<PAGE>
[GRAPHIC]
Smith Barney
Arizona
Municipals
Fund Inc.
ANNUAL REPORT
May 31, 1999
Smith Barney Mutual Funds
<PAGE>
Smith Barney
Arizona
Municipals
Fund Inc.
[PHOTO] [PHOTO]
HEATH B. JOSEPH P.
MCLENDON DEANE
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to present the annual report for the Smith Barney Arizona
Municipals Fund Inc. ("Fund") for the year ended May 31, 1999 and outline our
portfolio strategy. We hope you find this report to be useful and informative.
We are pleased to announce that Joseph P. Deane assumed management
responsibility for the Fund on February 2, 1999. Mr. Deane has over 28 years of
investment experience and currently manages the Smith Barney Managed Municipals
Fund, among many others. A detailed summary of the Fund's performance can be
found in the appropriate sections that follow.
Performance Update
For the period ended May 31, 1999, the Class A shares of the Fund posted a total
return of 3.79% without sales charges. In comparison, the average for Arizona
tax-exempt funds was 3.63% for the same period according to Lipper Inc. (Lipper
is a major independent fund tracking organization.)
Municipal Bond Market Update
In April, the Consumer Price Index ("CPI") increased 0.7% -- its largest monthly
increase in nine years. With global economic growth picking up, inflationary
fears surfaced. The Federal Reserve Board raised short-term interest rates 0.25%
on June 30, 1999, and yields in the bond market went up.
Looking forward, and as we near the end of the millennium and the onset of Y2K,
we believe that fixed income securities in the U.S. should experience solid
demand. That, in turn, should provide a positive environment for municipal bonds
for the remainder of 1999. We are positioning ourselves for modestly lower rates
over the next six months, and if there is no repeat of a higher CPI number, we
stand an excellent chance of seeing a modest decline in rates as we move toward
the fall.
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Smith Barney Arizona Municipals Fund Inc. 1
<PAGE>
Investment Strategy and Portfolio Update
The Fund is a diversified municipal fund that seeks to provide Arizona investors
with the maximum amount of income exempt from Federal and Arizona state income
taxes* as is consistent with the preservation of capital.
Our focus in the Fund will continue to be providing competitive yields with
preservation of capital as an important component. In our view, Arizona is a
state where local credits trade at a premium to general market levels. Credit
quality spreads both locally and nationally are very narrow. High grade credits
are at historically low spreads to BAA and non-investment grade paper. One of
the key goals in the Fund will be to upgrade ratings whenever possible and to
emphasize essential service revenue bonds such as water, sewer, toll roads and
local utilities and to pare down some of our positions in health care.
Arizona Economic Highlights
Moody's Investors Services has assigned an "A1" rating with respect to Arizona's
general obligation bonds. Arizona's impressive economic growth continued during
the Fund's fiscal year and high technology industries and a growing retiree
population have helped to broaden the diversification of its general economy. We
remain positive about the Grand Canyon State's long-term economic prospects.
In closing, thank you for your investment in the Smith Barney Arizona Municipals
Fund Inc. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Joseph P. Deane
Heath B. McLendon Joseph P. Deane
Chairman Vice President and
Investment Officer
July 8, 1999
- ----------
* A portion of the income from this fund may be subject to the Alternative
Minimum Income Tax (AMT).
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2 1999 Annual Report to Shareholders
<PAGE>
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Principal Risks of Investing in the Fund
Investors could lose money on their investment in the Fund, or the Fund may not
perform as well as other investments, if:
o Interest rates rise, causing the value of the Fund's portfolio to decline
o The issuer of a security owned by the Fund defaults on its obligation to
pay principal and/or interest or the security's credit rating is
downgraded
o Arizona municipal securities fall out of favor with investors. The Fund
will suffer more than a national municipal fund from adverse events
affecting Arizona municipal issuers
o Unfavorable legislation affects the tax-exempt status of municipal bonds
o The manager's judgment about the attractiveness, value or income potential
of a particular security proves to be incorrect
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Smith Barney Arizona Municipals Fund Inc. 3
<PAGE>
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Historical Performance -- Class A Shares
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Net Asset Value
-----------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
================================================================================
5/31/99 $10.54 $10.31 $0.49 $0.13 $0.00 3.79%
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5/31/98 10.21 10.54 0.52 0.05 0.00 9.00
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5/31/97 9.95 10.21 0.53 0.00 0.00 8.06
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5/31/96 10.09 9.95 0.52 0.00 0.00 3.82
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5/31/95 9.82 10.09 0.54 0.06 0.00 9.38
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5/31/94 10.40 9.82 0.53 0.21 0.00 1.33
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5/31/93 9.84 10.40 0.57 0.08 0.02 12.92
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5/31/92 9.63 9.84 0.60 0.06 0.04 9.86
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5/31/91 9.49 9.63 0.68 0.00 0.00 8.92
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5/31/90 9.66 9.49 0.71 0.05 0.00 6.31
================================================================================
Total $5.69 $0.64 $0.06
================================================================================
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Historical Performance -- Class B Shares
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Net Asset Value
-----------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
================================================================================
5/31/99 $10.54 $10.30 $0.44 $0.13 $0.00 3.15%
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5/31/98 10.21 10.54 0.47 0.05 0.00 8.46
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5/31/97 9.95 10.21 0.48 0.00 0.00 7.53
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5/31/96 10.09 9.95 0.47 0.00 0.00 3.30
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5/31/95 9.82 10.09 0.49 0.06 0.00 8.78
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5/31/94 10.40 9.82 0.49 0.21 0.00 0.84
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Inception*
- 5/31/93 9.97 10.40 0.29 0.08 0.01 8.31+
================================================================================
Total $3.13 $0.53 $0.01
================================================================================
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Historical Performance -- Class L Shares(2)
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Net Asset Value
-----------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
================================================================================
5/31/99 $10.53 $10.30 $0.43 $0.13 $0.00 3.21%
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5/31/98 10.21 10.53 0.47 0.05 0.00 8.30
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5/31/97 9.95 10.21 0.47 0.00 0.00 7.49
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5/31/96 10.09 9.95 0.47 0.00 0.00 3.26
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Inception*
- 5/31/95 9.28 10.09 0.23 0.06 0.00 12.10+
================================================================================
Total $2.07 $0.24 $0.00
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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4 1999 Annual Report to Shareholders
<PAGE>
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Average Annual Total Return
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Without Sales Charge(1)
---------------------------------
Class A Class B Class L(2)
================================================================================
Year Ended 5/31/99 3.79% 3.15% 3.21%
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Five Years Ended 5/31/99 6.78 6.21 N/A
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Ten Years Ended 5/31/99 7.29 N/A N/A
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Inception* through 5/31/99 7.30 6.11 7.64
================================================================================
Without Sales Charge(3)
---------------------------------
Class A Class B Class L(2)
================================================================================
Year Ended 5/31/99 (0.37)% (1.24)% 1.17%
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Five Years Ended 5/31/99 5.91 6.06 N/A
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Ten Years Ended 5/31/99 6.85 N/A N/A
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Inception* through 5/31/99 6.94 6.11 7.41
================================================================================
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Cumulative Total Return
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Without Sales Charge(1)
================================================================================
Class A (5/31/89 through 5/31/99) 102.06%
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Class B (Inception* through 5/31/99) 47.63
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Class L (Inception* through 5/31/99)(2) 39.07
================================================================================
(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) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gains 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. 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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B and L shares are June 1, 1987, November 6,
1992 and December 8, 1994, respectively.
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Smith Barney Arizona Municipals Fund Inc. 5
<PAGE>
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of
Smith Barney Arizona Municipals Fund Inc. vs.
the Lehman Brothers Municipal Bond Index and
Lipper Arizona Municipal Fund Average+
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May 1989 -- May 1999
[GRAPH LINE]
Smith Barney
Arizona Lehman Brothers Lipper Arizona
Municipals Municipal Peer Group
Fund Inc. Bond Index Average
--------- ---------- -------
05/89 10277 10000 10000
05/90 10925 10732 10596
05/91 11900 11814 11500
05/92 13073 12974 12655
05/93 14762 14527 14241
05/94 14958 14885 14470
05/95 16360 16242 15773
05/96 16985 16985 16331
05/97 18355 18391 17601
05/98 20007 20117 19137
05/99 20766 21058 19832
+ Hypothetical illustration of $10,000 invested in Class A shares on May 31,
1989, 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, 1999. 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 Lipper Arizona Municipal Fund Average is composed
of the Fund's peer group of mutual funds (39 funds as of May 31, 1999).
The index is unmanaged and is not subject to the same management and
trading expenses as a mutual fund. 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.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
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6 1999 Annual Report to Shareholders
<PAGE>
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Portfolio Highlights (unaudited) May 31, 1999
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Industry Breakdown
[PIE CHART]
Hospitals 14.6%
General Obligations 25.6%
Water and Sewer 8.0%
Utility 3.7%
Transportation 5.1%
Pollution Control 4.5%
Miscellaneous 7.0%
Life Care Systems 2.7%
Industrial Development 15.4%
Housing 13.4%
Summary of Investments by Combined Ratings
Standard & Percentage of
Moody's and/or Poor's Total Investments
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Aaa AAA 55.1%
Aa AA 20.1
A A 6.2
Baa BBB 6.1
B B 1.5
VMIG 1 A-1 0.3
NR NR 10.7
-----
100.0%
=====
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Smith Barney Arizona Municipals Fund Inc. 7
<PAGE>
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Schedule of Investments May 31, 1999
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
General Obligation -- 25.6%
Maricopa County Elementary School District 68:
$1,000,000 AAA Alhambra Refunding and Improvement Project,
AMBAC-Insured, (Partially Pre-Refunded -- Escrowed
with U.S. government securities to 7/1/03 Call @ 102),
5.625% due 7/1/13 $1,062,500
635,000 AAA School District No. 80, Chandler Unified School District,
FGIC-Insured, (Unrefunded Balance),
5.800% due 7/1/12 673,894
Maricopa County GO:
Elementary School District No. 8,
Osborne Elementary School District:
600,000 AAA FGIC-Insured, (Partially Pre-Refunded--
Escrowed with U.S. government securities to
7/1/06 Call @ 101), 5.875% due 7/1/14 644,250
1,000,000 A1* 7.500% due 7/1/09 1,235,000
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 7/1/08 748,313
1,000,000 AAA Elementary School District No. 40, (Glendale School
Improvement), AMBAC-Insured, 6.300% due 7/1/11 1,100,000
Unified School District No. 11, Peoria Unified School
District, MBIA-Insured, (Un-Refunded Balance):
635,000 AAA 6.400% due 7/1/10 667,544
500,000 AAA 7.000% due 7/1/10 532,500
Maricopa County Unified High School District No. 210,
GO, (Phoenix Project of 1995):
1,000,000 AA Series B, (Partially Pre-Refunded-- Escrowed with
U.S. government securities to 7/1/06 Call @ 101),
5.375% due 7/1/13(b) 1,070,000
370,000 AAA Union High School District No. 216, FGIC-Insured,
(Unrefunded Balance), 6.700% due 7/1/11 383,368
1,000,000 AA 4.750% due 7/1/17 950,000
1,250,000 AA+ Phoenix Civic Improvement Corp., (New City Hall Project),
5.100% due 7/1/28 1,209,375
Phoenix GO:
1,400,000 AA+ Refunding, Series A, 6.250% due 7/1/17 1,597,750
1,100,000 AA+ 4.750% due 7/1/19 1,040,875
400,000 A+ Phoenix Special Assignment, Central Avenue
Improvement District, 7.000% due 1/1/06 405,092
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,246,250
500,000 AAA Pinal County Unified School District No. 43, GO,
Apache Junction, Series A, FGIC-Insured,
5.850% due 7/1/15 536,875
</TABLE>
See Notes to Financial Statements.
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8 1999 Annual Report to Shareholders
<PAGE>
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Schedule of Investments (continued) May 31, 1999
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===============================================================================================
<S> <C> <C> <C>
General Obligation -- 25.6% (continued)
$ 200,000 A-1+ Puerto Rico Commonwealth Government Development Bank,
MBIA-Insured, 3.000% due 12/1/15(c) $ 200,000
500,000 A Scottsdale Mountain Communication Facilities District, GO,
District No. 3, Series A, 6.200% due 7/1/17 518,125
Tempe Union High School District No. 213, GO, FGIC-Insured:
715,000 NR Pre-Refunded -- Escrowed with state and local
government securities to 7/1/04 Call @ 101,
6.000% due 7/1/10 782,925
285,000 NR Un-Refunded Balance, 6.000% due 7/1/10 305,306
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16,909,942
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Hospitals -- 14.6%
750,000 AAA Arizona Health Facilities Authority, Hospital Systems Revenue,
Northern Arizona Healthcare Systems, AMBAC-Insured,
5.000% due 10/1/23 722,813
1,500,000 AAA Maricopa County Hospital District No. 1, AMBAC-Insured,
5.000% due 6/1/21 1,453,125
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 Baa1* 5.900% due 4/1/09 1,620,000
1,000,000 Baa1* 6.125% due 4/1/18 1,073,750
2,000,000 AA+ Maricopa County IDA, Hospital Revenue, Mayo Clinic,
5.250% due 11/15/37 1,947,500
500,000 AAA Maricopa County IDA, Hospital Revenue, Series A,
Samaritan Health Services, MBIA-Insured,
7.000% due 12/1/16 612,500
1,000,000 AAA Mohave County IDA, Hospital Systems Revenue,
Baptist Hospital, MBIA-Insured, 5.700% due 9/1/15 1,057,500
1,070,000 AAA Phoenix IDA, Hospital Revenue, John C. Lincoln Hospital,
FSA-Insured, 5.400% due 12/1/10 1,124,837
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9,612,025
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Housing -- 13.4%
Maricopa County IDA, Multi-Family Housing Revenue:
2,125,000 NR Stanford Court Apartments, Series B,
6.250% due 7/1/18(d) 2,148,906
Metro Gardens-Mesa Ridge Project, Series A, MBIA-Insured:
500,000 AAA 5.650% due 7/1/19 520,625
1,750,000 AAA 5.150% due 7/1/29 1,732,500
Phoenix IDA:
650,000 AAA Mortgage Revenue, (Chris Ridge Village Project),
FHA-Insured, 6.750% due 11/1/12 689,813
1,000,000 AA Multi-Family Housing Revenue, Woodstone & Silver Springs,
6.250% due 4/1/23 1,051,250
365,000 AAA Single-Family Mortgage Revenue,
GNMA/FNMA/FHLMC-Collateralized, 6.300% due 12/1/12(e) 384,163
Pima County IDA, Multi-Family Housing Revenue:
460,000 AA Rancho Mirage Project, 7.050% due 4/1/22(e) 483,000
880,000 AAA Single-Family Mortgage Revenue, GNMA-Collateralized,
6.750% due 11/1/27(e) 927,300
</TABLE>
See Notes to Financial Statements.
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Smith Barney Arizona Municipals Fund Inc. 9
<PAGE>
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Schedule of Investments (continued) May 31, 1999
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==============================================================================================
<S> <C> <C> <C>
Housing -- 13.4% (continued)
$ 640,000 AAA Single-Family Mortgage Revenue, Series A,
GNMA/FNMA/FHLMC-Collateralized,
6.250% due 11/1/30(e) $ 668,000
235,000 AAA Sierra Vista IDA, Multi-Family Housing,
(Mountain Steppes Apartment Project),
FNMA-Collateralized, 7.125% due 12/1/10 235,540
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8,841,097
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Industrial Development -- 15.4%
1,000,000 NR Flagstaff IDA, Living Community Revenue,
(Northern Community Project), 6.200% due 9/1/28 1,008,750
1,790,000 AAA Maricopa County IDA, Series A, Multi-Family
Housing Revenue, Mortgage Loan, FHA-Insured,
5.900% due 7/1/24 1,843,700
1,000,000 AA- Mohave County IDA, IDR, (Citizens Utility Project), Series
B, 7.050% due 8/1/20(d) 1,041,600
750,000 NR Navajo County IDA, IDR, (Stone Container Corp. Project),
7.400% due 4/1/26(e) 822,188
Pima County IDA, Industrial Revenue Refunding:
715,000 AAA FSA-Insured, 7.250% due 7/15/10 787,394
1,000,000 B Tucson Electric Power Co. Project, Series B,
6.000% due 9/1/29(d) 1,000,000
Tempe IDA, IDR, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 353,937
250,000 NR 6.250% due 12/1/04 252,500
1,000,000 AA Tucson COP, 6.375% due 7/1/09(d) 1,073,750
890,000 AAA Tucson Local Development Finance Corp., Lease Revenue,
FGIC-Insured, (Unrefunded Balance), 6.250% due 7/1/12 954,525
1,000,000 AA- Yavapai County IDA, IDR, Citizens Utilities Co. Project,
5.450% due 6/1/33(e) 1,012,500
- ----------------------------------------------------------------------------------------------
10,150,844
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Life Care Systems -- 2.7%
379,000 NR Peoria IDA, (Sierra Winds Life Care Project),
6.500% due 11/1/17 379,000
1,355,000 AAA Phoenix IDA, Christian Care, Series A,
FHA/MBIA-Insured, 6.000% due 7/1/20 1,432,912
- ----------------------------------------------------------------------------------------------
1,811,912
- ----------------------------------------------------------------------------------------------
Miscellaneous -- 7.0%
520,000 AAA Arizona State COP, Series B, AMBAC-Insured,
6.250% due 9/1/10 562,900
250,000 AAA Arizona State Municipal Financing Program, COP, Series 20,
BIG-Insured, (Escrowed to maturity with U.S. government
securities), 7.625% due 8/1/06 286,250
750,000 Aa* Arizona Student Loan Revenue Acquisition Authority, Series
B, 6.600% due 5/1/10(e) 799,688
</TABLE>
See Notes to Financial Statements.
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10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==============================================================================================
<S> <C> <C> <C>
Miscellaneous -- 7.0% (continued)
$ 500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
6.200% due 4/1/15 $ 543,125
1,665,000 AAA Scottsdale Preservation Authority, Excise Tax Revenue,
FGIC-Insured, 4.500% due 7/1/24 1,498,500
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 382,956
500,000 AAA 6.150% due 1/1/15 543,750
- ----------------------------------------------------------------------------------------------
4,617,169
- ----------------------------------------------------------------------------------------------
Pollution Control -- 4.5%
Coconino County Pollution Control Corp. Revenue Refunding:
1,000,000 A- Arizona Public Service Co., Series A,
5.875% due 8/15/28 1,025,000
1,000,000 BBB Nevada Power Co. Project, 6.375% due 10/1/36(e) 1,070,000
850,000 A- Navajo County PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28 871,250
- ----------------------------------------------------------------------------------------------
2,966,250
- ----------------------------------------------------------------------------------------------
Transportation -- 5.1%
3,500,000 AAA Phoenix Civic Improvement Corp., (Airport Revenue), Sr.
Lien, FSA-Insured, Series A, 5.000% due 7/1/25 3,377,500
- ----------------------------------------------------------------------------------------------
Utility -- 3.7%
1,000,000 AAA Maricopa County IDA, Water System Revenue,
Chapparral Water Co. Improvement, Series A,
AMBAC-Insured, 5.400% due 12/1/22(e) 1,005,000
1,200,000 AAA Phoenix Civic Improvement Corp., Water Systems Revenue,
FGIC-Insured, 5.000% due 7/1/19 1,165,500
250,000 BBB Prescott Valley Improvement District, Special Assessment,
Sewer Collection System, Roadway Repair,
7.900% due 1/1/12 281,562
- ----------------------------------------------------------------------------------------------
2,452,062
- ----------------------------------------------------------------------------------------------
Water and Sewer -- 8.0%
1,000,000 AAA Chandler Water & Sewer Revenue Refunding, FGIC-Insured,
6.250% due 7/1/13 1,076,250
1,000,000 NR Gilbert Water Reserve Municipal Property Corp., Water &
Wastewater Systems Revenue, Sub-Lien -- Connection
Development Fee, 6.875% due 4/1/16 1,030,000
1,000,000 Aaa* Pima County Metropolitan Domestic Water Improvement
District, FGIC-Insured, 4.875% due 1/1/19 966,250
1,700,000 AAA Prescott Valley Water District Revenue, MBIA-Insured,
4.875% due 1/1/19 1,636,250
</TABLE>
See Notes to Financial Statements.
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Smith Barney Arizona Municipals Fund Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Water and Sewer -- 8.0% (continued)
Sedona Wastewater Municipal Property Corp.
Excise Tax Revenue, Capital Appreciation, MBIA-Insured:
$1,000,000 AAA Zero coupon due 7/1/23 $ 278,750
1,000,000 AAA Zero coupon due 7/1/24 263,750
- ----------------------------------------------------------------------------------------------
5,251,250
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $63,667,180**) $65,990,051
==============================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service with the exception of
those identified by an asterisk (*), which are rated by Moody's Investor
Service, Inc.
(b) 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.
(c) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(d) Security segregated by Custodian for open purchase commitment.
(e) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 13 and 14 for definitions of ratings and certain security
descriptions.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
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 business, 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, financial, 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 Investor Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3 may
be applied to each generic rating from "Aa" to "Baa," 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 payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds 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 somewhat larger than in Aaa securities.
A -- Bonds rated "A" possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
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 outstanding investment characteristics and in fact have
speculative characteristics as well.
Fitch Investor Services, Inc. ("Fitch") -- Ratings may be modified by the
addition of a plus (+) or minus (-) sign to show relative standings within the
major rating categories.
A -- Bonds which are rated "A" are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and/or
dividends and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and
circumstances than securities with higher ratings.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited) (continued)
- --------------------------------------------------------------------------------
BBB -- Bonds which are rated "BBB" are considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay
interest or dividends and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these securities
and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for securities with higher ratings.
NR -- Indicates that the bond is not rated by Standard & Poor's, Moody's
or Fitch.
- --------------------------------------------------------------------------------
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 overwhelming 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
LEE -- College Construction Loan Insurance Association
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
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
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities May 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $63,667,180) $ 65,990,051
Cash 60,204
Interest receivable 1,229,819
Receivable for Fund shares sold 104,452
Receivable for securities sold 25,000
- --------------------------------------------------------------------------------
Total Assets 67,409,526
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 203,107
Dividends payable 112,828
Investment advisory fees payable 16,379
Administration fees payable 10,919
Distribution fees payable 3,122
Accrued expenses 66,263
- --------------------------------------------------------------------------------
Total Liabilities 412,618
- --------------------------------------------------------------------------------
Total Net Assets $ 66,996,908
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 6,500
Capital paid in excess of par value 64,679,396
Overdistributed net investment income (116,166)
Accumulated net realized gain from
security transactions 104,307
Net unrealized appreciation of investments 2,322,871
- --------------------------------------------------------------------------------
Total Net Assets $ 66,996,908
================================================================================
Shares Outstanding:
Class A 4,488,997
------------------------------------------------------------------------------
Class B 1,850,399
------------------------------------------------------------------------------
Class L 160,344
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.31
------------------------------------------------------------------------------
Class B* $10.30
------------------------------------------------------------------------------
Class L** $10.30
------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17%
of net asset value per share) $10.74
- --------------------------------------------------------------------------------
Class L (net asset value plus 1.01%
of net asset value per share) $10.40
================================================================================
* Redemption price is NAV of Class B shares reduced by 4.50% CDSC if shares
are redeemed within one year from purchase (See Note 4).
** Redemption price is NAV of Class L shares reduced by 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended May 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 3,777,279
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 208,269
Investment advisory fees (Note 4) 206,144
Administration fees (Note 4) 137,430
Audit and legal 50,361
Shareholder and system servicing fees 27,998
Shareholder communications 26,331
Registration fees 22,711
Directors' fees 13,712
Pricing service fees 7,671
Custody 4,123
Other 10,353
- --------------------------------------------------------------------------------
Total Expenses 715,103
- --------------------------------------------------------------------------------
Net Investment Income 3,062,176
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 29,644,073
Cost of securities sold 29,102,074
- --------------------------------------------------------------------------------
Net Realized Gain 541,999
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments:
Beginning of year 3,489,828
End of year 2,322,871
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (1,166,957)
- --------------------------------------------------------------------------------
Net Loss on Investments (624,958)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,437,218
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended May 31,
- --------------------------------------------------------------------------------
1999 1998
================================================================================
OPERATIONS:
Net investment income $ 3,062,176 $ 2,908,682
Net realized gain 541,999 752,174
Increase (decrease) in net
unrealized appreciation (1,166,957) 1,497,511
- --------------------------------------------------------------------------------
Increase in Net Assets
From Operations 2,437,218 5,158,367
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 3):
Net investment income (3,111,183) (3,022,096)
Net realized gains (875,676) (268,132)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,986,859) (3,290,228)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 9,529,906 13,482,281
Net asset value of shares issued
for reinvestment of dividends 2,340,052 1,888,919
Cost of shares reacquired (10,102,134) (8,472,997)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 1,767,824 6,898,203
- --------------------------------------------------------------------------------
Increase in Net Assets 218,183 8,766,342
NET ASSETS:
Beginning of year 66,778,725 58,012,383
- --------------------------------------------------------------------------------
End of year* $ 66,996,908 $ 66,778,725
================================================================================
* Includes overdistributed net investment
income of: $ (116,166) $ (67,159)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
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
non-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 ask prices provided by an independent
pricing service; (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 original issue discount, is recorded on an accrual basis;
market discount is recognized upon the disposition of the security; (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 generally accepted accounting principles. At May 31, 1999,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change; 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.
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
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
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
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Fund. The Fund pays SSBC an investment advisory fee calculated at
an annual rate of 0.30% of average daily net assets. This fee is calculated
daily and paid monthly.
SSBC 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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as a member of the selling group.
On June 12, 1998, the Portfolio's existing Class C shares were renamed Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares, also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase. There is also a CDSC of 4.50% on Class
B shares, which applies if redemption occurs within one year from purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by 1.00% per
year until no CDSC is incurred. In addition, Class A shares have a 1.00% CDSC,
which applies if redemption occurs within the first year of purchase. 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, 1999, CFBDS received sales charges of $86,000 and
$9,000 on sales of the Fund's Class A and Class L shares, respectively. In
addition, CDSCs paid to CFBDS for Class A and B shares were approximately
$15,000 and $6,000, respectively.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 for each 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%, respectively, of the average daily net assets for each class. For the
year ended May 31, 1999, total Distribution Plan fees were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $71,707 $127,508 $9,054
================================================================================
All officers and one Director of the Fund are employees of SSB.
5. Investments
During the year ended May 31, 1999, the aggregate cost of purchases and proceeds
from sales of investments (including maturities, but excluding short-term
securities) were as follows:
================================================================================
Purchases $27,652,931
- --------------------------------------------------------------------------------
Sales 29,644,073
================================================================================
At May 31, 1999, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $2,700,567
Gross unrealized depreciation (377,696)
- --------------------------------------------------------------------------------
Net unrealized appreciation $2,322,871
================================================================================
6. Capital Shares
At May 31, 1999, 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 June 12, 1998,
the Fund adopted the renaming of existing Class C shares as Class L shares.
At May 31, 1999, total paid-in capital amounted to the following for each class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $43,828,334 $19,213,066 $1,644,496
================================================================================
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
Year Ended Year Ended
May 31, 1999 May 31, 1998
------------------------ -------------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 565,684 $ 5,979,130 989,126 $ 10,375,485
Shares issued on
reinvestment 159,517 1,675,545 124,423 1,301,820
Shares reacquired (617,474) (6,479,448) (384,350) (4,020,356)
- --------------------------------------------------------------------------------
Net Increase 107,727 $ 1,175,227 729,199 $ 7,656,949
================================================================================
Class B
Shares sold 255,767 $ 2,691,766 280,136 $ 2,930,544
Shares issued on
reinvestment 58,850 617,705 52,631 550,361
Shares reacquired (335,973) (3,529,430) (408,288) (4,266,089)
- --------------------------------------------------------------------------------
Net Decrease (21,356) $ (219,959) (75,521) $ (785,184)
================================================================================
Class L(1)
Shares sold 81,638 $ 859,010 16,759 $ 176,252
Shares issued on
reinvestment 4,462 46,802 3,514 36,738
Shares reacquired (8,855) (93,256) (17,801) (186,552)
- --------------------------------------------------------------------------------
Net Increase 77,245 $ 812,556 2,472 $ 26,438
================================================================================
(1) On June 12, 1998, Class C shares were renamed Class L shares
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31, except where noted:
Class A Shares 1999(1) 1998 1997 1996 1995
================================================================================
Net Asset Value,
Beginning of Year $ 10.54 $ 10.21 $ 9.95 $ 10.09 $ 9.82
- --------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment
income (2) 0.49 0.50 0.53 0.53 0.54
Net realized and
unrealized gain
(loss) (0.10) 0.40 0.26 (0.15) 0.33
- --------------------------------------------------------------------------------
Total Income From
Operations 0.39 0.90 0.79 0.38 0.87
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.52) (0.53) (0.52) (0.54)
Net realized gains (0.13) (0.05) -- -- (0.06)
- --------------------------------------------------------------------------------
Total Distributions (0.62) (0.57) (0.53) (0.52) (0.60)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Year $ 10.31 $ 10.54 $ 10.21 $ 9.95 $ 10.09
- --------------------------------------------------------------------------------
Total Return 3.79% 9.00% 8.06% 3.82% 9.38%
- --------------------------------------------------------------------------------
Net Assets, End of
Year (000s) $46,279 $46,183 $37,304 $40,917 $43,222
- --------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses (2) 0.88% 0.85% 0.88% 0.82% 0.82%
Net investment
income 4.64 4.87 5.17 5.20 5.37
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 42% 27% 22% 21%
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The investment adviser waived all or part of its fees for each of the two
years ended May 31, 1996. If such fees were not waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
$0.02 $0.04 0.99% 1.01%
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31, except where noted:
Class B Shares 1999(1) 1998 1997 1996 1995
================================================================================
Net Asset Value,
Beginning of Year $ 10.54 $ 10.21 $ 9.95 $ 10.09 $ 9.82
- --------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment
income (2) 0.43 0.45 0.48 0.48 0.49
Net realized
and unrealized
gain (loss) (0.10) 0.40 0.26 (0.15) 0.33
- --------------------------------------------------------------------------------
Total Income From
Operations 0.33 0.85 0.74 0.33 0.82
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.47) (0.48) (0.47) (0.49)
Net realized gains (0.13) (0.05) -- -- (0.06)
- --------------------------------------------------------------------------------
Total Distributions (0.57) (0.52) (0.48) (0.47) (0.55)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Year $ 10.30 $ 10.54 $ 10.21 $ 9.95 $ 10.09
- --------------------------------------------------------------------------------
Total Return 3.15% 8.46% 7.53% 3.30% 8.78%
- --------------------------------------------------------------------------------
Net Assets, End of
Year (000s) $19,066 $19,721 $19,886 $22,369 $22,838
- --------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses (2) 1.42% 1.38% 1.39% 1.33% 1.33%
Net investment
income 4.11 4.35 4.66 4.69 4.85
- --------------------------------------------------------------------------------
Portfolio Turnover
Rate 41% 42% 27% 22% 21%
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The investment adviser waived all or part of its fees for each of the two
years ended May 31, 1996. If such fees were not waived, the per share
effect on net investment income and the expense ratios would have been as
follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
$0.02 $0.03 1.50% 1.52%
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31, except where noted:
Class L Shares(1) 1998(2) 1998 1997 1996 1995(3)
================================================================================
Net Asset Value,
Beginning of Year $10.53 $10.21 $ 9.95 $10.09 $ 9.28
- --------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment
income (4) 0.42 0.45 0.47 0.48 0.24
Net realized and
unrealized
gain (loss) (0.09) 0.39 0.26 (0.15) 0.86
- --------------------------------------------------------------------------------
Total Income
From Operations 0.33 0.84 0.73 0.33 1.10
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.47) (0.47) (0.47) (0.23)
Net realized gains (0.13) (0.05) -- -- (0.06)
- --------------------------------------------------------------------------------
Total Distributions (0.56) (0.52) (0.47) (0.47) (0.29)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Year $10.30 $10.53 $10.21 $ 9.95 $10.09
- --------------------------------------------------------------------------------
Total Return 3.21% 8.30% 7.49% 3.26% 12.10%++
- --------------------------------------------------------------------------------
Net Assets, End of
Year (000s) $1,652 $ 875 $ 822 $ 554 $ 386
- --------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses (4) 1.44% 1.42% 1.42% 1.39% 1.38%+
Net investment
income 4.09 4.30 4.63 4.63 4.81+
- --------------------------------------------------------------------------------
Portfolio Turnover
Rate 41% 42% 27% 22% 21%
================================================================================
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from December 8, 1994 (inception date) to May 31, 1995.
(4) The investment adviser waived all or part of its fees for the year ended
May 31, 1996, and the period ended May 31, 1995. If such fees were not
waived, the per share effect on net investment income and the expense
ratios would have been as follows:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
$0.02 $0.01 1.56% 1.56%+
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Smith Barney Arizona Municipals Fund Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Arizona Municipals Fund Inc. as of
May 31, 1999, 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 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 generally accepted auditing
standards. 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, 1999 by correspondence with the custodian. As to securities purchased or
sold but not yet received or 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 Smith
Barney Arizona Municipals Fund Inc. as of May 31, 1999, 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 generally
accepted accounting principles.
/s/ KPMG LLP
July 15, 1999
New York, New York
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 25
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
May 31, 1999:
-- 100.00% of the dividends paid by the Fund from net investment income
as tax-exempt for regular Federal income tax purposes.
-- Long-term capital gain distributions paid of $655,925.
- --------------------------------------------------------------------------------
26 1999 Annual Report to Shareholders
<PAGE>
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<PAGE>
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<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Directors
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr.
James J. Crisona, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Joseph P. Deane
Vice President and
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
and Administrator
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Arizona Municipals Fund Inc. It is not authorized for distribution
to prospective investors unless accompanied or preceded by a current Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
Salomon Smith Barney is a service mark of Salomon Smith Barney, Inc.
Smith Barney Arizona
Municipals Fund Inc.
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
