-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cu77UtYEMh5nL4TeWlMyOsnj24fE5msTuCjeUzubrs3LBycHDuSuyomgXXx+Xdl2 Zhy0XpO1OrSd9lXvoBckyQ== 0001193125-03-027669.txt : 20030801 0001193125-03-027669.hdr.sgml : 20030801 20030801120355 ACCESSION NUMBER: 0001193125-03-027669 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030801 EFFECTIVENESS DATE: 20030801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH BARNEY ARIZONA MUNICIPALS FUNDS INC CENTRAL INDEX KEY: 0000811706 STATE OF INCORPORATION: MD FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-05066 FILM NUMBER: 03816986 BUSINESS ADDRESS: STREET 1: 125 BROAD STREET STREET 2: 10TH FLOOR, MF-2 CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 800-451-2010 MAIL ADDRESS: STREET 1: 125 BROAD STREET STREET 2: 10TH FLOOR, MF-2 CITY: NEW YORK STATE: NY ZIP: 10004 FORMER COMPANY: FORMER CONFORMED NAME: SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC DATE OF NAME CHANGE: 19931015 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN BROTHERS ARIZONA MUNICIPALS FUND INC DATE OF NAME CHANGE: 19930331 FORMER COMPANY: FORMER CONFORMED NAME: SLH MUNICIPALS SERIES FUND INC /MD/ DATE OF NAME CHANGE: 19930331 N-CSR 1 dncsr.txt S/B ARIZONA MUNICIPALS FUND 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 EX-99.CERT 3 dex99cert.txt CERTIFICATION PURSUANT TO SECTION 302 CERTIFICATIONS PURSUANT TO SECTION 302 EX-99.CERT CERTIFICATIONS I, R. Jay Gerken, certify that: 1. I have reviewed this report on Form N-CSR of Smith Barney Arizona Municipals Fund Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 1, 2003 /s/ R. Jay Gerken ---------------------------------- R. Jay Gerken Chief Executive Officer I, Richard Peteka, certify that: 1. I have reviewed this report on Form N-CSR of Smith Barney Arizona Municipals Fund Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial information included in this report, and the financial statements on which the financial information is based, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 1, 2003 /s/ Richard Peteka ----------------------------- Richard Peteka Chief Financial Officer EX-99.906CERT 4 dex99906cert.txt CERTIFICATION PURSUANT TO SECTION 906 CERTIFICATIONS PURSUANT TO SECTION 906 EX-99.906CERT CERTIFICATION R. Jay Gerken, Chief Executive Officer, and Richard Peteka, Chief Financial Officer of Smith Barney Arizona Municipals Fund Inc. (the "Registrant"), each certify to the best of his or her knowledge that: 1. The Registrant's periodic report on Form N-CSR for the period ended May 31, 2003 (the "Form N-CSR") fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Chief Executive Officer Chief Financial Officer Smith Barney Arizona Municipals Fund Smith Barney Arizona Municipals Fund Inc. Inc. /s/ R. Jay Gerken /s/ Richard Peteka - --------------------------- -------------------------- R. Jay Gerken Richard Peteka Date: August 1, 2003 Date: August 1, 2003 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Smith Barney Arizona Municipals Fund Inc. and will be retained by Smith Barney Arizona Municipals Fund Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. (S) 1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----