles generally accepted in
the United States of America; and (j) estimates and assumptions are required to
be made regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Fund Concentration
Since the Fund invests primarily in obligations of issuers within Arizona, it
is subject to possible concentration risks associated with economic, political
or legal developments or industrial or regional matters specifically affecting
Arizona.
15 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy conditions that will enable interest from municipal
securities, which is exempt from regular Federal income tax and from designated
state income taxes, to retain such tax-exempt status when distributed to the
shareholders of the Fund.
It is the Fund's policy to distribute dividends monthly. Capital gains
distributions, if any, are taxable to shareholders, and are declared and paid
at least annually.
4. Investment Advisory Agreement, Administration Agreement and Affiliated
Transactions
Smith Barney Fund Management LLC (''SBFM''), an indirect wholly-owned
subsidiary of Citigroup Inc. ("Citigroup"), acts as investment adviser to the
Fund. The Fund pays SBFM an investment advisory fee calculated at an annual
rate of 0.30% of its average daily net assets. This fee is calculated daily and
paid monthly.
SBFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to
$500 million and 0.18% of the average daily net assets in excess of $500
million. This fee is calculated daily and paid monthly.
Citicorp Trust Bank, fsb. ("CTB"), formerly known as Travelers Bank & Trust,
fsb., another subsidiary of Citigroup, acts as the Fund's transfer agent. PFPC
Global Fund Services ("PFPC") acts as the Fund's sub-transfer agent. CTB
receives account fees and asset-based fees that vary according to the size and
type of account. PFPC is responsible for shareholder recordkeeping and
financial processing for all shareholder accounts and is paid by CTB. For the
year ended May 31, 2003, the Fund paid transfer agent fees of $12,120 to CTB.
Citigroup Global Markets Inc. ("CGM"), formerly known as Salomon Smith Barney
Inc., another indirect wholly-owned subsidiary of Citigroup, acts as the Fund's
distributor. In addition, CGM and certain other broker-dealers continue to sell
Fund shares to the public as members of the selling group.
There are maximum initial sales charges of 4.00% and 1.00% for Class A and L
shares, respectively. There is a contingent deferred sales charge ("CDSC") of
4.50% on Class B shares, which applies if redemption occurs within one year
16 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
from purchase payment. This CDSC declines by 0.50% the first year after
purchase and thereafter by 1.00% per year until no CDSC is incurred. Class L
shares also have a 1.00% CDSC, which applies if redemption occurs within one
year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC,
which applies if redemption occurs within one year of purchase payment. This
CDSC only applies to those purchases of Class A shares, which, when combined
with current holdings of Class A shares, equal or exceed $500,000 in the
aggregate. These purchases do not incur an initial sales charge.
For the year ended May 31, 2003, CGM received sales charges of approximately
$46,000 and $6,000 on sales of the Fund's Class A and L shares, respectively.
In addition, for the year ended May 31, 2003, CDSCs paid to CGM for Class B
shares were approximately $10,000.
All officers and one Director of the Fund are employees of Citigroup or its
affiliates.
5. Investments
During the year ended May 31, 2003, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
---------------------
Purchases $ 5,997,049
---------------------
Sales 10,639,317
---------------------
At May 31, 2003, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
-----------------------------------------
Gross unrealized appreciation $3,557,986
Gross unrealized depreciation (728,699)
-----------------------------------------
Net unrealized appreciation $2,829,287
-----------------------------------------
6. Futures Contracts
Securities or cash equal to the initial margin amount, which is made upon
entering into the futures contract, are either deposited with the broker or
segregated by the custodian. Additional securities are also segregated up to
the current market value of the futures contracts. During the period the futures
17 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking to market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are received or made and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses
are incurred. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the proceeds from (or cost of ) the
closing transactions and the Fund's basis in the contract. The Fund enters into
such contracts to hedge a portion of its portfolio. The Fund bears the market
risk that arises from changes in the value of the financial instruments and
securities indices.
At May 31, 2003, the Fund had the following open futures contracts:
Number of Basis Market Unrealized
Contracts Expiration Value Value Loss
---------------------------------------------------------------------------
To Sell:
U.S. Treasury Bonds 170 6/03 $19,564,805 $20,485,000 $(920,195)
---------------------------------------------------------------------------
7. Class Specific Expenses
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
its Class A, B and L shares calculated at an annual rate of 0.15% of the
average daily net assets of each respective class. In addition, the Fund pays a
distribution fee with respect to its Class B and L shares calculated at an
annual rate of 0.50% and 0.55% of the average daily net assets for each class,
respectively. For the year ended May 31, 2003, total Distribution Plan fees
incurred, which are accrued daily and paid monthly, were as follows:
Class A Class B Class L
----------------------------------------------
Distribution Plan Fees $61,834 $68,077 $24,375
----------------------------------------------
For the year ended May 31, 2003, total Shareholder Servicing fees were as
follows:
Class A Class B Class L
--------------------------------------------------
Shareholder Servicing Fees $13,253 $5,169 $1,107
--------------------------------------------------
18 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended May 31, 2003, total Shareholder Communication expenses were
as follows:
Class A Class B Class L
----------------------------------------------------------
Shareholder Communication Expenses $38,582 $12,317 $4,013
----------------------------------------------------------
8. Distributions Paid to Shareholders by Class
Year Ended Year Ended
Net Investment Income May 31, 2003 May 31, 2002
-----------------------------------------------
Class A $1,884,380 $1,949,474
Class B 420,544 450,318
Class L 138,911 103,744
-----------------------------------------------
Total $2,443,835 $2,503,536
-----------------------------------------------
9. Capital Shares
At May 31, 2003, the Fund had 500 million shares of capital stock authorized
with a par value of $0.001 per share. The Fund has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest and has the same rights, except that each class bears certain direct
expenses specifically related to the distribution of its shares.
Transactions in shares of each class were as follows:
Year Ended Year Ended
May 31, 2003 May 31, 2002
--------------------- ---------------------
Shares Amount Shares Amount
---------------------------------------------------------------------------
Class A
Shares sold 575,907 $ 5,832,668 808,393 $ 8,187,024
Shares issued on reinvestment 88,616 896,108 94,812 957,277
Shares reacquired (786,641) (7,988,657) (424,844) (4,283,687)
---------------------------------------------------------------------------
Net Increase (Decrease) (122,118) $(1,259,881) 478,361 $ 4,860,614
---------------------------------------------------------------------------
Class B
Shares sold 232,911 $ 2,367,706 210,807 $ 2,132,554
Shares issued on reinvestment 21,170 214,383 21,913 221,339
Shares reacquired (252,796) (2,557,156) (461,252) (4,667,054)
---------------------------------------------------------------------------
Net Increase (Decrease) 1,285 $ 24,933 (228,532) $(2,313,161)
---------------------------------------------------------------------------
Class L
Shares sold 89,315 $ 901,411 140,142 $ 1,418,554
Shares issued on reinvestment 10,886 110,030 8,079 81,512
Shares reacquired (57,671) (584,219) (24,107) (243,093)
---------------------------------------------------------------------------
Net Increase 42,530 $ 427,222 124,114 $ 1,256,973
---------------------------------------------------------------------------
19 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10.Capital Loss Carryforward
At May 31, 2003, the Fund had, for Federal income tax purposes, approximately
$1,145,000 of unused capital loss carryforwards available to offset future
capital gains. To the extent that these carryforward losses are used to offset
capital gains, it is probable that the gains so offset will not be distributed.
The amount and year of expiration for each carryforward loss is indicated
below. Expiration occurs on May 31 of the year indicated:
2008 2009 2010
-----------------------------------------------
Carryforward Amounts $52,000 $1,033,000 $60,000
-----------------------------------------------
In addition, the Fund had $1,948,119 of capital losses realized after October
31, 2002, which were deferred for tax purposes to the first day of the
following year.
11.Income Tax Information and Distributions to Shareholders
At May 31, 2003, the tax basis components of distributable earnings were:
--------------------------------------------
Undistributed tax-exempt income $ 122,749
--------------------------------------------
Accumulated capital loss (1,145,705)
--------------------------------------------
Unrealized appreciation 2,829,287
--------------------------------------------
The tax character of distributions paid during the year ended May 31, 2003 was:
----------------------------
Tax-exempt income $2,443,835
----------------------------
20 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
FINANCIAL HIGHLIGHTS
For a share of each class of capital stock outstanding throughout each year
ended May 31, unless otherwise noted:
Class A Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/
- ---------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year $10.04 $10.00 $ 9.54 $10.31 $10.54
- ----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.45 0.48 0.49 0.50 0.49
Net realized and unrealized
gain (loss) (0.05) 0.05 0.45 (0.77) (0.10)
- ----------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.40 0.53 0.94 (0.27) 0.39
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.46) (0.49) (0.48) (0.48) (0.49)
Net realized gains -- -- -- (0.02) (0.13)
- ----------------------------------------------------------------------------------------
Total Distributions (0.46) (0.49) (0.48) (0.50) (0.62)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.98 $10.04 $10.00 $ 9.54 $10.31
- ----------------------------------------------------------------------------------------
Total Return 4.07% 5.40% 10.03% (2.64)% 3.79%
- ----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $40,319 $41,824 $36,862 $36,524 $46,279
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.00% 0.91% 0.94% 0.88% 0.88%
Net investment income 4.48 4.80 4.98 5.09 4.64
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 11% 6% 16% 41%
- ----------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
21 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of capital stock outstanding throughout each year
ended May 31, unless otherwise noted:
Class B Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/
- ---------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year $10.05 $10.00 $ 9.54 $10.30 $10.54
- ----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.40 0.42 0.44 0.45 0.43
Net realized and unrealized
gain (loss) (0.06) 0.07 0.45 (0.77) (0.10)
- ----------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.34 0.49 0.89 (0.32) 0.33
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.41) (0.44) (0.43) (0.42) (0.44)
Net realized gains -- -- -- (0.02) (0.13)
- ----------------------------------------------------------------------------------------
Total Distributions (0.41) (0.44) (0.43) (0.44) (0.57)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.98 $ 10.05 $10.00 $ 9.54 $10.30
- ----------------------------------------------------------------------------------------
Total Return 3.38% 4.92% 9.40% (3.11)% 3.15%
- ----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 9,694 $ 9,746 $11,988 $15,860 $19,066
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54% 1.41% 1.48% 1.41% 1.42%
Net investment income 3.94 4.20 4.44 4.56 4.11
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 11% 6% 16% 41%
- ----------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
22 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of capital stock outstanding throughout each year
ended May 31, unless otherwise noted:
Class L Shares 2002/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)(2)/
- -------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year $10.04 $10.00 $ 9.53 $10.30 $10.53
- --------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.40 0.42 0.43 0.43 0.42
Net realized and unrealized
gain (loss) (0.07) 0.05 0.46 (0.76) (0.09)
- --------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.33 0.47 0.89 (0.33) 0.33
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.43) (0.42) (0.42) (0.43)
Net realized gains -- -- -- (0.02) (0.13)
- --------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.43) (0.42) (0.44) (0.56)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.97 $10.04 $10.00 $ 9.53 $10.30
- --------------------------------------------------------------------------------------------
Total Return 3.35% 4.78% 9.48% (3.24)% 3.21%
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,494 $3,091 $1,837 $988 $1,652
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.57% 1.51% 1.48% 1.56% 1.44%
Net investment income 3.91 4.18 4.44 4.38 4.09
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 11% 6% 16% 41%
- --------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed as Class L shares.
23 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Smith Barney Arizona Municipals Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Arizona Municipals Fund Inc.
("Fund") as of May 31, 2003, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended and the financial highlights for each of the
years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of May 31, 2003, by correspondence
with the custodian and broker. As to securities sold but not yet delivered, we
performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of May 31, 2003, and the results of its operations for the year then
ended, the changes in its net assets for each of the years in the two-year
period then ended and financial highlights for each of the years in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG
New York, New York
July 10, 2003
24 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
ADDITIONAL INFORMATION (UNAUDITED)
Information about Directors and Officers
The business and affairs of the Smith Barney Arizona Municipals Fund Inc.
("Fund") are managed under the direction of the Board of Directors. Information
pertaining to the Directors and Officers of the Fund is set forth below. The
Statement of Additional Information includes additional information about the
Fund Directors and is available, without charge, upon request by calling the
Fund's transfer agent (Citicorp Trust Bank, fsb. at 1-800-451-2010).
Number of
Investment
Term of Portfolios
Office* and Principal in Fund Other
Position(s) Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen by Held by
Name, Address and Age Fund Served 5 Years Director Director
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Non-Interested Directors:
Herbert Barg Director Since Retired 42 None
1460 Drayton Lane 1988
Wynnewood, PA 19096
Age 79
Dwight B. Crane Director Since Professor -- Harvard 49 None
Harvard Business School 1987 Business School
Soldiers Field
Morgan Hall #375
Boston, MA 02163
Age 65
Burt N. Dorsett Director Since President -- Dorsett 27 None
201 East 62nd Street 1994 McCabe Capital
Apt. 3C Management Inc.; Chief
New York, NY 10021 Investment Officer -- Leeb
Age 72 Capital Management, Inc.
1999-Present
Elliot S. Jaffe Director Since Chairman of 27 Zweig Total
The Dress Barn Inc. 1994 The Dress Barn Inc. Return Fund;
Executive Office Zweig Fund, Inc.
30 Dunnigan Drive
Suffern, NY 10901
Age 76
Stephen E. Kaufman Director Since Attorney 60 None
Stephen E. Kaufman PC 1988
277 Park Avenue
47th Floor
New York, NY 10172
Age 71
Joseph J. McCann Director Since Retired 27 None
200 Oak Park Place 1988
Suite One
Pittsburgh, PA 15243
Age 72
25 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of
Investment
Term of Portfolios
Office* and Principal in Fund Other
Position(s) Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen by Held by
Name, Address and Age Fund Served 5 Years Director Director
- ------------------------------------------------------------------------------------------------------
Cornelius C. Rose, Jr. Director Since Chief Executive Officer -- 27 None
P.O. Box 5388 1994 Performance Learning
West Lebanon NH 03784 Systems
Age 70
Interested Director:
R. Jay Gerken** Chairman, Since Managing Director of 219 None
Citigroup Global President and 2002 CGM; Chairman,
Markets Inc. ("CGM") Chief President and Chief
399 Park Avenue Executive Executive Officer of SBFM,
4th Floor Officer Travelers Investment
New York, NY 10022 Adviser, Inc. ("TIA") and
Age 52 Citi Fund Management
Inc. ("CFM")
Officers:
Lewis E. Daidone Senior Vice Since Managing Director of N/A N/A
CGM President and 1995 CGM; Director and Senior
125 Broad Street Chief Vice President of SBFM,
11th Floor Administrative TIA and CFM; Chief
New York, NY 10004 Officer Financial Officer and
Age 45 Treasurer of Mutual funds
affiliated with Citigroup
Inc.
Richard L. Peteka Chief Since Managing Director of N/A N/A
CGM Financial 2002 CGM; Director and Head
125 Broad Street Officer and of Internal Control for
11th Floor Treasurer Citigroup Asset
New York, NY 10004 Management U.S. Mutual
Age 42 Fund Administration from
1999-2002; Vice
President, Head of Mutual
Fund Administration and
Treasurer at Oppenheimer
Capital from 1996-1999
Joseph P. Deane Vice President Since Managing Director of N/A N/A
CGM and 1988 CGM; Investment Officer
399 Park Avenue Investment of SBFM
4th Floor Officer
New York, NY 10022
Age 54
26 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
TAX INFORMATION (UNAUDITED)
Number of
Investment
Term of Portfolios
Office* and Principal in Fund Other
Position(s) Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen by Held by
Name, Address and Age Fund Served 5 Years Director Director
- ------------------------------------------------------------------------------------------------
Kaprel Ozsolak Controller Since Vice President of CGM N/A N/A
CGM 2002
125 Broad Street
11th Floor
New York, NY 10004
Age 37
Christina T. Sydor Secretary Since Managing Director of N/A N/A
CGM 1995 CGM; General Counsel
300 First Stamford Place and Secretary of SBFM
4th Floor and TIA
Stamford, CT 06902
Age 52
- --------
* Each Director and Officer serves until his or her successor has been duly
elected and qualified.
** Mr. Gerken is an "interested person" of the Fund as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is an officer
of SBFM and certain of its affiliates.
27 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
For Federal tax purposes the Fund hereby designates for the fiscal year ended
May 31, 2003:
. 100% of the dividends paid by the Fund from net investment income as
tax-exempt for regular Federal income tax purposes and Arizona State
income tax purposes.
28 Smith Barney Arizona Municipals Fund Inc. | 2003 Annual Report to
Shareholders
TAX INFORMATION (UNAUDITED)
SMITH BARNEY
ARIZONA MUNICIPALS FUND INC.
DIRECTORS INVESTMENT ADVISER
Herbert Barg AND ADMINISTRATOR
Dwight B. Crane Smith Barney Fund
Burt N. Dorsett Management LLC
R. Jay Gerken, CFA
Chairman DISTRIBUTOR
Elliot S. Jaffe Citigroup Global Markets Inc.
Stephen E. Kaufman
Joseph J. McCann CUSTODIAN
Cornelius C. Rose, Jr. State Street Bank and
Trust Company
OFFICERS
R. Jay Gerken, CFA TRANSFER AGENT
President and Chief Citicorp Trust Bank, fsb.
Executive Officer 125 Broad Street, 11th Floor
New York, New York 10004
Lewis E. Daidone
Senior Vice President SUB-TRANSFER AGENT
and Chief Administrative PFPC Global Fund Services
Officer P.O. Box 9699
Providence, Rhode Island
Richard L. Peteka 02940-9699
Chief Financial Officer
and Treasurer
Joseph P. Deane
Vice President and
Investment Officer
Kaprel Ozsolak
Controller
Christina T. Sydor
Secretary
Smith Barney Arizona Municipals Fund Inc.
This report is submitted for the general information of the shareholders of
Smith Barney Arizona Municipals Fund Inc., but it may also be used as sales
literature when preceded or accompanied by the current Prospectus, which
gives details about charges, expenses, investment objectives and operating
policies of the Fund. If used as sales material after August 31, 2003, this
report must be accompanied by performance information for the most recently
completed calendar quarter.
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
For complete information on any Smith Barney Mutual Funds, including
management fees and expenses, call or write your financial professional for a
free prospectus. Read it carefully before you invest or send money.
www.smithbarneymutualfunds.com
(C)2003 Citigroup Global Markets Inc.
Member NASD, SIPC
FD2223 7/03 03-5053
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's
disclosure controls and procedures (as defined in Rule
30a-2(c) under the Investment Company Act of 1940, as
amended) are effective based on their evaluation of the
disclosure controls and procedures as of a date within 90
days of the filing date of this document.
(b) In the last 90 days, there have been no significant changes
in the Registrant's internal controls or in other factors
that could significantly affect these controls.
ITEM 10. EXHIBITS.
(a) Not applicable.
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, there unto duly authorized.
Smith Barney Arizona Municipals Fund Inc.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Smith Barney Arizona Municipals Fund Inc.
Date: August 1, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
(R. Jay Gerken)
Chief Executive Officer of
Smith Barney Arizona Municipals Fund Inc.
Date: August 1, 2003
By: /s/ Richard Peteka
Chief Financial Officer of
Smith Barney Arizona Municipals Fund Inc.
Date: August 1, 2003