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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-CSR
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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)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
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, 2004
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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, 2004
[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............................................ 3
Fund Performance............................................ 7
Historical Performance...................................... 8
Schedule of Investments..................................... 9
Statement of Assets and Liabilities......................... 15
Statement of Operations..................................... 16
Statements of Changes in Net Assets......................... 17
Notes to Financial Statements............................... 18
Financial Highlights........................................ 26
Report of Independent Registered Public Accounting Firm..... 29
Additional Information...................................... 30
Tax Information............................................. 34
LETTER FROM THE CHAIRMAN
[PHOTO]
R. JAY GERKEN
R. JAY GERKEN, CFA
Chairman, President and Chief Executive Officer
Dear Shareholder,
During the past year, a pronounced pick-up/i/ in the pace of economic growth
from its sluggish state in early 2003 triggered a sea change in the bond
markets. The acceleration in the national economy also trickled down to a state
level to an extent, leading Moody's Investors Service to upgrade its outlook on
bonds issued by the State of Arizona from negative to stable earlier this
year./ii /Even the U.S. labor market, which generated lackluster results
throughout much of the period, grew significantly during the past several
months by some measures./iii/
Although interest rates were on the decline earlier in the fund's fiscal year,
the shift in interest rate perceptions triggered volatility in the bond markets
and bond yields spiraled upward, particularly toward the end of the year.
However, given that the fund's manager had anticipated that the U.S. economy
could begin to pick up, the manager maintained a more defensive posture in
managing exposure to interest rate sensitivity versus prior periods when rates
were declining. Although this approach detracted from the fund's performance
during times when bond prices rose, it diminished some of the downward pricing
pressures on the portfolio when prices retreated and yields rose, such as in
April.
Please read on for a more detailed look at prevailing economic and market
conditions during the fund's fiscal year and to learn how those conditions and
changes made to the portfolio during this time may have affected fund
performance.
Information About Your Fund
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser and some of its
affiliates have received requests for information from various government
regulators regarding market timing, late trading, fees and other mutual fund
issues in connection with various investigations. The regulators appear to be
examining, among other things, the fund's response to market timing and
shareholder exchange activity, including compliance with prospectus disclosure
related to these subjects. The fund has been informed that the Adviser and its
affiliates are responding to those information requests, but are not in a
position to predict the outcome of these requests and investigations.
1 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
In November 2003, Citigroup Asset Management disclosed an investigation by the
Securities and Exchange Commission ("SEC") and the U.S. Attorney relating to
Citigroup Asset Management's entry into the transfer agency business during
1997-1999. On July 20, 2004, Citigroup disclosed that it had been notified by
the Staff of the SEC that the Staff is considering recommending a civil
injunctive action and/or an administrative proceeding against certain advisory
and transfer agent entities affiliated with Citigroup relating to the creation
and operation of its internal transfer agent unit to serve primarily the Smith
Barney family of mutual funds. Citigroup is cooperating with the SEC and will
seek to resolve this matter in discussion with the SEC Staff. Although there
can be no assurance, Citigroup does not believe that this matter will have a
material adverse effect on the fund.
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to meet your financial goals.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
July 20, 2004
2 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
MANAGER OVERVIEW
[PHOTO]
Joseph P. Deane
JOSEPH P. DEANE
Vice President and Investment Officer
[PHOTO]
David T. Fare
DAVID T. FARE
Vice President and Investment Officer
Special Shareholder Notice
On February 2, 2004, the initial sales charges on Class L shares were
eliminated. Effective April 29, 2004, Class L shares were renamed Class C
shares.
Effective April 29, 2004, the Fund's Board appointed David Fare Co-Portfolio
Manager of the fund, joining Joe Deane in managing the fund. Mr. Fare is Vice
President and Investment Officer of the fund. Mr. Fare is an investment officer
of the fund's adviser, Smith Barney Fund Management LLC. Mr. Fare is a Director
of
PERFORMANCE SNAPSHOT
AS OF MAY 31, 2004
(excluding sales charges)
6 Months 12 Months
Class A Shares 0.28% 4.45%
Lehman Brothers Municipal Bond Index -0.22% -0.03%
Lipper Arizona Municipal Debt Funds Category Average -0.39% -0.28%
The performance shown represents past performance. Past performance is no
guarantee of future results and current performance may be higher or lower
than the performance shown above. Principal value and investment returns
will fluctuate and investors' shares, when redeemed may be worth more or
less than their original cost. To obtain performance data current to the
most recent month-end, please visit our website at
www.smithbarneymutualfunds.com.
Class A share returns assume the reinvestment of income dividends and
capital gains distributions at net asset value and the deduction of all fund
expenses. Returns have not been adjusted to include sales charges that may
apply when shares are purchased or the deduction of taxes that a shareholder
would pay on fund distributions. Excluding sales charges, Class B shares
returned 0.12% and Class C shares returned 0.10% over the six months ended
May 31, 2004. Excluding sales charges, Class B shares returned 4.00% and
Class C shares returned 3.97% over the 12 months ended May 31, 2004.
Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the period ended May 31, 2004, calculated among the 36
funds for the six- and 12-month periods, in the fund's Lipper category
including the reinvestment of dividends and capital gains, if any, and
excluding sales charges.
3 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
Citigroup Global Markets Inc. and Portfolio Manager of Citigroup Asset
Management. He has been with CGM or its predecessor firms since 1989. Mr. Fare
holds a B.A. from St. John's University.
Performance Review
For the 12 months ended May 31, 2004, Class A shares of the Smith Barney
Arizona Municipals Fund Inc., excluding sales charges, returned 4.45%. In
comparison the unmanaged broad-based Lehman Brothers Municipal Bond Index/iv/
returned -0.03% and its Arizona municipal bond component subindex returned
- -0.02% for the same period./v/ The fund's Lipper peer group of Arizona
municipal debt funds category average returned -0.28% for the 12-month
period./1/
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.
Market Snapshot
The interest rate environment experienced an about-face over the past year. The
municipal bond markets got off to a relatively strong start last spring as the
economy was still in a relatively sluggish state and interest rates were still
declining. To help boost economic activity, last June the Fed reduced its
target for the federal funds rate,/vi/ which dropped to four-decade lows.
However, bond prices retreated through the early summer following comments from
the Fed about its monetary policy and data suggesting a recent pick-up in
economic activity. Although this led to concerns about rising interest rates,
as bond prices move opposite to anticipated interest rate movements, inflation
remained contained. When the summer came to a close, the broader bond markets
stabilized and bonds traded in a fairly narrower range in the fall versus the
summer.
In terms of the national economy, annual growth of real gross domestic
product/i/ rose over the period versus levels in early 2003. Moody's Investors
Service, a major credit ratings service, upgraded its outlook on the State of
Arizona's debt obligations from negative to positive amid signs suggesting an
improvement in the state's economy./ii/ In 2004, comments from the Fed about
the improvement in the economy, coupled with stronger reports on job growth
late in the period and a pick-up in inflation, generated more pronounced
concerns about interest rates. As a result, bond prices pulled back
significantly, particularly toward the end of the first and during the second
calendar quarters. Although municipal bond prices fluctuated in May, they held
up better than during periods in March and April./vii/
/1/Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended May 31, 2004, calculated
among the 36 funds in the fund's Lipper category including the reinvestment
of dividends and capital gains, if any, and excluding sales charges.
4 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
Factors Influencing Fund Performance
Given that we anticipated that the economy would improve and yields would
eventually rise and exert pressure on bond prices, we took a more cautious
stance in terms of the fund's exposure to interest rate risk than we had in
past years when the Fed was in the middle of its rate-cutting cycle. For
example, to help mitigate the effects of a possible rise in interest rates, we
structured the portfolio defensively in terms of the fund's duration (a measure
of a portfolio's price sensitivity to interest rate movements). The fund
maintained an emphasis on longer-term, premium-priced higher-coupon callable
bonds and continued to hold a short position in U.S. Treasury futures to help
hedge the portfolio against some of the effects of a potential rise in interest
rates./viii/ Although our conservative approach at times limited the fund's
full participation in market rallies, it helped reduce the negative impact on
the fund during times when bond prices declined, such as during April.
The fund's assets were concentrated in revenue bonds, which are backed by
revenue streams of specific public works. In general, given their yields during
the period, we favored revenue bonds to many comparable-maturity state-backed
general obligation bonds on a risk/reward basis. Rather than target specific
industries, however, we invested in bonds that we felt offered better overall
relative values after taking into account their yields in accordance with their
credit risk.
We have maintained the view that the key to pursuing an effective offense is to
develop a strong defense. Therefore, while no one can say for sure where
interest rates and bond prices will be, given the recent economic picture, as
of the end of the period we continued to maintain a defensive posture in regard
to interest rate risk.
Thank you for your investment in the Smith Barney Arizona Municipals Fund Inc.
We appreciate your confidence in our stewardship of your assets and we value
our relationship with you.
Sincerely,
/s/ Joseph P. Deane
/s/ David T. Fare
Joseph P. Deane David T. Fare
Vice President Vice President and
and Investment Officer Investment Officer
June 7, 2004
5 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
The information provided 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, 2004 and are subject to
change. Please refer to pages 9 through 12 for a list and percentage breakdown
of the fund's holdings.
RISKS: Keep in mind, the fund's investments are subject to interest rate and
credit risks. Portfolio holdings may include lower-rated securities that
present greater risk of loss of principal and interest than higher-rated
securities. The fund may use derivatives, such as options and futures, which
can be illiquid, may disproportionately increase losses, and have a potentially
large impact on fund performance.
All index performance reflects no deduction for fees, expenses or taxes. Please
note that an investor cannot invest directly in an index.
/i/Source: Based upon gross domestic product data from the Bureau of Economic
Analysis. Gross domestic product is a market value of goods and services
produced by labor and property in a given country.
/ii/Based upon data derived from the Governor's Office for the State of Arizona
(www.GOVERNOR.STATE.AZ.US).
/iii/Based upon non-farm payroll growth data from the U.S. Department of Labor.
/iv/The Lehman Brothers Municipal Bond Index is a broad measure of the
municipal bond market with maturities of at least one year.
/v/Source: Lehman Brothers. This subindex is a broad measure of the market for
Arizona municipal bonds with maturities of at least one year.
/vi/The federal funds rate is the interest rate that banks with excess reserves
at a Federal Reserve district bank charge other banks that need overnight
loans.
/vii/Based upon data derived via Bloomberg L.P.
/viii/Derivatives, such as options and futures, can be illiquid and harder to
value, especially in declining markets. A small investment in certain
derivatives may have a potentially large impact on the fund's
performance. Derivatives can disproportionately increase losses as stated
in the prospectus.
6 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
Without Sales Charges/(1)/
--------------------------
Class A Class B Class C/(2)/
- --------------------------------------------------------
Twelve Months Ended 5/31/04 4.45% 4.00% 3.97%
- -------------------------------------------------------
Five Years Ended 5/31/04 4.18 3.64 3.59
- -------------------------------------------------------
Ten Years Ended 5/31/04 5.47 4.92 N/A
- -------------------------------------------------------
Inception* through 5/31/04 6.38 5.04 5.49
- -------------------------------------------------------
With Sales Charges/(3)/
---------------------------
Class A Class B Class C/(2)/
- ---------------------------------------------------------
Twelve Months Ended 5/31/04 0.23% (0.50)% 2.97%
- --------------------------------------------------------
Five Years Ended 5/31/04 3.33 3.47 3.59
- --------------------------------------------------------
Ten Years Ended 5/31/04 5.04 4.92 N/A
- --------------------------------------------------------
Inception* through 5/31/04 6.12 5.04 5.49
- --------------------------------------------------------
CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
Without Sales Charges/(1)/
- --------------------------------------------------------------------
Class A (5/31/94 through 5/31/04) 70.38%
- -------------------------------------------------------------------
Class B (5/31/94 through 5/31/04) 61.64
- -------------------------------------------------------------------
Class C (Inception* through 5/31/04)/(2)/ 65.87
- -------------------------------------------------------------------
(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 shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) On April 29, 2004, Class L shares were renamed as Class C shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.00%. 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 C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within one year from purchase payment. The 1.00%
initial sales on Class C shares is no longer imposed effective February 2,
2004.
+ All figures represent past performance and are not a guarantee of future
results. Investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. The returns shown do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or
the redemption of fund shares. In the absence of fee waivers and/or expense
reimbursements, the total return would be reduced.
* Inception dates for Class A, B and C shares are June 1, 1987, November 6,
1992 and December 8, 1994, respectively.
7 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
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 1994 -- May 2004
[CHART]
Smith Barney Arizona
Municipals Fund Inc. Lehman Brothers Lipper Arizona Municipal
-- Class A Shares Municipal Bond Index Debt Funds Average
--------------------- -------------------- ------------------------
5/94 9,599 10,000 10,000
5/95 10,499 10,912 10,900
5/96 10,900 11,410 11,286
5/97 11,779 12,355 12,164
5/98 12,840 13,514 13,225
5/99 13,327 14,147 13,706
5/00 12,975 14,138 13,300
5/01 14,275 15,855 14,664
5/02 15,047 16,886 15,512
5/03 15,658 18,636 16,845
5/04 16,355 18,681 16,798
+Hypothetical illustration of $10,000 invested in Class A shares on May 31,
1994, 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, 2004. 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,
2004). 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
higher or lower sales charges and fees were incurred by shareholders investing
in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment return and principal value of an investment will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
their original cost. The returns shown do not reflect the deduction of taxes
that a shareholder would pay on fund distributions or the redemption of fund
shares. In the absence of fee waivers and/or expense reimbursements, the total
return would be reduced.
8 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
SCHEDULE OF INVESTMENTS MAY 31, 2004
FACE
AMOUNT RATING(a) SECURITY VALUE
- ----------------------------------------------------------------------------------------------------
General Obligation -- 21.9%
Maricopa County GO:
Elementary School District No. 8, Osborne Elementary School
District:
$1,000,000 A 7.500% due 7/1/09 $ 1,190,210
210,000 AAA Series A, FGIC-Insured, 5.875% due 7/1/14 226,252
650,000 AAA Elementary School District No. 14, (Creighton School
Improvement Project of 1990), Series C, FGIC-Insured,
(Partially escrowed to maturity with U.S. government
securities), 6.500% due 7/1/08 738,563
Elementary School District No. 40, (Glendale School
Improvement Project), AMBAC-Insured:
565,000 AAA 6.300% due 7/1/11 (b) 597,233
435,000 AAA Call 7/1/05 @ 101, 6.300% due 7/1/11 (b)(c) 461,418
390,000 AAA School District No. 008, FGIC-Insured,
(Call 7/1/06 @ 101), 5.875% due 7/1/14 (c) 424,090
635,000 AAA School District No. 80, Chandler Unified School District, FGIC-
Insured, (Call 7/1/04 @ 101), 5.800% due 7/1/12 (c) 643,674
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 1,077,290
Phoenix GO:
1,400,000 AA+ Refunding, Series A, 6.250% due 7/1/17 (d) 1,673,966
Series B:
400,000 AA+ 5.000% due 7/1/22 407,704
575,000 AA+ 5.000% due 7/1/23 582,216
400,000 A+ Phoenix Special Assignment GO, Central Avenue Improvement
District, 7.000% due 1/1/06 401,628
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 (d) 1,219,080
500,000 AAA Pinal County Unified School District No. 43, GO, Apache Junction,
Series A, FGIC-Insured, (Pre-Refunded -- Escrowed with state
and local government securities to 7/1/06 Call @ 101),
5.850% due 7/1/15 543,455
1,000,000 AAA Tempe Union High School District No. 213, GO, FGIC-Insured,
(Pre-Refunded -- Escrowed with state and local government
securities to 7/1/04 Call @ 101), 6.000% due 7/1/10 1,013,820
- ---------------------------------------------------------------------------------------------------
11,200,599
- ---------------------------------------------------------------------------------------------------
Hospitals -- 15.0%
1,500,000 Ba2* Arizona Health Facilities Authority, Hospital Systems Revenue,
Phoenix Children's Hospital, Series A, 6.125% due 11/15/22 (d) 1,345,140
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 BBB 5.900% due 4/1/09 (d) 1,591,005
1,000,000 BBB 6.125% due 4/1/18 1,031,640
See Notes to Financial Statements.
9 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 2004
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------------------------
Hospitals -- 15.0% (continued)
$ 500,000 AAA Maricopa County IDA, Hospital Revenue, Samaritan Health
Services, Series A, MBIA-Insured, 7.000% due 12/1/16 (e) $ 620,585
3,000,000 AAA Mesa IDA, Discovery Health Systems, Series A, MBIA-Insured,
5.625% due 1/1/29 (d) 3,083,580
- -------------------------------------------------------------------------------------------------
7,671,950
- -------------------------------------------------------------------------------------------------
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 7/1/19 498,170
2,125,000 NR Stanford Court Apartments, Series B, 6.250% due 7/1/18 (d) 1,856,379
Phoenix IDA, MFH Revenue:
Ventana Palms Apartments Project, Series A, MBIA-Insured:
150,000 Aaa* 6.100% due 10/1/19 158,501
950,000 Aaa* 6.150% due 10/1/29 1,002,554
970,000 AA Woodstone & Silver Springs, Radian-Insured,
6.250% due 4/1/23 974,607
- -------------------------------------------------------------------------------------------------
4,490,211
- -------------------------------------------------------------------------------------------------
Housing: Single-Family -- 0.1%
55,000 AAA Phoenix IDA, Single-Family Mortgage Revenue, GNMA/FNMA/
FHLMC-Collateralized, 6.300% due 12/1/12 (f) 56,743
- -------------------------------------------------------------------------------------------------
Industrial Development -- 8.1%
750,000 NR Navajo County IDA, IDR, (Stone Container Corp. Project),
7.400% due 4/1/26 (f) 757,073
700,000 A-1+ Phoenix, Arizona IDA Revenue, (Valley of the Sun YMCA Project),
1.090% due 1/1/31 (g) 700,000
Pima County IDA, Industrial Revenue Refunding:
450,000 AAA FSA-Insured, 7.250% due 7/15/10 461,205
1,000,000 B+ Tucson Electric Power Co. Project, Series B, 6.000% due 9/1/29 953,730
250,000 NR Tempe IDA, IDR, Friendship Village Refunding, Series A,
6.250% due 12/1/04 250,417
1,000,000 AAA Tucson IDA, Lease Revenue, University of Arizona/Marshall
Foundation, Series A, AMBAC-Insured, 5.000% due 7/15/22 1,018,650
- -------------------------------------------------------------------------------------------------
4,141,075
- -------------------------------------------------------------------------------------------------
Miscellaneous -- 24.6%
250,000 AAA Arizona State Municipal Financing Program, COP, Series 20,
BIG-Insured, 7.625% due 8/1/06 (e) 265,080
750,000 Aa1* Arizona Student Loan Acquisition Authority, Student Loan
Revenue, Series B, 6.600% due 5/1/10 (f) 768,300
500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
(Call 4/1/05 @ 100), 6.200% due 4/1/15 (c) 518,615
See Notes to Financial Statements.
10 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 2004
FACE
AMOUNT RATING(a) SECURITY VALUE
- ------------------------------------------------------------------------------------------------
Miscellaneous -- 24.6% (continued)
Phoenix Civic Improvement Corp., Excise Tax Revenue, Sr. Lien:
$2,630,000 AAA Adams Street Garage Project B, 5.375% due 7/1/29 (d) $ 2,706,007
2,350,000 AAA Municipal Courthouse Project A, 5.375% due 7/1/10 (d) 2,417,915
Sierra Vista Municipal Property Corp., Muni Facilities Revenue,
AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 367,670
500,000 AAA 6.150% due 1/1/15 518,125
2,050,000 A-1+ Tempe, Arizona Excise Tax Revenue, (Tempe Center for the Arts
Project), 1.080% due 7/1/20 (g) 2,050,000
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 1,004,120
2,000,000 AAA University of Arizona COP, Series B, AMBAC-Insured,
5.000% due 6/1/28 (d) 1,994,460
- ------------------------------------------------------------------------------------------------
12,610,292
- ------------------------------------------------------------------------------------------------
Pollution Control -- 5.3%
1,800,000 VMIG 1* Apache County IDA Revenue, Tucson Electric Power, Series 83A,
1.080% due 12/15/18 (g) 1,800,000
1,000,000 B- Coconino County Pollution Control Corp., Revenue Refunding,
Nevada Power Co. Project, 6.375% due 10/1/36 (f) 931,070
- ------------------------------------------------------------------------------------------------
2,731,070
- ------------------------------------------------------------------------------------------------
Transportation -- 4.9%
Phoenix Civic Improvement Corp., Airport Revenue:
1,000,000 AAA FGIC-Insured, 5.375% due 7/1/29 (f) 1,002,620
1,500,000 AAA Series A, FSA-Insured, 5.000% due 7/1/25 (d) 1,508,520
- ------------------------------------------------------------------------------------------------
2,511,140
- ------------------------------------------------------------------------------------------------
Utilities -- 7.2%
Agricultural Improvement and Power District, Electric Systems
Revenue, (Salt River Project):
1,000,000 AA Series A, 5.000% due 1/1/23 1,015,290
1,555,000 AA Series B, 5.000% due 1/1/31 (d) 1,548,142
183,000 BBB- Prescott Valley Improvement District, Special Assessment, Sewer
Collection System, Roadway Repair, 7.900% due 1/1/12 187,414
1,000,000 BBB Yavapai County IDA, IDR, (Citizens Utilities Co. Project),
5.450% due 6/1/33 (f) 968,210
- ------------------------------------------------------------------------------------------------
3,719,056
- ------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
11 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 2004
FACE
AMOUNT RATING(a) SECURITY VALUE
- --------------------------------------------------------------------------------------------
Water and Sewer -- 4.1%
$1,000,000 Aaa* Arizona Water Infrastructure Finance Authority, Series A,
(Call 10/1/11 @ 100), 5.000% due 10/1/19 (c) $ 1,094,140
1,000,000 AAA Phoenix Civic Improvement Corp., Wastewater System Revenue,
FGIC-Insured, 5.000% due 7/1/24 1,007,670
- --------------------------------------------------------------------------------------------
2,101,810
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $50,031,163**) $51,233,946
- --------------------------------------------------------------------------------------------
(a) All ratings are by Standard & Poor's Ratings Service, except for those that
are 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.
(c) Pre-Refunded bonds are escrowed with U.S. government securities and are
considered by the manager to be triple-A rated even if issuer has not
applied for new ratings.
(d) All or a portion of this security is segregated by the custodian for open
futures contracts.
(e) Bonds are escrowed to maturity with U.S. government securities and are
considered by the manager to be triple-A rated even if issuer has not
applied for new ratings.
(f) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(g) Variable rate obligation payable at par on demand at anytime on no more
than seven days notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 13 and 14 for definitions of ratings and certain abbreviations.
See Notes to Financial Statements.
12 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
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 differ 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 they are somewhat more susceptible to the
adverse effects of changes in circum- stances and economic
conditions than bonds 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 bonds 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 bonds in this
class.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
13 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
SHORT-TERM SECURITY RATINGS (UNAUDITED)
SP-1 -- Standard & Poor's highest rating indicating very strong or strong
capacity to pay principal and interest; those issues determined to
possess overwhelming safety charac- teristics 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.
ABBREVIATIONS* (UNAUDITED)
ABAG --Association of Bay Area Governments
AIG --American International Guaranty
AMBAC --Ambac Assurance 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
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
Radian --Radian Asset Assurance Co.
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
- -----
*Abbreviations may or may not appear in the Schedule of Investments.
14 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2004
ASSETS:
Investments, at value (Cost -- $50,031,163) $51,233,946
Cash 20,006
Interest receivable 962,191
Receivable from broker -- variation margin 100,938
Receivable for securities sold 86,700
Prepaid expenses 9,871
Receivable for Fund shares sold 72
- -----------------------------------------------------------------------------------------------
Total Assets 52,413,724
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 105,641
Payable for Fund shares reacquired 31,989
Investment advisory fee payable 13,341
Administration fee payable 8,894
Distribution plan fees payable 4,057
Accrued expenses 51,521
- -----------------------------------------------------------------------------------------------
Total Liabilities 215,443
- -----------------------------------------------------------------------------------------------
Total Net Assets $52,198,281
- -----------------------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 5,228
Capital paid in excess of par value 52,393,220
Undistributed net investment income 36,232
Accumulated net realized loss from investment transactions and futures contracts (2,421,994)
Net unrealized appreciation of investments and futures contracts 2,185,595
- -----------------------------------------------------------------------------------------------
Total Net Assets $52,198,281
- -----------------------------------------------------------------------------------------------
Shares Outstanding:
Class A 4,128,372
- -----------------------------------------------------------------------------------------------
Class B 757,839
- -----------------------------------------------------------------------------------------------
Class C 341,466
- -----------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.98
- -----------------------------------------------------------------------------------------------
Class B * $9.99
- -----------------------------------------------------------------------------------------------
Class C * $9.98
- -----------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value per share) $10.40
- -----------------------------------------------------------------------------------------------
*Redemption price is NAV of Class B and C 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.
15 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31, 2004
INVESTMENT INCOME:
Interest $2,807,263
- ----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 4) 158,728
Distribution plan fees (Note 7) 142,213
Administration fee (Note 4) 105,819
Audit and legal 54,546
Shareholder communications (Note 7) 32,404
Custody 21,619
Registration fees 12,531
Transfer agency services (Note 7) 11,202
Directors' fees 11,053
Other 4,924
- ----------------------------------------------------------------------------------------
Total Expenses 555,039
- ----------------------------------------------------------------------------------------
Net Investment Income 2,252,224
- ----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 5 AND 6):
Realized Gain (Loss) From:
Investment transactions 2,152
Futures contracts (250,517)
- ----------------------------------------------------------------------------------------
Net Realized Loss (248,365)
- ----------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments and Futures Contracts:
Beginning of year 1,909,092
End of year 2,185,595
- ----------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 276,503
- ----------------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 28,138
- ----------------------------------------------------------------------------------------
Increase in Net Assets From Operations $2,280,362
- ----------------------------------------------------------------------------------------
See Notes to Financial Statements.
16 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED MAY 31,
2004 2003
----------------------------------------------------------------
OPERATIONS:
Net investment income $ 2,252,224 $ 2,394,590
Net realized loss (248,365) (716,981)
Increase in net unrealized
appreciation 276,503 420,064
---------------------------------------------------------------
Increase in Net Assets From
Operations 2,280,362 2,097,673
---------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 8):
Net investment income (2,231,948) (2,443,835)
---------------------------------------------------------------
Decrease in Net Assets
From Distributions to
Shareholders (2,231,948) (2,443,835)
---------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 9,143,962 9,101,785
Net asset value of shares issued
for reinvestment of dividends 1,012,784 1,220,521
Cost of shares reacquired (11,513,654) (11,130,032)
---------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (1,356,908) (807,726)
---------------------------------------------------------------
Decrease in Net Assets (1,308,494) (1,153,888)
NET ASSETS:
Beginning of year 53,506,775 54,660,663
---------------------------------------------------------------
End of year* $ 52,198,281 $ 53,506,775
---------------------------------------------------------------
* Includes undistributed net
investment income of: $36,232 $15,956
---------------------------------------------------------------
See Notes to Financial Statements.
17 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
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 following are significant accounting policies consistently followed by the
Fund and are in conformity with U.S. generally accepted accounting principles
("GAAP"); (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 will be valued in good faith at fair value by or under 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) class specific expenses are charged to each class;
management fees and general fund expenses are allocated on the basis of
relative net assets by class or on another reasonable basis; (h) the character
of income and gains to be distributed is determined in accordance with income
tax regulations which may differ from GAAP; (i) 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; 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.
18 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 Other
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 the Fund's 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 Fund's average daily net assets up
to $500 million and 0.18% of the Fund's average daily net assets in excess of
$500 million. This fee is calculated daily and paid monthly.
Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as the
Fund's transfer agent. PFPC Inc. ("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, 2004, the Fund paid transfer agent fees of $10,947 to
CTB.
Citigroup Global Markets Inc. ("CGM"), another indirect wholly-owned subsidiary
of Citigroup, acts as the Fund's distributor.
19 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On February 2, 2004, the initial sales charges on Class L shares were
eliminated. Effective April 29, 2004, Class L shares were renamed Class C
shares.
There is a maximum initial sales charge of 4.00% for Class A shares. There is a
contingent deferred sales charge ("CDSC") of 4.50% on Class B shares, which
applies if redemption occurs 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 C shares 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 from 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, 2004, CGM received sales charges of approximately
$84,000 and $3,000 on sales of the Fund's Class A and C shares, respectively.
In addition, for the year ended May 31, 2004, CDSCs paid to CGM for Class A and
B shares were approximately $7,000 and $13,000, respectively.
All officers and one Director of the Fund are employees of Citigroup or its
affiliates.
5. Investments
During the year ended May 31, 2004, 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 $4,525,872
--------------------
Sales 6,958,747
--------------------
At May 31, 2004, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
-----------------------------------------
Gross unrealized appreciation $1,769,448
Gross unrealized depreciation (566,665)
-----------------------------------------
Net unrealized appreciation $1,202,783
-----------------------------------------
20 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Futures Contracts
Securities or cash equal to the initial margin amount, are either deposited
with the broker or segregated by the custodian upon entering into the futures
contract. Additional securities are also segregated up to the current market
value of the futures contracts. During the period the futures 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 typically
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, 2004, the Fund had the following open futures contracts:
Number of Basis Market Unrealized
Contracts Expiration Value Value Gain
---------------------------------------------------------------------------
Contracts To Sell:
U.S. Treasury Bonds 170 6/04 $19,098,437 $18,115,625 $982,812
---------------------------------------------------------------------------
7. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with
respect to its Class A, B and C 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 C 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, 2004, total Rule 12b-1
Distribution Plan fees incurred, which are accrued daily and paid monthly, were
as follows:
Class A Class B Class C
---------------------------------------------------------
Rule 12b-1 Distribution Plan Fees $61,048 $56,039 $25,126
---------------------------------------------------------
21 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended May 31, 2004, total Transfer Agency Service expenses were as
follows:
Class A Class B Class C
--------------------------------------------------------
Transfer Agency Service Expenses $7,595 $2,626 $981
--------------------------------------------------------
For the year ended May 31, 2004, total Shareholder Communication expenses were
as follows:
Class A Class B Class C
----------------------------------------------------------
Shareholder Communication Expenses $22,348 $7,393 $2,663
----------------------------------------------------------
8. Distributions Paid to Shareholders by Class
Year Ended Year Ended
Net Investment Income May 31, 2004 May 31, 2003
-----------------------------------------------
Class A $1,768,792 $1,884,380
Class B 326,753 420,544
Class C+ 136,403 138,911
-----------------------------------------------
Total $2,231,948 $2,443,835
-----------------------------------------------
+On April 29, 2004, Class L shares were renamed as Class C shares.
9. Capital Shares
At May 31, 2004, 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. Effective
April 29, 2004, the Fund renamed Class L shares as Class C shares.
22 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions in shares of each class were as follows:
Year Ended Year Ended
May 31, 2004 May 31, 2003
--------------------- ---------------------
Shares Amount Shares Amount
---------------------------------------------------------------------------
Class A
Shares sold 807,089 $ 8,154,272 575,907 $ 5,832,668
Shares issued on reinvestment 76,428 770,629 88,616 896,108
Shares reacquired (796,770) (8,038,075) (786,641) (7,988,657)
---------------------------------------------------------------------------
Net Increase (Decrease) 86,747 $ 886,826 (122,118) $(1,259,881)
---------------------------------------------------------------------------
Class B
Shares sold 56,452 $ 570,976 232,911 $ 2,367,706
Shares issued on reinvestment 14,261 143,917 21,170 214,383
Shares reacquired (283,959) (2,868,548) (252,796) (2,557,156)
---------------------------------------------------------------------------
Net Increase (Decrease) (213,246) $(2,153,655) 1,285 $ 24,933
---------------------------------------------------------------------------
Class C+
Shares sold 41,437 $ 418,714 89,315 $ 901,411
Shares issued on reinvestment 9,745 98,238 10,886 110,030
Shares reacquired (60,064) (607,031) (57,671) (584,219)
---------------------------------------------------------------------------
Net Increase (Decrease) (8,882) $ (90,079) 42,530 $ 427,222
---------------------------------------------------------------------------
+On April 29, 2004, Class L shares were renamed as Class C shares.
10.Capital Loss Carryforward
At May 31, 2004, the Fund had, for Federal income tax purposes, approximately
$1,376,000 of unused capital loss carryforwards available to offset future
capital gains, if any. 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 2012
--------------------------------------------------------
Carryforward Amounts $52,000 $1,033,000 $60,000 $231,000
--------------------------------------------------------
In addition, the Fund had $63,045 of capital losses realized after October 31,
2003, which were deferred for tax purposes to the first day of the following
year.
23 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11.Income Tax Information and Distributions to Shareholders
At May 31, 2004, the tax basis components of distributable earnings were:
--------------------------------------------
Undistributed tax-exempt income $ 144,751
--------------------------------------------
Accumulated capital losses (1,376,137)
--------------------------------------------
Unrealized appreciation 1,202,783
--------------------------------------------
At May 31, 2004, there was no difference between book basis and tax basis
unrealized appreciation and depreciation.
The tax character of distributions paid during the years ended May 31, was:
2004 2003
---------------------------------------
Tax-exempt income $2,231,761 $2,443,835
Ordinary income 187 --
---------------------------------------
Total $2,231,948 $2,443,835
---------------------------------------
12.Additional Information
Citigroup has been notified by the Staff of the Securities and Exchange
Commission ("SEC") that the Staff is considering recommending a civil
injunctive action and/or an administrative proceeding against Citigroup Asset
Management ("CAM"), including its applicable investment advisory companies and
Citicorp Trust Bank ("CTB"), an internal transfer agent, relating to the
creation and operation of the internal transfer agent unit to serve certain
CAM-managed funds, including the Fund. This notification arises out of a
previously disclosed investigation by the SEC and the U.S. Attorney and relates
to CTB's entry in 1999 into the transfer agency business, CAM's retention of,
and agreements with an unaffiliated sub transfer agent, the adequacy of the
disclosures made to the fund boards that approved the transfer agency
arrangements, (including CAM's failure to disclose a related revenue guarantee
agreement benefiting CAM and its affiliates), and CAM's operation of and
compensation for the transfer agency business. The revenue guarantee described
above was terminated in 1999 and CAM will be paying the applicable funds,
primarily through fee waivers, a total of approximately $17 million (plus
interest) that is the amount of the revenue received by Citigroup relating to
the revenue guarantee. Citigroup is cooperating fully in the investigation and
will seek to resolve the matter in discussions with the SEC Staff. Although
there can be no assurance, Citigroup does not believe that this matter will
have a material adverse effect on the Fund.
24 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13.Legal Matters
Class action lawsuits have been filed against Citigroup Global Markets Inc.
(the "Distributor") and a number of its affiliates, including Smith Barney Fund
Management LLC and Salomon Brothers Asset Management Inc (the "Advisers"),
substantially all of the mutual funds managed by the Advisers (the "Funds"),
and directors or trustees of the Funds. The complaints allege, among other
things, that the Distributor created various undisclosed incentives for its
brokers to sell Smith Barney and Salomon Brothers funds. In addition, according
to the complaints, the Advisers caused the Funds to pay excessive brokerage
commissions to the Distributor for steering clients towards proprietary funds.
The complaints also allege that the defendants breached their fiduciary duty to
the Funds by improperly charging Rule 12b-1 fees and by drawing on Fund assets
to make undisclosed payments of soft dollars and excessive brokerage
commissions. The complaints seek injuctive relief and compensatory and punitive
damages, rescission of the Funds' contracts with the Advisers, recovery of all
fees paid to the Advisers pursuant to such contracts and an award of attorneys'
fees and litigation expenses. Citigroup Asset Management believes that the
suits are without merit and intends to defend the cases vigorously.
Additional lawsuits arising out of these circumstances and presenting similar
allegations and requests for relief may be filed against the defendants in the
future. Neither Citigroup Asset Management nor the Funds believe that any of
the pending actions will have a material adverse effect on the Funds or the
ability of the Distributor or the Advisers to perform under their respective
contracts with the Funds.
25 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
FINANCIAL HIGHLIGHTS
For a share of each class of capital stock outstanding throughout each year
ended May 31, unless otherwise noted:
Class A Shares 2004/(1)/ 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/
- ----------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 9.98 $10.04 $10.00 $ 9.54 $10.31
- ---------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.44 0.45 0.48 0.49 0.50
Net realized and unrealized gain (loss) -- (0.05) 0.05 0.45 (0.77)
- ---------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.44 0.40 0.53 0.94 (0.27)
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.46) (0.49) (0.48) (0.48)
Net realized gains -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------------
Total Distributions (0.44) (0.46) (0.49) (0.48) (0.50)
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.98 $ 9.98 $10.04 $10.00 $ 9.54
- ---------------------------------------------------------------------------------------
Total Return 4.45% 4.07% 5.40% 10.03% (2.64)%
- ---------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $41,220 $40,319 $41,824 $36,862 $36,524
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92% 1.00% 0.91% 0.94% 0.88%
Net investment income 4.39 4.48 4.80 4.98 5.09
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 9% 11% 11% 6% 16%
- ---------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
26 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
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 2004/(1)/ 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/
- ------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 9.98 $10.05 $10.00 $ 9.54 $10.30
- ---------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.39 0.40 0.42 0.44 0.45
Net realized and unrealized gain (loss) 0.01 (0.06) 0.07 0.45 (0.77)
- ---------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.40 0.34 0.49 0.89 (0.32)
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.41) (0.44) (0.43) (0.42)
Net realized gains -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------------
Total Distributions (0.39) (0.41) (0.44) (0.43) (0.44)
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.99 $ 9.98 $ 10.05 $10.00 $ 9.54
- ---------------------------------------------------------------------------------------
Total Return 4.00% 3.38% 4.92% 9.40% (3.11)%
- ---------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 7,571 $ 9,694 $ 9,746 $11,988 $15,860
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.47% 1.54% 1.41% 1.48% 1.41%
Net investment income 3.84 3.94 4.20 4.44 4.56
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 9% 11% 11% 6% 16%
- ---------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
27 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of capital stock outstanding throughout each year
ended May 31, unless otherwise noted:
Class C Shares/(1)/ 2004/(2)/ 2003/(2)/ 2002/(2)/ 2001/(2)/ 2000/(2)/
- -------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 9.97 $10.04 $10.00 $ 9.53 $10.30
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.38 0.40 0.42 0.43 0.43
Net realized and unrealized gain (loss) 0.01 (0.07) 0.05 0.46 (0.76)
- ---------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.39 0.33 0.47 0.89 (0.33)
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.38) (0.40) (0.43) (0.42) (0.42)
Net realized gains -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------------------
Total Distributions (0.38) (0.40) (0.43) (0.42) (0.44)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.98 $ 9.97 $10.04 $10.00 $ 9.53
- ---------------------------------------------------------------------------------------------
Total Return 3.97% 3.35% 4.78% 9.48% (3.24)%
- ---------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,407 $3,494 $3,091 $1,837 $988
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.50% 1.57% 1.51% 1.48% 1.56%
Net investment income 3.81 3.91 4.18 4.44 4.38
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 9% 11% 11% 6% 16%
- ---------------------------------------------------------------------------------------------
(1) On April 29, 2004, Class L shares were renamed as Class C shares.
(2) Per share amounts have been calculated using the monthly average shares
method.
28 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, 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, 2004, 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 U.S. generally accepted
accounting principles.
/s/ KPMG
New York, New York
July 19, 2004
29 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
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 Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen by Held by
and Age Fund Served Five Years Director Director
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Non-Interested Directors:
Dwight B. Crane Director Since Professor -- Harvard 49 None
Harvard Business 1987 Business School
School
Soldiers Field
Morgan Hall #375
Boston, MA 02163
Age 66
Burt N. Dorsett Director Since President -- Dorsett 27 None
The Stratford #702 1994 McCabe Capital
5601 Turtle Bay Drive Management Inc.;
Naples, FL 34108 Chief Investment
Age 73 Officer of Leeb Capital
Management, Inc.
(Since 1999)
Elliot S. Jaffe Director Since Chairman of 27 The Dress Barn,
The Dress Barn Inc. 1994 The Dress Barn, Inc. Inc.
Executive Office
30 Dunnigan Drive
Suffern, NY 10901
Age 77
Stephen E. Kaufman Director Since Attorney 55 None
Stephen E. Kaufman 1988
PC
277 Park Avenue
47th Floor
New York, NY 10172
Age 72
Joseph J. McCann** Director Since Retired 28 None
200 Oak Park Place 1988
Suite One
Pittsburgh, PA 15243
Age 74
30 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of
Investment
Term of Portfolios
Office* and Principal in Fund Other Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen by Held by
and Age Fund Served Five Years Director Director
- ----------------------------------------------------------------------------------------------
Cornelius C. Rose, Jr. Director Since Chief Executive Officer 27 None
P.O. Box 5388 1994 -- Performance
West Lebanon NH Learning Systems
03784
Age 71
Interested Director:
R. Jay Gerken, CFA*** Chairman, Since Managing Director of 221 None
Citigroup Asset President 2002 Citigroup Global
Management and Chief Markets Inc. ("CGM");
("CAM") Executive Chairman, President
399 Park Avenue Officer and Chief Executive
4th Floor Officer of Smith Barney
New York, NY Fund Management LLC
10022 ("SBFM"), Travelers
Age 53 Investment Adviser,
Inc. ("TIA") and Citi
Fund Management Inc.
("CFM"); President
and Chief Executive
Officer of certain
mutual funds
associated with
Citigroup Inc.
("Citigroup"); Formerly
Portfolio Manager of
Smith Barney
Allocation Series Inc.
(from 1996 to 2001)
and Smith Barney
Growth and Income
Fund (from 1996 to
2000)
31 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of
Investment
Term of Portfolios
Office* and Principal in Fund Other Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen by Held by
and Age Fund Served Five Years Director Director
- ------------------------------------------------------------------------------------------
Officers:
Andrew B. Shoup Senior Vice Since Director of CAM; N/A N/A
CAM President, 2003 Senior Vice President
125 Broad Street Chief and Chief
11th Floor Administrative Administrative Officer
New York, NY Officer, of mutual funds
10004 Treasurer and associated with
Age 47 Chief Citigroup; Treasurer
Financial and Chief Financial
Officer/#/ Officer of certain
mutual funds
associated with
Citigroup; Head of
International Funds
Administration of CAM
(from 2001 to 2003);
Director of Global
Funds Administration
of CAM (from 2000 to
2001); Head of U.S.
Citibank Funds
Administration of CAM
(from 1998 to 2000)
Joseph P. Deane Vice President Since Managing Director of N/A N/A
CAM and 1988 CGM; Investment
399 Park Avenue Investment Officer of SBFM
4th Floor Officer
New York, NY
10022
Age 55
David T. Fare Vice President Since Director of CGM; N/A N/A
CAM and 2004 Investment Officer of
399 Park Avenue Investment SBFM
4th Floor Officer
New York, NY
10022
Age 41
32 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of
Investment
Term of Portfolios
Office* and Principal in Fund Other Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen by Held by
and Age Fund Served Five Years Director Director
- -----------------------------------------------------------------------------------------
Andrew Beagley Chief Anti- Since Director of CGM (since N/A N/A
CAM Money 2002 2000); Director of
399 Park Avenue Laundering Compliance, North
4th Floor Compliance America, CAM (since
New York, NY Officer 2000); Chief Anti-
10022 Money
Age 41 Laundering Compliance
Officer and Vice
President of certain
mutual funds
associated with
Citigroup; Director of
Compliance, Europe,
the Middle East and
Africa, CAM (from
1999 to 2000);
Compliance Officer,
Salomon Brothers
Asset Management
Limited, Smith Barney
Global Capital
Management Inc.,
Salomon Brothers
Asset Management
Asia Pacific Limited
(from 1997 to 1999)
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain
125 Broad Street mutual funds
11th Floor associated with
New York, NY Citigroup
10004
Age 38
Robert I. Frenkel Secretary Since Managing Director and N/A N/A
CAM and Chief 2003 General Counsel of
300 First Stamford Legal Global Mutual Funds
Place Officer for CAM and its
4th Floor predecessor (since
Stamford, CT 1994); Secretary of
06902 CFM; Secretary and
Age 48 Chief Legal Officer of
mutual funds
associated with
Citigroup
- --------
* Each Director and officer serves until his or her respective successor has
been duly elected and qualified.
** Mr. McCann became Director Emeritus on June 30, 2004.
*** 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.
# Treasurer and Chief Financial Officer as of June 24, 2004.
33 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Fund hereby designates for the fiscal year ended
May 31, 2004:
. 99.99% 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.
34 Smith Barney Arizona Municipals Fund Inc. | 2004 Annual Report
SMITH BARNEY
ARIZONA MUNICIPALS FUND INC.
DIRECTORS OFFICERS (continued)
Dwight B. Crane Kaprel Ozsolak
Burt N. Dorsett Controller
R. Jay Gerken, CFA
Chairman Robert I. Frenkel
Elliot S. Jaffe Secretary and
Stephen E. Kaufman Chief Legal Officer
Joseph J. McCann*
Cornelius C. Rose, Jr. INVESTMENT ADVISER
AND ADMINISTRATOR
OFFICERS Smith Barney Fund
R. Jay Gerken, CFA Management LLC
President and Chief
Executive Officer DISTRIBUTOR
Citigroup Global Markets Inc.
Andrew B. Shoup
Senior Vice President, CUSTODIAN
Chief Administrative State Street Bank and
Officer, Treasurer and Trust Company
Chief Financial Officer**
TRANSFER AGENT
Joseph P. Deane Citicorp Trust Bank, fsb.
Vice President and 125 Broad Street, 11th Floor
Investment Officer New York, New York 10004
David T. Fare SUB-TRANSFER AGENT
Vice President and PFPC Inc.
Investment Officer P.O. Box 9699
Providence, Rhode Island
Andrew Beagley 02940-9699
Chief Anti-Money
Laundering Compliance
Officer
* Mr. McCann became Director Emeritus on June 30, 2004.
** Treasurer and Chief Financial Officer as of June 24, 2004.
Smith Barney Arizona Municipals Fund Inc.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available without
charge, upon request, by telephoning the Fund (toll-free) at 1-800-451-2010
and by visiting the SEC's web site at www.sec.gov.
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.
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
This document must be preceded or accompanied by a free prospectus. Investors
should consider the fund's investment objectives, risks, charges and expenses
carefully before investing. The prospectus contains this and other important
information about the fund. Please read the prospectus carefully before you
invest or send money.
www.smithbarneymutualfunds.com
(C)2004 Citigroup Global Markets Inc.
Member NASD, SIPC
FD2223 7/04 04-6911
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that Dwight B.
Crane, Chairman of the Board's Audit Committee, possesses the technical
attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as an "audit committee financial expert," and has designated Mr.
Crane as the Audit Committee's financial expert. Mr. Crane is an
"independent" Director pursuant to paragraph (a)(2) of Item 3 to Form
N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for the Smith Barney Arizona Municipals Fund Inc. of
$21,000 and $21,000 for the years ended 5/31/04 and 5/31/03.
(b) Audit-Related Fees for the Smith Barney Arizona Municipals Fund
Inc. of $0 and $0 for the years ended 5/31/04 and 5/31/03.
(c) Tax Fees for Smith Barney Arizona Municipals Fund Inc. of $1,900
and $2,000 for the years ended 5/31/04 and 5/31/03. These amounts
represent aggregate fees paid for tax compliance, tax advice and
tax planning services, which include (the filing and amendment of
federal, state and local income tax returns, timely RIC
qualification review and tax distribution and analysis planning)
rendered by the Accountant to Smith Barney Arizona Municipals
Fund Inc.
(d) All Other Fees for Smith Barney Arizona Municipals Fund Inc. of
$0 and $0 for the years ended 5/31/04 and 5/31/03.
(e) (1) Audit Committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
The Charter for the Audit Committee (the "Committee") of the
Board of each registered investment company (the "Fund") advised
by Smith Barney Fund Management LLC or Salomon Brothers Asset
Management Inc. or one of their affiliates (each, an "Adviser")
requires that the Committee shall approve (a) all audit and
permissible non-audit services to be provided to the Fund and (b)
all permissible non-audit services to be provided by the Fund's
independent auditors to the Adviser and any Covered Service
Providers if the engagement relates directly to the operations
and financial reporting of the Fund. The Committee may implement
policies and procedures by which such services are approved other
than by the full Committee.
The Committee shall not approve non-audit services that the
Committee believes may impair the independence of the auditors.
As of the date of the approval of this Audit Committee Charter,
permissible non-audit services include any professional services
(including tax services), that are not prohibited services as
described below, provided to the Fund by the independent
auditors, other than those provided to the Fund in connection
with an audit or a review of the financial statements of the
Fund. Permissible non-audit services may not include: (i)
bookkeeping or other services related to the accounting records
or financial statements of the Fund; (ii) financial information
systems design and implementation; (iii) appraisal or valuation
services, fairness opinions or contribution-in-kind reports; (iv)
actuarial services; (v) internal audit outsourcing services; (vi)
management functions or human resources; (vii) broker or dealer,
investment adviser or investment banking services; (viii) legal
services and expert services unrelated to the audit; and (ix) any
other service the Public Company Accounting Oversight Board
determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit
services is not required so long as: (i) the aggregate amount of
all such permissible non-audit services provided to the Fund, the
Adviser and any service providers controlling, controlled by or
under common control with the Adviser that provide ongoing
services to the Fund ("Covered Service Providers") constitutes
not more than 5% of the total amount of revenues paid to the
independent auditors during the fiscal year in which the
permissible non-audit services are provided to (a) the Fund, (b)
the Adviser and (c) any entity controlling, controlled by or
under common control with the Adviser that provides ongoing
services to the Fund during the fiscal year in which the services
are provided that would have to be approved by the Committee;
(ii) the permissible non-audit services were not recognized by
the Fund at the time of the engagement to be non-audit services;
and (iii) such services are promptly brought to the attention of
the Committee and approved by the Committee (or its delegate(s))
prior to the completion of the audit.
(f) N/A
(g) Non-audit fees billed by the Accountant for services rendered to
Smith Barney Arizona Municipals Fund Inc. and CAM and any entity
controlling, controlled by, or under common control with CAM that
provides ongoing services to Smith Barney Arizona Municipals Fund
Inc. were $0 and $0 for the years ended 5/31/04 and 5/31/03.
(h) Yes. The Smith Barney Arizona Municipals Fund Inc's Audit
Committee has considered whether the provision of non-audit
services that were rendered to Service Affiliates which were not
pre-approved (not requiring pre-approval) is compatible with
maintaining the Accountant's independence. All services provided
by the Accountant to the Smith Barney Arizona Municipals Fund
Inc. or to Service Affiliates which were required to be
pre-approved were pre-approved as required.
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- 3(c)
under the Investment Company Act of 1940, as amended (the "1940
Act")) are effective as of a date within 90 days of the filing
date of this report that includes the disclosure required by
this paragraph, based on their evaluation of the disclosure
controls and procedures required by Rule 30a-3(b) under the 1940
Act and 15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are likely to
materially affect the registrant's internal control over
financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(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 9, 2004
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 9, 2004
By: /s/ Andrew B. Shoup
(Andrew B. Shoup)
Chief Administrative Officer of
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
Date: August 9, 2004