N-CSR 1 dncsr.txt SMITH BARNEY ARIZONA MUNICIPALS FUND INC. ================================================================================ 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) 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 ================================================================================ 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