<PAGE>
[LOGO OF SMITH BARNEY]
SMITH BARNEY ARIZONA MUNICIPALS
Fund Inc.
SPECIAL DISCIPLINE SERIES
ANNUAL REPORT
MAY 31, 2000
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
<PAGE>
Smith Barney
Arizona Municipals Fund Inc.
[PHOTO]
HEATH B. MCLENDON
Chairman
[PHOTO]
JOSEPH P. DEANE
Vice President and Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Arizona
Municipals Fund Inc. ("Fund") for the year ended May 31, 2000. A detailed
summary of the Fund's performance and investment strategy can be found in the
appropriate sections below.1 We hope that you find this report to be useful and
informative.
Performance Update
For the year ended May 31, 2000, the Fund's Class A shares, with and without
sales charges, reported total negative returns of 6.54% and 2.64%, respectively.
In comparison, the Lipper, Inc. peer group of Arizona tax-exempt funds returned
a negative 2.96% for the same period. (Lipper, Inc. is an independent mutual
fund-tracking organization.) For additional Fund performance information, please
refer to pages 5 through 7. (Past performance is not indicative of future
results).
Market and Economic Review
On May 16,2000,the Federal Reserve Board ("Fed") enacted the sixth in a series
of interest rate hikes that began June 30, 1999, when the federal funds rate was
at 4.75%. (The federal funds rate is the interest rate charged by banks with
excess reserves at a Federal Reserve district bank to banks needing overnight
loans to meet reserve requirements.) With the federal funds rate presently at
6.50%, the cumulative effect of the interest rate increases so far, in our view,
may begin to have a more pronounced effect in reducing inflationary pressures.
In our opinion, changes in the Fed's monetary policy generally take time to be
absorbed into the economy. We believe that the recent market rallies are a
result of monetary changes enacted six to nine months ago. In addition, barring
a major change in the economy or the rate of inflation, we think it is likely
that the Fed's monetary policy may be relatively benign for the remainder of
2000.
-----------------
1 The information provided represents the opinion of the manager and is not
intended to be a forecast of future events, a guarantee of future results
nor investment advice. Further, there is no assurance that certain
securities will remain in or out of the portfolio.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 1
<PAGE>
Over the past several weeks, the performance of the bond market has shown signs
of improvement amid a series of economic reports that suggest the economy is
slowing and that the Fed may be close to completing its series of interest rate
hikes. However, we also think that any further Fed policy actions may have
already been comfortably priced into the bond market.
The inversion of the yield curve, while making us somewhat cautious, still
indicates to us that the market believes inflation is under control. (The yield
curve is the graphical depiction of the relationship between the yield on bonds
of the same credit quality but different maturities. An inverted yield curve
represents a unique situation whereby short-term interest rates are higher than
long-term rates.) While the fundamentals in higher-quality tier securities are
still sound and valuations have improved, poor technical conditions, most
notably large pent-up issuance needs, may have created concern among many
investors about the future prospects for municipal bonds. Yet, as we discuss
later in the report, we are optimistic about current municipal bond
opportunities.
The prospect of further Fed tightening may result in modest further increases in
interest rates on securities with shorter maturities. In contrast, long-term
rates are not likely to rise much. Our favorable outlook for inflation, plus the
ongoing reduction in the supply of U.S. Treasuries, may help to contain the rise
in long-term rates and further invert the Treasury yield curve (that is,
long-term yields should fall even further below short-term yields).
In our view, modestly higher U.S. Treasury yields and a further increase in the
inversion of the yield curve are likely as the Fed continues to push up
short-term rates. A decrease in the amount of new issuance and more buy backs of
currently outstanding debt, while already largely discounted by the market, may
likely reinforce the inversion of the yield curve. In addition, we are presently
seeing general positive market sentiment toward bonds of higher credit quality.
We think that the short-end of the curve is racing to stay ahead of short-term
rates. The inversion is not just a factor of the U.S. Treasury buy back program,
but rather, it indicates that inflation may be under control and rates on
longer-term paper still represent fair value.
Arizona Economic Highlights2
Arizona's economy has grown over the last eight years, as the state continues to
implement business-friendly practices, leading to its top-five ranking in the
nation in terms of fastest job growth. The majority of new jobs throughout
Arizona have been primarily created by smaller businesses. Over the last year,
nearly 40,000 businesses were established in the Grand Canyon State, and Arizona
presently has the highest percentage of women-owned businesses in the U.S. at
41%.
--------------
2 Source: State of Arizona, Governor's Office
--------------------------------------------------------------------------------
2 2000 Annual Report to Shareholders
<PAGE>
Another factor behind the growth of the state's economy was a general reduction
in taxes. Over the last nine years, the Arizona's legislature has enacted $1.5
billion in tax cuts. Additionally, Arizona continues to score high marks in the
New Economy, one marked by a shift to innovation and technology as opposed to
mass production manufacturing. High technology companies have expanded their
presence in the U.S. economy, especially in the state, which may have helped to
further diversify Arizona's economy.
Investment Strategy
The Fund 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 capital3. The Fund invests primarily in investment grade4
municipal securities.
Over the period covered by this report, the Fund continued to focus on
high-quality issues and remained broadly diversified across various sectors. As
of May 31, 2000, 87.8% of the Fund's holdings were rated investment grade. In
addition, 49.4% of the Fund's portfolio was invested in AAA-rated bonds, the
highest possible rating. At the end of the reporting period, the Fund's average
weighted maturity5 was roughly 18.7 years. As of May 31, 2000, the Fund's
largest holdings are concentrated in general obligation bonds (25.2%), hospital
bonds (17.9%) and multi-family housing bonds (14.6%).
The Fund's investment strategy going forward may be three-fold:
. We seek to lengthen maturities in the portfolio to take advantage of
the inexpensive valuations of municipal bonds relative to U.S.
Treasuries;
. We seek to focus on investing in high-grade issues; and
. We seek to invest in discount paper, an area where we believe we can
obtain the best value.
Our aim is to sell off some of our shorter-term maturities that were defensive
and stretch at the longer end of the yield curve to lock in today's higher
rates. We see the best opportunity for potential reward right now at the long
end of the yield curve.
----------------
3 Please note a portion of the income from this Fund may be subject to the
Alternative Minimum Tax ("AMT").
4 Investment-grade bonds are those rated Aaa,Aa,A and Baa by Moody's
Investors Service, Inc. or AAA,AA,A and BBB by Standard & Poor's Ratings
Service, or have an equivalent rating by any nationally recognized
statistical ratings organization, or are determined by the manager to be of
equivalent quality.
5 Average maturity is the average timeframe within the portfolio for which
the debt instruments are due and payable.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 3
<PAGE>
Municipal Bond Market Outlook
In our judgment, a number of influences remain favorable for the municipal bond
market. The new-issue municipals may be expected to decline this year, boosting
demand for bonds that are currently outstanding and enhancing interest for new
municipal securities expected in 2000.
National fiscal trends may be another major positive. During past economic
downturns, some municipal issuers faced declining tax receipts and were
hard-pressed to repay their bond obligations. Today, many state and local
governments have budget surpluses. We believe these surpluses may make investors
more comfortable holding municipals, even in a downturn. Lastly, recent
narrowing of spreads in the taxable market has made other fixed income
alternatives less attractive on a relative basis. All of these trends help to
explain why we remain optimistic about the long-term prospects for the municipal
bond market.
In closing, thank you for investing in the Smith Barney Arizona Municipals Fund
Inc. We look forward to continuing to help you pursue your financial goals in
the new century.
Sincerely,
/s/ Heath B. McLendon /s/ Joseph P. Deane
Heath B. McLendon Joseph P. Deane
Chairman Vice President and
Investment Officer
June 15, 2000
--------------------------------------------------------------------------------
4 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Historical Performance -- Class A Shares
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/00 $10.31 $ 9.54 $0.48 $0.02 $0.00 (2.64)%
-----------------------------------------------------------------------------------------------
5/31/99 10.54 10.31 0.49 0.13 0.00 3.79
-----------------------------------------------------------------------------------------------
5/31/98 10.21 10.54 0.52 0.05 0.00 9.00
-----------------------------------------------------------------------------------------------
5/31/97 9.95 10.21 0.53 0.00 0.00 8.06
-----------------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.52 0.00 0.00 3.82
-----------------------------------------------------------------------------------------------
5/31/95 9.82 10.09 0.54 0.06 0.00 9.38
-----------------------------------------------------------------------------------------------
5/31/94 10.40 9.82 0.53 0.21 0.00 1.33
-----------------------------------------------------------------------------------------------
5/31/93 9.84 10.40 0.57 0.08 0.02 12.92
-----------------------------------------------------------------------------------------------
5/31/92 9.63 9.84 0.60 0.06 0.04 9.86
-----------------------------------------------------------------------------------------------
5/31/91 9.49 9.63 0.68 0.00 0.00 8.92
===============================================================================================
Total $5.46 $0.61 $0.06
===============================================================================================
</TABLE>
--------------------------------------------------------------------------------
Historical Performance -- Class B Shares
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/00 $10.30 $ 9.54 $0.42 $0.02 $0.00 (3.11)%
-----------------------------------------------------------------------------------------------
5/31/99 10.54 10.30 0.44 0.13 0.00 3.15
-----------------------------------------------------------------------------------------------
5/31/98 10.21 10.54 0.47 0.05 0.00 8.46
-----------------------------------------------------------------------------------------------
5/31/97 9.95 10.21 0.48 0.00 0.00 7.53
-----------------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.47 0.00 0.00 3.30
-----------------------------------------------------------------------------------------------
5/31/95 9.82 10.09 0.49 0.06 0.00 8.78
-----------------------------------------------------------------------------------------------
5/31/94 10.40 9.82 0.49 0.21 0.00 0.84
-----------------------------------------------------------------------------------------------
Inception*- 5/31/93 9.97 10.40 0.29 0.08 0.01 8.31+
===============================================================================================
Total $3.55 $0.55 $0.01
===============================================================================================
</TABLE>
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 5
<PAGE>
--------------------------------------------------------------------------------
Historical Performance -- Class L Shares
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/00 $10.30 $ 9.53 $0.42 $0.02 $0.00 (3.24)%
-----------------------------------------------------------------------------------------------
5/31/99 10.53 10.30 0.43 0.13 0.00 3.21
-----------------------------------------------------------------------------------------------
5/31/98 10.21 10.53 0.47 0.05 0.00 8.30
-----------------------------------------------------------------------------------------------
5/31/97 9.95 10.21 0.47 0.00 0.00 7.49
-----------------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.47 0.00 0.00 3.26
-----------------------------------------------------------------------------------------------
Inception*- 5/31/95 9.28 10.09 0.23 0.06 0.00 12.10+
===============================================================================================
Total $2.49 $0.26 $0.00
===============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital
gains, if any, annually.
--------------------------------------------------------------------------------
Average Annual Total Returns
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charges(1)
------------------------------------
Class A Class B Class L
===============================================================================================
<S> <C> <C> <C>
Year Ended 5/31/00 (2.64)% (3.11)% (3.24)%
-----------------------------------------------------------------------------------------------
Five Years Ended 5/31/00 4.32 3.78 3.72
-----------------------------------------------------------------------------------------------
Ten Years Ended 5/31/00 6.35 N/A N/A
-----------------------------------------------------------------------------------------------
Inception* through 5/31/00 6.50 4.84 5.56
===============================================================================================
With Sales Charges(2)
------------------------------------
Class A Class B Class L
===============================================================================================
Year Ended 5/31/00 (6.54)% (7.27)% (5.09)%
-----------------------------------------------------------------------------------------------
Five Years Ended 5/31/00 3.48 3.62 3.52
-----------------------------------------------------------------------------------------------
Ten Years Ended 5/31/00 5.91 N/A N/A
-----------------------------------------------------------------------------------------------
Inception* through 5/31/00 6.17 4.84 5.38
===============================================================================================
</TABLE>
--------------------------------------------------------------------------------
6 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Cumulative Total Returns
--------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (5/31/90 through 5/31/00) 85.05%
--------------------------------------------------------------------------------
Class B (Inception* through 5/31/00) 43.04
--------------------------------------------------------------------------------
Class L (Inception* through 5/31/00) 34.56
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital 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.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 7
<PAGE>
--------------------------------------------------------------------------------
Historical Performance (unaudited)
--------------------------------------------------------------------------------
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+
[GRAPH]
--------------------------------------------------------------------------------
May 1990 -- May 2000
Smith Barney Arizona Lehman Brothers Lipper Arizona
Municipals Fund Inc. Municipal Bond Index Peer Group Average
May-90 9,596 10,000 10,000
May-91 10,452 11,008 10,853
May-92 11,482 12,089 11,943
May-93 12,965 13,536 13,440
May-94 13,137 13,870 13,656
May-95 14,369 15,134 14,885
May-96 14,918 15,826 15,412
May-97 16,121 17,136 16,611
May-98 17,572 18,744 18,061
May-99 18,239 19,622 18,717
May-00 17,757 19,610 18,163
+ Hypothetical illustration of $10,000 invested in Class A shares on May 31,
1990, 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, 2000. 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 (40 funds as of May 31, 2000). 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.
--------------------------------------------------------------------------------
8 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 2000
--------------------------------------------------------------------------------
[GRAPH]
Industry Breakdown
25.2% General Obligation
17.9% Hospitals
14.6% Housing: Multi-Family
10.7% Miscellaneous
8.1% Water & Sewer
5.8% Pollution Control
5.5% Industrial Development
4.1% Utility
3.5% Housing: Single-Family
1.6% Life Care Systems
1.6% Escrowed to Maturity
1.4% Pre-Refunded
Summary of Investments by Combined Ratings
Standard & Percentage of
Moody's and/or Poor's Total Investments
--------------------------------------------------------------------------------
Aaa AAA 49.4%
Aa AA 21.7
A A 9.9
Baa BBB 6.8
Ba BB 1.6
VMIG 1 A-1 0.8
NR NR 9.8
------
100.0%
======
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 9
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
<S> <C> <C> <C>
Escrowed to Maturity -- 1.6%
$ 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 $ 269,375
500,000 AAA Maricopa County IDA, Hospital Revenue, Series A,
Samaritan Health Services, MBIA-Insured,
7.000% due 12/1/16 565,625
----------------------------------------------------------------------------------------------------
835,000
----------------------------------------------------------------------------------------------------
General Obligation -- 25.2%
Maricopa County GO:
Elementary School District No. 8, Osborne Elementary
School District:
1,000,000 A1* 7.500% due 7/1/09 1,150,000
600,000 AAA FGIC-Insured, (Partially Pre-Refunded-- Escrowed
with U.S. government securities to 7/1/06
Call @ 101), 5.875% due 7/1/14 612,750
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 7/1/08 703,625
1,000,000 AAA Elementary School District No. 40, (Glendale School
Improvement), AMBAC-Insured, 6.300% due 7/1/11 1,051,250
1,000,000 AAA Elementary School District No. 68, 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 1,015,000
635,000 AAA School District No. 80, Chandler Unified School District,
FGIC-Insured, (Un-Refunded Balance), 5.800% due 7/1/12 647,700
Unified School District. No. 11, Peoria Unified School District,
MBIA-Insured, (Un-Refunded Balance):
635,000 AAA 6.400% due 7/1/10 650,494
500,000 AAA 7.000% due 7/1/10 515,295
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) 1,020,000
370,000 AAA Union High School District No. 216, FGIC-Insured,
(Un-Refunded Balance), 6.700% due 7/1/11 374,240
1,250,000 AA+ Phoenix Civic Improvement Corp., (New City Hall Project),
5.100% due 7/1/28 1,079,688
1,400,000 AA+ Phoenix GO, Refunding, Series A, 6.250% due 7/1/17 1,482,250
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
10 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
<S> <C> <C>
General Obligation -- 25.2% (continued)
$ 400,000 A Phoenix Special Assignment, Central Avenue Improvement
District, 7.000% due 1/1/06 $ 402,644
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,163,750
500,000 AAA Pinal County Unified School District No. 43, GO, Apache
Junction, Series A, FGIC-Insured, 5.850% due 7/1/15 507,500
500,000 A Scottsdale Mountain Communication Facilities District, GO,
District No. 3, Series A, 6.200% due 7/1/17 494,375
285,000 AAA Tempe Union High School District No. 213, GO, FGIC-Insured,
(Un-Refunded Balance), 6.000% due 7/1/10 294,263
----------------------------------------------------------------------------------------------------
13,164,824
----------------------------------------------------------------------------------------------------
Hospitals -- 17.9%
1,500,000 A2* Arizona Health Facilities Authority, Hospital Systems Revenue,
Phoenix Childrens Hospital, Series A, 6.125% due 11/15/22 1,430,625
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 Baa1* 5.900% due 4/1/09 1,436,250
1,000,000 Baa1* 6.125% due 4/1/18 913,750
2,000,000 AA+ Maricopa County IDA, Hospital Revenue, Mayo Clinic,
5.250% due 11/15/37 1,702,500
3,000,000 AAA Mesa, AZ IDA, Discovery Health Systems, Series A,
MBIA-Insured, 5.625% due 1/1/29 2,801,250
1,070,000 AAA Phoenix IDA, Hospital Revenue, John C. Lincoln Hospital,
FSA-Insured, 5.400% due 12/1/10 1,063,313
----------------------------------------------------------------------------------------------------
9,347,688
----------------------------------------------------------------------------------------------------
Housing: Multi-Family -- 14.6%
Maricopa County IDA, Multi-Family Housing Revenue:
500,000 AAA Metro Gardens-Mesa Ridge Project, Series A,
MBIA-Insured, 5.650% due 7/1/19 477,500
1,780,000 AAA Mortgage Loan, Series A, FHA-Insured, 5.900% due 7/1/24 1,726,600
2,125,000 NR Stanford Court Apartments, Series B, 6.250% due 7/1/18 1,965,625
Phoenix IDA:
650,000 AAA Mortgage Revenue, (Chris Ridge Village Project),
FHA-Insured, 6.750% due 11/1/12 669,500
Multi-Family Housing Revenue:
Ventana Palms Apartments Project, Series A, MBIA-Insured:
150,000 Aaa* 6.100% due 10/1/19 149,438
950,000 Aaa* 6.150% due 10/1/29 939,312
1,000,000 AA Woodstone & Silver Springs, 6.250% due 4/1/23 1,006,250
450,000 AA Pima County IDA, Multi-Family Housing Revenue,
Rancho Mirage Project, 7.050% due 4/1/22 (c) 457,875
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 11
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
<C> <C> <S> <C>
Housing: Multi-Family -- 14.6% (continued)
$ 225,000 AAA Sierra Vista IDA, Multi-Family Housing, (Mountain
Steppes Apartment Project), FNMA-Collateralized,
7.125% due 12/1/10 $ 226,251
----------------------------------------------------------------------------------------------------
7,618,351
----------------------------------------------------------------------------------------------------
Housing: Single-Family -- 3.5%
310,000 AAA Phoenix IDA, Single-Family Mortgage Revenue,
GNMA/FNMA/FHLMC-Collateralized, 6.300% due 12/1/12 (c) 315,425
Pima County IDA, Single-Family Mortgage Revenue:
845,000 AAA GNMA-Collateralized, 6.750% due 11/1/27 (c) 862,956
640,000 AAA Series A, GNMA/FNMA/FHLMC-Collateralized,
6.250% due 11/1/30 (c) 636,000
----------------------------------------------------------------------------------------------------
1,814,381
----------------------------------------------------------------------------------------------------
Industrial Development -- 5.5%
750,000 NR Navajo County IDA, IDR, (Stone Container Corp. Project),
7.400% due 4/1/26 (c) 728,438
Pima County IDA, Industrial Revenue Refunding:
665,000 AAA FSA-Insured, 7.250% due 7/15/10 705,731
1,000,000 Ba3* Tucson Electric Power Co. Project, Series B,
6.000% due 9/1/29 853,750
Tempe IDA, IDR, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 344,312
250,000 NR 6.250% due 12/1/04 244,375
----------------------------------------------------------------------------------------------------
2,876,606
----------------------------------------------------------------------------------------------------
Life Care Systems -- 1.6%
1,000,000 NR Flagstaff IDA, Living Community Revenue,
(Northern Community Project), 6.200% due 9/1/28 842,500
----------------------------------------------------------------------------------------------------
Miscellaneous -- 10.7%
520,000 AAA Arizona State COP, Series B, AMBAC-Insured,
6.250% due 9/1/10 542,750
750,000 Aa* Arizona Student Loan Revenue Acquisition Authority,
Series B, 6.600% due 5/1/10 (c) 768,750
500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
6.200% due 4/1/15 511,875
1,000,000 AA+ Phoenix, AZ Civic Improvement Corp., Excise Tax Revenue,
Sr. Lien, (Municipal Courthouse Project), Series A,
5.250% due 7/1/24 892,500
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 365,206
500,000 AAA 6.150% due 1/1/15 514,375
</TABLE>
See Notes to Financial Statements.
------------------------------------------------------------------------------
12 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
<C> <C> <S> <C>
Miscellaneous -- 10.7% (continued)
$1,000,000 AA Tucson COP, 6.375% due 7/1/09 $1,048,750
890,000 AAA Tucson Local Development Finance Corp., Lease Revenue,
FGIC-Insured, (Un-Refunded Balance), 6.250% due 7/1/12 928,938
----------------------------------------------------------------------------------------------------
5,573,144
----------------------------------------------------------------------------------------------------
Pollution Control -- 5.8%
Coconino County Pollution Control Corp. Revenue Refunding:
1,000,000 A- Arizona Public Service Co., Series A, 5.875% due 8/15/28 931,250
1,000,000 BBB Nevada Power Co. Project, 6.375% due 10/1/36 (c) 930,000
Maricopa County Pollution Control Corp. PCR:
100,000 A-1+ Series A, 4.450% due 5/1/29 (d) 100,000
300,000 A-1+ Series B, 4.450% due 5/1/29 (d) 300,000
850,000 A- Navajo County PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28 791,562
----------------------------------------------------------------------------------------------------
3,052,812
----------------------------------------------------------------------------------------------------
Pre-Refunded -- 1.4%
715,000 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 7/1/10 746,281
----------------------------------------------------------------------------------------------------
Utility -- 4.1%
1,000,000 AA+ Mohave County IDA, IDR, (Citizens Utility Project),
Series B, 7.050% due 8/1/20 1,023,500
250,000 BBB- Prescott Valley Improvement District, Special Assessment,
Sewer Collection System, Roadway Repair,
7.900% due 1/1/12 269,375
1,000,000 AA- Yavapai County IDA, IDR, (Citizens Utilities Co. Project),
5.450% due 6/1/33 (c) 877,500
----------------------------------------------------------------------------------------------------
2,170,375
----------------------------------------------------------------------------------------------------
Water & Sewer -- 8.1%
1,000,000 AAA Chandler Water & Sewer Revenue Refunding,
FGIC-Insured, 6.250% due 7/1/13 1,027,500
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 1,006,250
1,000,000 AAA Maricopa County IDA, Water System Revenue, Chaparral
Water Co. Improvement, Series A, AMBAC-Insured,
5.400% due 12/1/22 (c) 903,750
1,000,000 Aaa* Pima County, Metropolitan Domestic Water Improvement
District, FGIC-Insured, 4.875% due 1/1/19 860,000
</TABLE>
See Notes to Financial Statements.
------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 13
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================
<C> <C> <S> <C>
Water & Sewer -- 8.1% (continued)
Sedona Wastewater Municipal Property Corp. Excise Tax
Revenue, Capital Appreciation, MBIA-Insured:
$1,000,000 AAA Zero coupon due 7/1/23 $ 243,750
1,000,000 AAA Zero coupon due 7/1/24 230,000
----------------------------------------------------------------------------------------------------
4,271,250
----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $53,610,066**) $52,313,212
====================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except for those
which are identified by an asterisk (*) are rated by Moody's Investors
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) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(d) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 15 and 16 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
--------------------------------------------------------------------------------
14 2000 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 Investors 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.
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 postion characterizes in this class.
NR -- Indicates that the bond is not rated by Standard & Poor's, Moody's or
Fitch.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 15
<PAGE>
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
16 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $53,610,066) $52,313,212
Interest receivable 1,050,701
Receivable for Fund shares sold 107,000
Receivable for securities sold 10,000
------------------------------------------------------------------------------------
Total Assets 53,480,913
------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 30,337
Administration fees payable 15,457
Investment advisory fees payable 10,208
Distribution fees payable 5,550
Payable to bank 3,237
Accrued expenses 43,749
------------------------------------------------------------------------------------
Total Liabilities 108,538
------------------------------------------------------------------------------------
Total Net Assets $53,372,375
====================================================================================
NET ASSETS:
Par value of capital shares $5,596
Capital paid in excess of par value 55,953,354
Undistributed net investment income 25,260
Accumulated net realized loss from security transactions (1,314,981)
Net unrealized depreciation of investments (1,296,854)
------------------------------------------------------------------------------------
Total Net Assets $53,372,375
====================================================================================
Shares Outstanding:
Class A 3,829,052
---------------------------------------------------------------------------------
Class B 1,662,843
---------------------------------------------------------------------------------
Class L 103,754
---------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.54
---------------------------------------------------------------------------------
Class B * $9.54
---------------------------------------------------------------------------------
Class L ** $9.53
---------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value per share) $9.94
---------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $9.63
====================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 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 a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 17
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations For the Year Ended May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $3,600,978
---------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 185,720
Investment advisory fees (Note 4) 182,295
Administration fees (Note 4) 121,530
Audit and legal 34,694
Shareholder and system servicing fees 31,650
Shareholder communications 27,479
Registration fees 17,486
Directors' fees 13,231
Pricing service fees 9,296
Custody 2,605
Other 5,918
---------------------------------------------------------------------------------------
Total Expenses 631,904
---------------------------------------------------------------------------------------
Net Investment Income 2,969,074
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 5):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 18,286,912
Cost of securities sold 19,601,893
---------------------------------------------------------------------------------------
Net Realized Loss (1,314,981)
---------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments:
Beginning of year 2,322,871
End of year (1,296,854)
---------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (3,619,725)
---------------------------------------------------------------------------------------
Net Loss on Investments (4,934,706)
---------------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(1,965,632)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
18 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended May 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
======================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $2,969,074 $3,062,176
Net realized gain (loss) (1,314,981) 541,999
Increase in net unrealized depreciation (3,619,725) (1,166,957)
------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (1,965,632) 2,437,218
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 3):
Net investment income (2,827,648) (3,111,183)
Net realized gains (104,307) (875,676)
------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,931,955) (3,986,859)
------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 6,255,392 9,529,906
Net asset value of shares issued for
reinvestment of dividends 1,565,941 2,340,052
Cost of shares reacquired (16,548,279) (10,102,134)
------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (8,726,946) 1,767,824
------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (13,624,533) 218,183
NET ASSETS:
Beginning of year 66,996,908 66,778,725
------------------------------------------------------------------------------------------------------
End of year* $53,372,375 $66,996,908
======================================================================================================
* Includes undistributed (overdistributed) net investment income of: $25,260 $(116,166)
======================================================================================================
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 19
<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
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; 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.
--------------------------------------------------------------------------------
20 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
3. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy conditions that will enable interest from municipal
securities, which is exempt from regular Federal income tax and from designated
state income taxes, to retain such tax-exempt status when distributed to the
shareholders of the Fund.
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
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), which, in
turn, is a subsidiary of Citigroup Inc. ("Citigroup"), 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.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Fund's sub-transfer
agent. CFTC 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 CFTC.
During the period from October 1, 1999 through May 31, 2000, the Fund paid
transfer agent fees of $9,074 to CFTC.
CFBDS, Inc. ("CFBDS") acts as the Fund's distributor. Salomon Smith Barney Inc.
("SSB"), another subsidiary of SSBH, as well as certain other broker-dealers,
continues to sell Fund shares to the public as a member of the selling group.
There are maximum initial sales charges of 4.00% and 1.00% for Class A and L
shares, respectively. There is a contingent deferred sales charge ("CDSC") of
4.50% on Class B shares, which applies if redemption occurs within one year from
initial 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 have
a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 21
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
For the year ended May 31, 2000, CFBDS and SSB received sales charges of $42,000
and $3,000 on sales of the Fund's Class A and L shares, respectively. In
addition, CDSCs paid to CFBDS for Class B and L shares were approximately
$21,000 and $3,000, respectively.
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, 2000, total Distribution Plan fees were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $62,977 $113,358 $9,385
================================================================================
All officers and one Director of the Fund are employees of SSB.
5. Investments
During the year ended May 31, 2000, the aggregate cost of purchases and proceeds
from sales of investments (including maturities, but excluding short-term
securities) were as follows:
================================================================================
Purchases $ 9,330,140
--------------------------------------------------------------------------------
Sales 18,286,912
================================================================================
At May 31, 2000, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 831,661
Gross unrealized depreciation (2,128,515)
--------------------------------------------------------------------------------
Net unrealized depreciation $(1,296,854)
================================================================================
6. Capital Loss Carryforward
At May 31, 2000, the Fund had, for Federal income tax purposes, approximately
$363,000 of unused capital loss carryforwards available to offset future capital
gains expiring May 31, 2008. 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.
--------------------------------------------------------------------------------
22 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
7. Capital Shares
At May 31, 2000, 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.
At May 31,2000, total paid-in capital amounted to the following for each class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $37,465,379 $17,396,272 $1,097,299
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 2000 May 31, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 406,286 $4,006,375 565,684 $5,979,130
Shares issued on reinvestment 115,173 1,123,438 159,517 1,675,545
Shares reacquired (1,181,404) (11,492,768) (617,474) (6,479,448)
------------------------------------------------------------------------------------------------
Net Increase (Decrease) (659,945) $(6,362,955) 107,727 $1,175,227
================================================================================================
Class B
Shares sold 190,200 $1,863,743 255,767 $2,691,766
Shares issued on reinvestment 41,333 402,977 58,850 617,705
Shares reacquired (419,089) (4,083,515) (335,973) (3,529,430)
------------------------------------------------------------------------------------------------
Net Decrease (187,556) $(1,816,795) (21,356) $(219,959)
================================================================================================
Class L*
Shares sold 38,505 $385,274 81,638 $859,010
Shares issued on reinvestment 4,044 39,526 4,462 46,802
Shares reacquired (99,139) (971,996) (8,855) (93,256)
------------------------------------------------------------------------------------------------
Net Increase (Decrease) (56,590) $(547,196) 77,245 $812,556
================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
8. Subsequent Event
Effective June 5, 2000, the Board of Directors of the Fund approved a
Distribution Agreement with SSB, replacing the Distribution Agreement with
CFBDS.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 23
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31:
<TABLE>
<CAPTION>
Class A Shares 2000(1) 1999(1) 1998 1997 1996
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.31 $10.54 $10.21 $9.95 $10.09
------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.50 0.49 0.50 0.53 0.53
Net realized and unrealized gain (loss) (0.77) (0.10) 0.40 0.26 (0.15)
------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.27) 0.39 0.90 0.79 0.38
------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.48) (0.49) (0.52) (0.53) (0.52)
Net realized gains (0.02) (0.13) (0.05) -- --
------------------------------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.62) (0.57) (0.53) (0.52)
------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.54 $10.31 $10.54 $10.21 $9.95
------------------------------------------------------------------------------------------------------------------
Total Return (2.64)% 3.79% 9.00% 8.06% 3.82%
------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $36,524 $46,279 $46,183 $37,304 $40,917
------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.88% 0.88% 0.85% 0.88% 0.82%
Net investment income 5.09 4.64 4.87 5.17 5.20
------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 16% 41% 42% 27% 22%
==================================================================================================================
</TABLE>
(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 the year ended
May 31, 1996. If such fees were not waived, the per share decrease to net
investment income and the actual expense ratio would have been $0.02 and
0.99%, respectively.
--------------------------------------------------------------------------------
24 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31:
<TABLE>
<CAPTION>
Class B Shares 2000(1) 1999(1) 1998 1997 1996
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.30 $10.54 $10.21 $9.95 $10.09
---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.45 0.43 0.45 0.48 0.48
Net realized and unrealized gain (loss) (0.77) (0.10) 0.40 0.26 (0.15)
---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.32) 0.33 0.85 0.74 0.33
---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.44) (0.47) (0.48) (0.47)
Net realized gains (0.02) (0.13) (0.05) -- --
---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.44) (0.57) (0.52) (0.48) (0.47)
---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.54 $10.30 $10.54 $10.21 $9.95
---------------------------------------------------------------------------------------------------------------------
Total Return (3.11)% 3.15% 8.46% 7.53% 3.30%
---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year(000s) $15,860 $19,066 $19,721 $19,886 $22,369
---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.41% 1.42% 1.38% 1.39% 1.33%
Net investment income 4.56 4.11 4.35 4.66 4.69
---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 16% 41% 42% 27% 22%
=====================================================================================================================
</TABLE>
(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 the year ended
May 31, 1996. If such fees were not waived, the per share decrease to net
investment income and the actual expense ratio would have been $0.02 and
1.50%, respectively.
--------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 25
<PAGE>
--------------------------------------------------------------------------------
Financial Hightlights (continued)
--------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31:
<TABLE>
<CAPTION>
Class L Shares 2000(1) 1999(1)(2) 1998 1997 1996
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.30 $10.53 $10.21 $9.95 $10.09
------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.43 0.42 0.45 0.47 0.48
Net realized and unrealized gain (loss) (0.76) (0.09) 0.39 0.26 (0.15)
------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.33) 0.33 0.84 0.73 0.33
------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.43) (0.47) (0.47) (0.47)
Net realized gains (0.02) (0.13) (0.05) -- --
------------------------------------------------------------------------------------------------------------
Total Distributions (0.44) (0.56) (0.52) (0.47) (0.47)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.53 $10.30 $10.53 $10.21 $9.95
------------------------------------------------------------------------------------------------------------
Total Return (3.24)% 3.21% 8.30% 7.49% 3.26%
------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $988 $1,652 $875 $822 $554
------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.56% 1.44% 1.42% 1.42% 1.39%
Net investment income 4.38 4.09 4.30 4.63 4.63
------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 16% 41% 42% 27% 22%
============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) The investment adviser waived all or part of its fees for the year ended
May 31, 1996. If such fees were not waived, the per share decrease to net
investment income and the actual expense ratio would have been $0.02 and
1.56%, respectively.
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26 2000 Annual Report to Shareholders
<PAGE>
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Independent Auditors' Report
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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, 2000, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 2000, by correspondence with the custodian. 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 Smith
Barney Arizona Municipals Fund Inc. as of May 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for each of
the years in the five-year period then ended, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
July 13, 2000
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Smith Barney Arizona Municipals Fund Inc. 27
<PAGE>
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Tax Information (unaudited)
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For Federal tax purposes the Fund hereby designates for the fiscal year ended
May 31,2000:
. 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 $19,211.
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28 2000 Annual Report to Shareholders
<PAGE>
[SMITH BARNEY 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
SSB Citi Fund Management LLC
Distributor
CFBDS, Inc.
Custodian
PFPC Trust Company
Transfer Agent
Citi Fiduciary Trust Company
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Arizona Municipals Fund Inc., but it may also be used as sales
literature when preceded or accompanied by the current Prospectus, which gives
details about charges, expenses, investment objectives and operating policies of
the Fund. If used as sales material after August 31, 2000, this report must be
accompanied by performance information for the most recently completed calendar
quarter.
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/mutualfunds
FD2223 7/00
