1994 ANNUAL REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing the opening of a canyon in Arizona.
SMITH BARNEY SHEARSON
ARIZONA MUNICIPALS FUND INC.
MAY 31, 1994
[Logo]
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report and portfolio of in-
vestments for Smith Barney Shearson Arizona Municipals Fund Inc. for the
fiscal year ended May 31, 1994. The Fund's net asset value was $10.40 per
share on May 31, 1993, the beginning of the Fund's fiscal year; in re-
sponse to declining prices for municipal bonds during the second half of
its fiscal year, the Fund's net asset value declined to $9.82 per share.
Investors owning Class A shares received tax-exempt distributions of
$0.53 per share and a capital gains distribution of $0.21; investors own-
ing Class B shares received tax- exempt distributions of $0.49 per share
and a capital gains distribution of $0.21. The total return for the fiscal
year was a modest 1.33% for Class A shares and 0.84% for Class B shares.
Further information about the performance of your investment during this
and previous fiscal periods is available on the "Financial Highlights"
pages following the Fund's financial statements.
THE MUNICIPAL MARKET AND THE ECONOMIC ENVIRONMENT
After a very strong market and rising valuations during the first half of
the Fund's fiscal year, municipal securities experienced increased vola-
tility and declining prices during its second half. The catalyst for this
reversal was the Federal Reserve's aggressive attempt to control inflation
by increasing the Federal funds rate in four separate moves between Febru-
ary 4, 1994 and May 17, 1994 and the discount rate, two very sensitive in-
dicators of the direction of interest rates. The textbook result of an in-
crease in short-term rates is slower economic growth and low long-term in-
terest rates. However, at the time there were many leveraged investments
in the marketplace based on short-term interest rates staying low. As
short-term rates rose, investors met liquidity demands by selling long-
term U.S. Treasuries which caused an unintended and unwarranted rise in
long-term interest rates. Interest rates on municipal securities followed
suit as dealers sold their municipal inventory in order to meet the sell-
ing demands of Treasury investors. This uncertain investment environment
caused many investors to purchase shorter maturities which are generally
less volatile than longer-term issues.
It's clear to us from the Federal Reserve's actions of the last few months
that they will continue to raise interest rates as long as they see infla-
tion building into the economy. But we believe that it will be later in
the year before we see any further movement in rates by the Federal Re-
serve. We think that the slowdown in mortgage refinancings, new construc-
tion, and sales of single family homes will translate into a slowdown in
economic growth. In addition, job growth and wage growth haven't been con-
tributing much strength to the economy. The real issue is whether or not
the economy reaches the equilibrium state of growth with low inflation
that the Federal Reserve is striving for.
Unlike the majority of states, Arizona's economy has been expanding dra-
matically, fueled primarily over the past two years by emigrants from
California. Tax revenues to the state have increased meaningfully, to the
point that Arizona's taxpayers will receive a modest income tax cut begin-
ning with the 1995 fiscal year. There has been a great deal of rhetoric of
late about eliminating entirely the state's income tax, but we are in-
clined to attribute this to the upcoming gubernatorial election. Since
most of the state's revenues come from income taxes, the likelihood of a
total repeal seems quite small.
If increased tax revenues and economic growth are among Arizona's assets,
one if its liabilities was the recent rating downgrade of Maricopa County
to A from AA by both Standard & Poor's Corporation and Moody's Investors
Services, Inc. (The majority of the state's population resides in Maricopa
County.) In their decision to downgrade the county, the agencies cited the
Board of Supervisor's projected $75 million budget deficit as well struc-
tural imbalances in health care and employment, and problems with the
county's newly-installed computer system. Fortunately, all of these prob-
lems are remediable.
INVESTMENT STRATEGY
As investment advisers, our goal is to provide you with tax-free income
and stability of principal through investments in securities exempt from
Federal and Arizona personal income taxes.* We tend to take a longer-term
investment perspective to tax-exempt investing and although we are not
market timers, when the market requires it we are ready, willing and able
to adjust the portfolio accordingly. Such a situation occurred during this
fiscal year. When the very attractive tax-exempt market environment of the
first half of the Fund's fiscal year gave way in November to an environ-
ment of tumbling bond prices, we reduced the average maturity of the Port-
folio. We were concerned by the market's volatility and lack of liquidity
caused by various dislocations, and therefore substantially raised the
Fund's cash holdings. Yields in the municipal market have now risen ap-
proximately 100 basis points (one percentage point) and we believe that
the worst of the market's volatility is behind us.
We recently have been allocating the portfolio's cash holdings to the
longer-term market to try and capture a little bit more yield. This higher
yield will be important to maintaining the Fund's income stream which has
been reduced by the bond calls and refinancings of the past year and will
continue to be challenged by bond calls during the rest of 1994.
[FN]
* Income may be subject to Federal minimum tax and state or local taxes.
LEVEL DIVIDEND POLICY
Although not explicitly stated in the prospectus, the Fund's policy is to
pay a level monthly dividend based on our projections for the municipal
market and the general direction of interest rates. This policy has no
appreciable affect on the Fund's investment strategies or net asset value
per share since it is guided by market conditions. We continually monitor
both the market and the Fund's income stream to see that our dividend pro-
jections are on target. This means that we do not sacrifice the quality of
the portfolio by investing in higher yielding but lower quality bonds that
may undermine the Fund's net asset value per share in order to maintain an
unrealistically high dividend policy.
Although the economy is strong, we have been emphasizing high quality se-
curities because the spread (the difference in yield between high quality
and lower quality securities) in the Arizona tax-exempt market is still
quite narrow. We used the market decline as an opportunity to invest in
AAA-rated securities at very attractive prices, and until we feel that we
are additionally compensated for buying lower rated securities we will
confine the majority of our holdings to the investment grade category. At
the end of this reporting period, over 50% of the Fund was invested in
AAA-rated securities. Recent additions to the portfolio have included se-
curities issued for Phoenix and Tucson, and Salt River Project bonds. We
also have invested in Maricopa County debt that was additionally secured
by municipal bond insurance. Because of the uncertainties surrounding na-
tional health care reform and its reimbursement policies, we have reduced
the portfolio's holdings in hospital and health care issues.
In closing, we welcome new investors to the Fund and thank more tenured
investors for their continued trust. As we have since the Fund's commence-
ment of operations in 1987, we will strive to provide you with investment
performance that best serves the interests of the Fund's shareholders.
Sincerely,
Heath B. McLendon
Chairman of the Board
Lawrence T. McDermott
Vice President and
Investment Officer
July 12, 1994
HISTORICAL PERFORMANCE -- CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR CAPITAL
ENDED RETURN OF GAINS DIVIDENDS
TOTAL
MAY 31 BEGINNING ENDING CAPITAL PAID PAID
RETURN*
<S> <C> <C> <C> <C> <C>
<C>
1988 $ 9.60 $ 9.22 -- -- $0.40
2.32%
1989 $ 9.22 $ 9.66 -- -- $0.69
12.70%
1990 $ 9.66 $ 9.49 -- $0.05 $0.71
6.31%
1991 $ 9.49 $ 9.63 -- -- $0.68
8.92%
1992 $ 9.63 $ 9.84 $0.04 $0.06 $0.60
9.86%
1993 $ 9.84 $10.40 $0.02 $0.08 $0.57
12.92%
1994 $10.40 $ 9.82 -- $0.21 $0.53
1.33%
Total $0.06 $0.40 $4.18
Cumulative Total Return -- (6/1/87 through 5/31/94)
67.84%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the front-end
sales charge (maximum 4.5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES
<TABLE>
<CAPTION>
WITHOUT SALES CHARGE WITH SALES
CHARGE***
WITH WITHOUT WITH
WITHOUT
FEE WAIVER FEE WAIVER FEE WAIVER
FEE WAIVER
AND EXPENSE AND EXPENSE AND EXPENSE
AND EXPENSE
REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
REIMBURSEMENT
<S> <C> <C> <C>
<C>
Year Ended 5/31/94 1.33% 1.09% (3.23)%
(3.46)%
Five Years Ended
5/31/94 7.80% 6.94% 6.81%
5.96%
Inception 6/1/87
through 5/31/94 7.68% 5.74% 6.98%
5.05%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value. The Fund commenced op-
erations June 1, 1987. The Fund waived fees and/or reimbursed expenses
from June 1, 1987 to May 31, 1994. A shareholder's actual return for a
given class for periods during which waivers and reimbursements were
in effect would be the greater of the two numbers shown.
*** Average annual total return figures assume the deduction of the maxi-
mum 4.5% sales charge.
</TABLE>
NOTE: On November 6, 1992, existing shares of the Fund were desig-
nated Class A shares. Class A shares are subject to a maximum 4.5%
front-end sales charge and a service fee of 0.15% of the value of the
average daily net assets attributable to that class. The Fund's annual
rates of return would have been lower had service fees been in effect
prior to November 6, 1992.
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS A)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Ari-
zona Municipals Fund's Class A shares on June 1, 1987 through May 31, 1994
as compared with the growth of a $10,000 investment in Lehman Municipal
Bond Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 INVESTMENT IN THE
INVESTED IN CLASS A LEHMAN
MONTH SHARES OF THE MUNICIPAL
<S> <C> <C>
ENDED FUND BOND INDEX
05/31/87 -- $10,000
06/01/87 $ 9,550 --
06/87 $ 9,550 $10,294
09/87 $ 9,312 $10,038
12/87 $ 9,614 $10,487
03/88 $ 9,688 $10,847
06/88 $ 9,964 $11,057
09/88 $10,210 $11,340
12/88 $10,444 $11,551
03/89 $10,556 $11,627
06/89 $11,202 $12,316
09/89 $11,204 $12,324
12/89 $11,548 $12,798
03/90 $11,553 $12,855
06/90 $11,865 $13,155
09/90 $11,855 $13,163
12/90 $12,417 $13,731
03/91 $12,528 $14,040
06/91 $12,709 $14,341
09/91 $13,210 $14,898
12/91 $13,616 $15,399
03/92 $13,702 $15,445
06/92 $14,222 $16,031
09/92 $14,640 $16,458
12/92 $14,924 $16,758
03/93 $15,584 $17,380
06/93 $16,092 $17,948
09/93 $16,636 $18,555
12/93 $16,880 $18,815
03/94 $15,820 $17,782
05/94 $16,026 $18,089
<FN>
+ Illustration of $10,000 invested in Class A shares on June 1, 1987 as-
suming deduction of the maximum 4.5% sales charge at the time of invest-
ment and reinvestment of dividends and capital gains at net asset value
through May 31, 1994.
</TABLE>
LEHMAN MUNICIPAL BOND INDEX -- The Lehman Municipal Bond Index is an un-
managed, broad-based index which includes about 8,000 tax-free bonds and
reflects approximately $300 billion of market capitalization.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results of Class A shares.
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE -- CLASS B SHARES NET ASSET VALUE
CAPITAL
YEAR ENDED RETURN OF GAINS
DIVIDENDS TOTAL
MAY 31 BEGINNING ENDING CAPITAL PAID PAID
RETURN*
<S> <C> <C> <C> <C> <C>
<C>
11/6/92-
5/31/93 $ 9.97 $10.40 $0.01 $0.08 $0.29
8.31%
1994 $10.40 $ 9.82 -- $0.21 $0.49
0.84%
Total $0.01 $0.29 $0.78
Cumulative Total Return -- (11/6/92 through 5/31/94)
9.22%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the contin-
gent deferred sales charge ("CDSC").
</TABLE>
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES
<TABLE>
<CAPTION>
WITHOUT CDSC WITH CDSC***
WITH WITHOUT WITH
WITHOUT
FEE WAIVER FEE WAIVER FEE WAIVER
FEE WAIVER
AND EXPENSE AND EXPENSE AND EXPENSE
AND EXPENSE
REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
REIMBURSEMENT
<S> <C> <C> <C>
<C>
Year Ended 5/31/94 0.84% 0.59% (3.41)%
(3.65)%
Inception 11/6/92
through 5/31/94 5.79% 5.50% 3.34%
3.05%
<FN>
** All average annual total return figures shown reflect reinvestment
of dividends and capital gains at net asset value. The Fund waived
investment advisory, administration, custodian, distributor and
transfer agent fees from November 6, 1992 to May 31, 1994. A share-
holder's actual return for periods during which waivers were in ef-
fect would be the greater of the two numbers shown.
*** Average annual total return figures assume the deduction of the max-
imum applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: The Fund began offering Class B shares on November 6, 1992.
Class B shares are subject to a 4.5% CDSC and service and distribu-
tion fees of 0.15% and 0.50%, respectively, of the value of the av-
erage daily net assets attributable to that class.
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS B)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Ari-
zona Municipals Fund's Class B shares on November 6, 1992 through May 31,
1994 as compared with the growth of a $10,000 investment in Lehman Munici-
pal Bond Index. The plot points used to draw the line graph were as fol-
lows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
GROWTH OF $10,000 INVESTMENT IN
THE
INVESTED IN CLASS B LEHMAN
SHARES OF THE MUNICIPAL
MONTH ENDED FUND BOND INDEX
<S> <C> <C>
10/31/92 -- $10,000
11/06/92 $10,000 --
11/92 $10,129 $10,179
12/92 $10,243 $10,283
03/93 $10,680 $10,664
06/93 $11,014 $11,013
09/93 $11,374 $11,385
12/93 $11,528 $11,545
03/94 $10,790 $10,911
05/94 $10,527 $11,100
<FN>
+ Illustration of $10,000 invested in Class B shares on November 6, 1992
assuming deduction of the maximum CDSC at the time of redemption and re-
investment of dividends and capital gains at net asset value through May
31, 1994.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on May
31, 1994).
</TABLE>
LEHMAN MUNICIPAL BOND INDEX -- The Lehman Municipal Bond Index is an
unmanaged, broad-based index which includes about 8,000 tax-free bonds
and reflects approximately $300 billion of market capitalization.
Index information is available at month-end only; therefore, the clos-
est month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results of Class B shares.
PORTFOLIO HIGHLIGHTS (UNAUDITED)
MAY 31, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Arizona Municipals Fund's in-
vestment securities held at May 31, 1994 by industry classification. The
pie is broken in pieces representing industries in the following percent-
ages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
INDUSTRIAL CONTROL 6.8%
GENERAL OBLIGATION 32.5%
UTILITY REVENUE 9.2%
TRANSPORTATION 5.4%
HOSPITAL 4.8%
OTHER NET ASSETS AND LIABILITIES 0.1%
POLLUTION CONTROL 9.5%
HOUSING 12.1%
EDUCATION 19.6%
</TABLE>
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS
<TABLE>
<CAPTION>
STANDARD & PERCENTAGE OF
MOODY'S POOR'S VALUE
<S> <C> <C> <C>
Aaa or AAA 52.2%
Aa AA 24.8
A A 7.6
Baa BBB 11.5
Ba BB 1.4
NR NR 2.5
100.0%
</TABLE>
AVERAGE MATURITY 20.25 years
PORTFOLIO OF INVESTMENTS
MAY 31, 1994
KEY TO INSURANCE ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
CAPGTY -- Capital Guaranty
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Federal Security Assurance
MBIA -- Municipal Bond Investors Assurance
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED)
MARKET
VALUE
FACE VALUE MOODY'S S&P (NOTE
1)
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- 99.9%
ARIZONA-- 93.4%
Arizona Health Facilities Author-
ity, Hospital Revenue Refunding,
(Phoenix Baptist Hospital), (MBIA
Insured),
$ 500,000 6.250% 9/1/11 Aaa AAA $
501,875
Arizona State, Certificates of
Participation,
(FSA Insured),
60,000 6.625% 9/1/08 Aaa AAA
63,000
Arizona State, Certificates of
Participation
Series B:
(AMBAC Insured),
520,000 6.250% 9/1/10 Aaa AAA
524,550
(CAPGTY Insured),
1,200,000 5.000% 5/1/10 Aaa AAA
1,066,500
Arizona State, Municipal Financ-
ing Project, Certificates of Par-
ticipation, Series 20,
(MBIA Insured):
250,000 7.625% 8/1/06 Aaa AAA
295,313
50,000 7.700% 8/1/10 Aaa AAA
57,375
Arizona State, Power Authority,
Power Resources, Reference Reve-
nue, (Hoover Uprating Project),
(MBIA Insured),
750,000 5.250% 10/1/17 Aaa AAA
667,500
Arizona State Transportation
Board, Excise Tax Revenue, Mari-
copa County, (MBIA Insured),
265,000 7.000% 7/1/05 Aaa AAA
286,531
Arizona State Transportation
Board, Highway Revenue, Series A,
1,500,000 6.000% 7/1/08 Aa AA
1,533,750
Arizona State University, (Reve-
nue Refunding System),
1,855,000 6.000% 7/1/08 A1 AA
1,880,506
Arizona Student Loan Revenue Ac-
quisition Authority, Series B,
750,000 6.600% 5/1/10 A NR
750,000
Avondale, Arizona, Municipal De-
velopment Corporation, Municipal
Facility Revenue,
(MBIA Insured),
300,000 6.625% 7/1/11 Aaa AAA
310,875
Casa Grande, Arizona, Industrial
Development Authority, Multifam-
ily Housing Center:
(Center Park Apartments),
250,000 7.125% 12/1/10 NR AAA
257,500
(Quail Gardens Apartments),
250,000 7.125% 12/1/10 NR AAA
257,500
Central Arizona, Water Conserva-
tion District, Central Arizona
Project, Series A,
750,000 5.500% 11/1/10 A1 AA-
715,313
Chandler, Arizona, Water & Sewer
Revenue Refunding, (FGIC In-
sured),
1,000,000 6.250% 7/1/13 Aaa AAA
1,008,750
Cochise County, Arizona, Certifi-
cates of Participation, (MBIA In-
sured),
450,000 6.750% 8/1/03 Aaa AAA
470,813
Cochise County, Arizona, Unified
School District, (FGIC Insured),
750,000 7.500% 7/1/10 Aaa AAA
859,687
Coconino County, Arizona, Pollu-
tion Control Corporation, Revenue
Refunding, Arizona Public Service
Company, Series A,
1,000,000 5.875% 8/15/28 Baa2 BBB
888,750
Gila County, Arizona, Industrial
Development Authority, Pollution
Control, Asarco 87,
1,630,000 8.900% 7/1/06 Baa2 BBB
1,823,562
Gilbert, Arizona, Improvement
District No. 011, (FGIC Insured),
250,000 7.600% 1/1/01 Aaa AAA
258,125
Glendale, Arizona, Municipal
Property Corporation, (MBIA In-
sured),
900,000 7.000% 7/1/09 Aaa AAA
959,625
Maricopa County, Arizona, Alham-
bra Elementary School District,
(AMBAC Insured),
1,000,000 5.625% 7/1/23 Aaa AAA
1,025,000
Maricopa County, Arizona, Hospi-
tal Revenue Corporation, (Sun
Health Corporation),
1,000,000 8.125% 4/1/12 Baa BB+
1,056,250
Maricopa County, Arizona, Indus-
trial Development Authority, Hos-
pital Facilities Revenue:
(John C. Lincoln Hospital), (FSA
Insured),
400,000 7.500% 12/1/13 Aaa AAA
443,000
(Mercy Health System Revenue),
Series A, (MBIA Insured),
95,000 7.125% 7/1/07 Aaa AAA
104,975
Maricopa County, Arizona, Indus-
trial Development Authority,
Statewide Single Family Mortgage
Revenue, (GNMA Mortgage-Backed
Securities Program),
420,000 8.050% 9/1/23 Aaa NR
443,625
Maricopa County, Arizona, Indus-
trial Development Authority,
Statewide Single Family Mortgage
Revenue, Series A,
340,000 7.500% 8/1/12 Aa NR
345,100
Maricopa County, Arizona, Indus-
trial Development, Series A, Mul-
tifamily Housing, Revenue, (FHA
Insured), Mortgage Loan,
1,000,000 5.900% 7/1/24 NR AAA
935,000
Maricopa County, Arizona, Pollu-
tion Control Corporation, Public
Service Company, Series A, (Palo
Verde Project),
1,000,000 6.375% 8/15/23 Ba2 BB
917,500
Maricopa County, Arizona, Union
School District #3, (Temple Ele-
mentary),
(AMBAC Insured),
800,000 6.000% 7/1/13+ Aaa AAA
788,000
Maricopa County, Arizona, Union
School District #8, (Osborn Ele-
mentary),
1,000,000 7.500% 7/1/09 A1 A
1,151,250
Maricopa County, Arizona, Union
School District #11, (Peoria),
(MBIA Insured):
1,000,000 6.400% 7/1/10 Aaa AAA
1,027,500
500,000 7.000% 7/1/10 Aaa AAA
537,500
Maricopa County, Arizona, Union
School District #14, (Creighton
School Improvement Project 1990),
Series C, (FGIC Insured),
650,000 6.500% 7/1/08 Aaa AAA
697,125
Maricopa County, Arizona, Union
School District #80, (Chandler
School),
(FGIC Insured),
1,000,000 5.800% 7/1/12 Aaa AAA
966,250
Maricopa County, Arizona, Union
School District #98, (Fountain
Hills), (FGIC Insured),
100,000 6.625% 7/1/10 Aaa AAA
103,875
Maricopa County, Arizona, Union
School District #216, (FGIC In-
sured),
1,000,000 6.700% 7/1/11 Aaa AAA
1,087,500
Maricopa County, Arizona Stadium,
District Revenue, Series A, (MBIA
Insured),
1,000,000 5.500% 7/1/13 Aaa AAA
935,000
Mohave County, Arizona, Indus-
trial Development Authority,
(Citizens Utility Project), Se-
ries B,
1,000,000 7.050% 8/1/20 NR AAA
1,085,000
Navajo County, Arizona, Pollution
Control Corporation,
2,500,000 5.875% 8/15/28 Baa2 BBB
2,203,125
Navajo County, Arizona, Union
School District #32, Series A,
(Blue Ridge),
(CAPGTY Insured),
500,000 6.000% 7/1/09+ Aaa AAA
499,375
Peoria, Arizona, Industrial De-
velopment Authority, (Sierra
Winds Life Care Project),
580,000 10.750% 1/1/18 NR NR
237,800
Phoenix, Arizona, Civic Improve-
ment Corporation, Excise Tax Rev-
enue,
(New City Hall Project):
1,750,000 5.500% 7/1/24 A1 AA-
1,544,375
1,250,000 5.100% 7/1/28 Aa AA+
1,046,875
Phoenix, Arizona, Industrial De-
velopment Authority, (John C.
Lincoln Hospital & Health),
600,000 6.000% 12/1/10 NR BBB+
558,750
Phoenix, Arizona, Industrial De-
velopment Authority, Home Mort-
gage Revenue,
(GNMA Project), Series B,
110,000 7.700% 10/1/11 NR AAA
113,300
Phoenix, Arizona, Industrial De-
velopment Authority, Multifamily
Housing, Revenue, (Woodstone &
Silver Springs),
1,000,000 6.250% 4/1/23 NR AA
988,750
Phoenix, Arizona, Industrial De-
velopment Mortgage Revenue,
(Chris Ridge Village Project),
(FHA Insured),
650,000 6.750% 11/1/12 NR AAA
678,438
Phoenix, Arizona, Refunding, Se-
ries C,
1,555,000 6.000% 7/1/09 Aa AA+
1,576,381
Phoenix, Arizona, Special Assign-
ment, Central Avenue Improvement
District,
400,000 7.000% 1/1/06 A A+
423,000
Pima County, Arizona, Industrial
Development Authority, Health
Care Corporation Revenue, (Caron-
delet State, St. Joseph's and
Mary's), (MBIA Insured),
70,000 8.000% 7/1/13 Aaa AAA
78,050
Pima County, Arizona, Industrial
Development Authority, Multifam-
ily Revenue:
(Eastside Place Project),
250,000 7.125% due 12/1/10 NR AAA
258,437
(Rancho Mirage Project),
490,000 7.050% 4/1/22 NR AA
504,087
Pima County, Arizona, Industrial
Development Authority, Single
Family Mortgage Revenue,
1,500,000 6.750% 11/1/27 NR AAA
1,515,000
Pima County, Arizona, Industrial
Development Authority, (Tucson
Medical Center), Series A, (MBIA
Insured),
875,000 5.400% 4/1/09 Aaa AAA
824,687
Pima County, Arizona, Sewer Reve-
nue Refunding, Prerefunded
7/1/02,
(AMBAC Insured),
975,000 6.200% 7/1/09 Aaa AAA
1,034,719
Pima County, Arizona, Unified
School District, Series E,
(Tuscon Project 1989),
(FGIC Insured),
1,000,000 6.750% 7/1/10 Aaa AAA
1,070,000
Pima County, Arizona, Unified
School District #1, (Tucson),
(FGIC Insured),
1,000,000 7.500% 7/1/10 Aaa AAA
1,146,250
Pinal County, Arizona, Industrial
Development Authority, Industrial
Development Revenue, (Casa Grande
Regional Medical Center),
715,000 9.000% 12/1/13 NR NR
749,856
Prescott Valley, Arizona, Im-
provement District, Sewer Collec-
tion System, Roadway Repair,
250,000 7.900% 1/1/12 NR BBB
267,500
Salt River, Arizona, Agriculture
Improvement & Power District,
(Electric System Project),
Series A,
1,500,000 6.000% 1/1/31 Aa AA
1,432,500
Salt River, Arizona, Linked
Stripes & Stars, (Agriculture
Project),
3,000,000 5.050% 1/1/12 Aa AA
2,658,750
Scottsdale, Arizona, Government
Obligation Bonds, Series B,
500,000 6.000% 7/1/11 Aa1 AA
523,750
Scottsdale, Arizona, Industrial
Development Authority, Hospital
Revenue, (Scottsdale Memorial
Hospital), Series A, (AMBAC In-
sured),
70,000 8.500% 9/1/17 Aaa AAA
78,313
Scottsdale, Arizona, Mountain
Communication Facilities, Dis-
trict 3, Series A,
500,000 6.200% 7/1/17 NR A
456,875
Sierra Vista, Arizona, Industrial
Development Authority, Multifam-
ily FNMA, (Steppes Apartment
Project),
250,000 7.125% 12/1/10 NR AAA
258,437
Tempe, Arizona, Industrial Devel-
opment Authority, (Friendship
Village):
Refunding, Series A,
350,000 6.200% 12/1/03 NR NR
338,188
Series A,
250,000 6.250% 12/1/04 NR NR
240,312
Tucson, Arizona, Airport Author-
ity, Inc.,
(MBIA Insured):
500,000 5.400% 6/1/06 Aaa AAA
486,250
500,000 5.500% 6/1/07 Aaa AAA
485,625
Tucson, Arizona, Certificates of
Participation,
1,000,000 6.375% 7/1/09+ Baa1 AA
987,500
Tucson, Arizona, General Obliga-
tion Bonds:
1,500,000 6.100% 7/1/12 Aaa AAA
1,490,625
(FGIC Insured),
80,000 6.875% 7/1/14 A1 AA-
81,600
Series 1984-G,
1,000,000 6.250% 7/1/18 Aaa AAA
1,007,500
Tucson, Arizona, Local Develop-
ment Corporation, (FGIC Insured),
1,275,000 6.250% 7/1/12 Aaa AAA
1,289,344
Tucson, Arizona, (Water Revenue
Project 1984),
1,000,000 5.250% 7/1/18 A1 A+
880,000
Yuma County, Arizona, Industrial
Development Authority, Multifam-
ily Housing, (Alexandra Sands
Apartment Project), (FHA In-
sured),
500,000 7.700% 12/1/29 NR AAA
516,250
59,617,424
PUERTO RICO -- 6.5%
Commonwealth of Puerto Rico,
(AMBAC Insured),
2,500,000 5.850% 7/1/15 Aaa AAA
2,450,000
Commonwealth of Puerto Rico, Gen-
eral Obligation Bonds,
300,000 8.000% 7/1/08 Baa1 A
336,000
Commonwealth of Puerto Rico,
Urban Housing Revenue Bonds,
475,000 7.875% 10/1/04 Baa BBB
530,813
Puerto Rico Municipal Finance
Agency,
Series A,
540,000 8.250% 7/1/08 Baa1 A-
600,750
Puerto Rico Public Building Au-
thority Guaranteed, Public Health
& Education Facility, Series M,
250,000 5.750% 7/1/16 Baa1 A
234,687
4,152,250
VIRGIN ISLANDS -- 0.0%
Virgin Islands, Public Finance
Authority Revenue, Series A, (Es-
crowed to Maturity),
15,000 7.300% 10/1/18 Aaa AAA
16,763
TOTAL INVESTMENTS (Cost $64,970,180*) 99.9%
63,786,437
TOTAL OTHER ASSETS AND LIABILITIES (NET) 0.1
71,940
NET ASSETS 100.0%
$63,858,377
<FN>
* Aggregate cost for Federal tax purposes.
+ When-issued security (see Note 1).
</TABLE>
See Notes to Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $64,970,180) (Note 1)
See accompanying schedule
$63,786,437
Cash
7,547
Interest receivable
1,456,040
Receivable for investment securities sold
928,960
Receivable for Fund shares sold
134,007
TOTAL ASSETS
66,312,991
LIABILITIES:
Payable for investment securities purchased $2,277,089
Dividends payable 40,726
Investment advisory fee payable (Note 2) 37,480
Administration fee payable (Note 2) 21,417
Distribution fee payable (Note 3) 8,047
Service fees payable (Note 3) 8,046
Custodian fees payable (Note 2) 4,000
Payable for Fund shares redeemed 2,500
Transfer agent fees payable (Note 2) 2,209
Accrued expenses and other payables 53,100
TOTAL LIABILITIES
2,454,614
NET ASSETS
$63,858,377
NET ASSETS CONSIST OF:
Distributions in excess of net investment income
$(40,726)
Accumulated net realized gain on investments sold
416,358
Unrealized depreciation of investments
(1,183,743)
Par value
6,505
Paid-in capital in excess of par value
64,659,983
TOTAL NET ASSETS
$63,858,377
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($44,552,212 / 4,538,247 shares of common stock
outstanding) $
9.82
Maximum offering price per share ($9.82 / 0.955)
(based on a sales charge of 4.5% of the offering
price on May 31, 1994)
$10.28
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($19,306,165 / 1,966,896 shares of common stock
outstanding) $
9.82
<FN>
+ Redemption price per share is equal to Net Asset Value less any applica-
ble contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest
$3,678,999
EXPENSES:
Investment advisory fee (Note 2) $ 212,048
Administration fee (Note 2) 121,170
Service fees (Note 3) 91,131
Distribution fee (Note 3) 75,884
Shareholder reports expense 58,292
Legal and audit fees 48,765
Custodian fees (Note 2) 25,903
Transfer agent fees (Notes 2 and 4) 23,876
Directors' fees and expenses (Note 2) 14,343
Other 43,283
Fees waived by investment adviser and administrator
(Note 2) (134,321)
TOTAL EXPENSES
580,374
NET INVESTMENT INCOME
3,098,625
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on investments sold during the
year
1,016,134
Net unrealized depreciation of investments during
the year
(3,755,771)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(2,739,637)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$358,988
</TABLE>
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
5/31/94 5/31/93
<S> <C> <C>
Net investment income $3,098,625
$2,458,475
Net realized gain on investments sold during the
year 1,016,134
1,101,821
Net unrealized appreciation/(depreciation) on
investments during the year (3,755,771)
1,663,297
Net increase in net assets resulting from opera-
tions 358,988
5,223,593
Distributions to shareholders from net invest-
ment income:
Class A (2,296,168)
(2,346,194)
Class B (685,607)
(112,281)
Distributions in excess of net investment in-
come:
Class A (31,362) --
Class B (9,364) --
Distributions to shareholders from net realized
gain on investments:
Class A (898,488)
(322,672)
Class B (321,560)
(14,295)
Distributions to shareholders from capital:
Class A --
(64,850)
Class B --
(3,104)
Net increase in net assets from Fund share
transactions (Note 6):
Class A 3,081,032
3,056,850
Class B 12,457,664
8,027,003
Net increase in net assets 11,655,135
13,444,050
NET ASSETS:
Beginning of year 52,203,242
38,759,192
End of year (including distributions in excess
of net investment income of $40,726 at May 31,
1994) $ 63,858,377
$52,203,242
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
5/31/94# 5/31/93
5/31/92
<S> <C> <C> <C>
Net asset value, beginning of year $10.40 $9.84
$9.63
Income from investment operations:
Net investment income+ 0.54 0.58
0.59
Net realized and unrealized gain/(loss) on in-
vestments (0.38) 0.65
0.32
Total from investment operations 0.16 1.23
0.91
Less distributions:
Dividends from net investment income (0.52) (0.57)
(0.60)
Distributions in excess of net investment in-
come (0.01) -- -
- - -
Distributions from net realized capital gains (0.21) (0.08)
(0.06)
Distributions from capital -- (0.02)
(0.04)
Total distributions (0.74) (0.67)
(0.70)
Net asset value, end of year $9.82 $10.40
$9.84
Total return++ 1.33% 12.92%
9.86%
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $44,552 $44,055
$38,759
Ratio of operating expenses to average net as-
sets+++ 0.83% 0.77%
0.68%
Ratio of net investment income to average net
assets 5.24% 5.66%
6.02%
Portfolio turnover rate 49% 44%
44%
<FN>
* The Fund commenced operations on June 1, 1987. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
+ Net investment income before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the years ended May 31, 1994,
1993, 1992, 1991, 1990, 1989 and 1988, were $0.52, $0.54, $0.57,
$0.58, $0.51, $0.16 and $0.27, respectively.
++ Total return represents aggregate total return for the years indicated
and does not reflect any applicable sales charges.
+++ Annualized expense ratios before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the years ended May 31, 1994,
1993, 1992, 1991, 1990, 1989 and 1988, were 1.05%, 1.10%, 0.90%,
1.13%, 2.13%, 6.20% and 2.58%, respectively.
(a) Not covered by Coopers & Lybrand's report.
# The per share amounts have been calculated using the monthly average
shares method, which more appropriately presents per share data for
this period since use of the undistributed method did not accord with
results of operation.
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR
ENDED ENDED ENDED
ENDED
5/31/91 5/31/90 5/31/89(A)
5/31/88*(A)
<S> <C> <C> <C>
<C>
Net asset value, beginning of year $9.49 $9.66 $9.22
$9.60
Income from investment operations:
Net investment income+ 0.68 0.71 0.82
0.40
Net realized and unrealized gain/(loss)
on investments 0.14 (0.12) 0.31
(0.19)
Total from investment operations 0.82 0.59 1.13
0.21
Less distributions:
Dividends from net investment income (0.68) (0.71) (0.69)
(0.40)
Distributions in excess of net invest-
ment income -- -- --
(0.19)
Distributions from net realized capital
gains -- (0.05) --
- - --
Distributions from capital -- -- --
- - --
Total distributions (0.68) (0.76) (0.69)
(0.59)
Net asset value, end of year $9.63 $9.49 $9.66
$9.22
Total return++ 8.92% 6.31% 12.70%
2.32%
Ratios to average net assets/supplemen-
tal data:
Net assets, end of year (in 000's) $28,373 $18,167 $4,903
$1,626
Ratio of operating expenses to average
net assets+++ 0.14% 0.03% 0.34%
0.16%
Ratio of net investment income to aver-
age net assets 7.06% 7.34% 7.23%
3.95%
Portfolio turnover rate 49% 86% 63%
53%
<FN>
* The Fund commenced operations on June 1, 1987. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
+ Net investment income before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the years ended May 31, 1994,
1993, 1992, 1991, 1990, 1989 and 1988, were $0.52, $0.54, $0.57,
$0.58, $0.51, $0.16 and $0.27, respectively.
++ Total return represents aggregate total return for the years indicated
and does not reflect any applicable sales charges.
+++ Annualized expense ratios before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the years ended May 31, 1994,
1993, 1992, 1991, 1990, 1989 and 1988, were 1.05%, 1.10%, 0.90%,
1.13%, 2.13%, 6.20% and 2.58%, respectively.
(a) Not covered by Coopers & Lybrand's report.
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED ENDED
5/31/94#
5/31/93*
<S> <C> <C>
Net asset value, beginning of period $10.40
$9.97
Income from investment operations:
Net investment income+ 0.49
0.31
Net realized and unrealized gain/(loss) on in-
vestments (0.37)
0.50
Total from investment operations 0.12
0.81
Less distributions:
Dividends from net investment income (0.48)
(0.29)
Distributions in excess of net investment income (0.01) -
- - -
Distributions from net realized capital gains (0.21)
(0.08)
Distributions from capital --
(0.01)
Total distributions (0.70)
(0.38)
Net asset value, end of period $9.82
$10.40
Total return++ 0.84%
8.31%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $19,306
$8,149
Ratio of operating expenses to average net as-
sets+++ 1.35%
1.33%**
Ratio of net investment income to average net
assets 4.73%
5.10%**
Portfolio turnover rate 49%
44%
<FN>
* The Fund commenced selling Class B shares on November 6, 1992.
** Annualized.
+ Net investment income before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the year ended May 31, 1994,
and for the period ended May 31, 1993, were $0.47 and $0.29, respec-
tively.
++ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charges.
+++ Annualized expense ratios before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the year ended May 31, 1994,
and for the period ended May 31, 1993, were 1.57% and 1.66%, respec-
tively.
# The per share amounts have been calculated using the monthly average
shares method, which more appropriately presents per share data for
this period since use of the undistributed method did not accord with
results of operation.
</TABLE>
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENT
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Arizona Municipals Fund Inc. (the "Fund") was incor-
porated under the laws of the State of Maryland on May 4, 1987. The Fund
is a diversified, open-end management investment company registered with
the Securities and Exchange Commission under the Investment Company Act of
1940, as amended (the "1940 Act"). As of November 6, 1992, the Fund of-
fered two classes of shares: Class A shares and Class B shares. Class A
shares are sold with a front-end sales charge. Class B shares may be sub-
ject to a contingent deferred sales charge ("CDSC"). Both classes of
shares have identical rights and privileges except with respect to the ef-
fect of the respective sales charges, the distribution and/or service fees
borne by each class, expenses allocable exclusively to each class, voting
rights on matters affecting a single class, the exchange privilege of each
class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
Portfolio valuation: Securities are valued by The Boston Company
Advisors, Inc. ("Boston Advisors") after consultation with an independent
pricing service (the "Service") approved by the Fund's Board of Directors.
Valuations furnished by the Service are based upon a computerized matrix
system and/or appraisals based in each case upon such factors as yields or
prices of municipal bonds of comparable quality, type or issue, coupon
rate, maturity and rating, indications as to value from dealers, and gen-
eral market conditions and quotations from recognized municipal securities
dealers. The Fund's officers, under the general supervision of its Board
of Directors, regularly review procedures used and valuations provided by
the Service. Securities for which market quotations are readily available
are valued at market value, which is the last reported sale price or, if
no sales are reported on that day, at the mean between the latest avail-
able bid and asked prices. Securities having 60 days or less remaining to
maturity at the time of purchase are valued at their amortized cost, which
approximates market value.
Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Interest income is recorded on the ac-
crual basis. Realized gains and losses from securities sold are recorded
on the identified cost basis. Investment income and realized and unreal-
ized gains and losses are allocated based upon relative net assets of each
class.
Securities purchased or sold on a when-issued or delayed-delivery basis
may be settled a month or more after the trade date. Interest income is
not accrued until settlement date.
Dividends and distributions to shareholders: It is the policy of the Fund
to declare dividends from net investment income determined on a class
level, daily, and to pay such dividends on the last business day of the
Smith Barney Inc. ("Smith Barney") statement month. Distributions from net
realized capital gains determined on a Fund basis are declared and paid
annually, after the end of the fiscal year in which earned. In addition,
in order to avoid the application of a 4% nondeductible excise tax on cer-
tain undistributed amounts of ordinary income and capital gains, the Fund
may make an additional distribution shortly before December 31st of each
year of undistributed ordinary income or capital gains and expects to make
any other distributions as are necessary to avoid this tax. To the extent
that net realized capital gains can be offset by capital loss carryovers,
it is the policy of the Fund not to distribute such gains. Income distri-
butions and capital gain distributions on a Fund level are determined in
accordance with income tax regulations which may differ from generally ac-
cepted accounting principles. These differences are primarily due to dif-
fering treatments of income and gains on various investment securities
held by the Fund, timing differences and differing characterization of
distributions made by the Fund as a whole.
Permanent differences incurred during the year ended May 31, 1994,
resulted from the reclassification of distributions from income to
capital gains.
Federal income taxes: It is the policy of the Fund to qualify as a regu-
lated investment company, which distributes exempt-interest dividends, by
complying with the requirements of the Internal Revenue Code applicable to
regulated investment companies and by making all required distributions to
its shareholders. Therefore, no Federal income tax provision is required.
Reclassifications: During the current period, the Fund adopted Statement
of Position 93-2 "Determination, Disclosure and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions
by Investment Companies." Accordingly, certain reclassifications have been
made to the components of capital in the Statement of Net Assets to con-
form with the accounting and reporting guidelines of this statement.
Distributions in excess of book basis accumulated realized gains or undis-
tributed net investment income that were the result of permanent book and
tax accounting differences have been reclassified to paid-in capital. In
addition, amounts distributed in excess of undistributed net investment
income as determined for financial statement purposes but as distributions
from net investment income or net realized gains for tax purposes, previ-
ously reported as distributions from paid-in capital, have been reclassi-
fied to reflect the tax characterization. Accordingly, amounts as of May
31, 1993, have been restated to reflect an increase in paid-in capital, an
increase in distributions in excess of net investment income and a de-
crease in accumulated net realized gains of $385,203, $116,850, and
$268,353, respectively. The Statement of Changes in Net Assets and Finan-
cial Highlights for prior periods have not been restated to reflect this
change in presentation. Net investment income, net realized gains, and net
assets on a book and tax basis were not affected by this change.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors ("Greenwich Street Advisors"),
a division of Mutual Management Corp., which is controlled by Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The
Travelers Inc. Under the Advisory Agreement, the Fund pays a monthly fee
at the following annual rates: .35% of the value of the Fund's average
daily net assets up to $500 million and .32% of the value of the Fund's
average daily net assets in excess of $500 million.
Prior to April 20, 1994, the Fund was party to an administration agree-
ment, with Boston Advisors, an indirect wholly owned subsidiary of Mellon
Bank Corporation ("Mellon"). Under this agreement the Fund paid a monthly
fee at the following annual rates: .20% of the value of the Fund's average
daily net assets up to $500 million and .18% of the value of the Fund's
average daily net assets in excess of $500 million.
As of the close of business on April 20, 1994, Smith, Barney Advisers,
Inc. ("SBA"), which is controlled by Holdings, succeeded Boston Advisors
as the Fund's administrator. The new administration agreement contains
substantially the same terms and conditions, including the level of fees,
as the predecessor agreement.
As of the close of business on April 20, 1994, the Fund also entered into
a sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, Boston Advisors
is paid a portion of the fee paid by the Fund to SBA at a rate agreed upon
from time to time between SBA and Boston Advisors.
From time to time, Greenwich Street Advisors and the Fund's administrator
may voluntarily waive a portion or all of the fees otherwise payable to it
and reimburse expenses. For the year ended May 31, 1994, Greenwich Street
Advisors and Boston Advisors, the Fund's prior administrator, voluntarily
waived fees in the amount of $85,477 and $48,844, respectively.
Smith Barney Inc. ("Smith Barney") acts as exclusive distributor of the
Fund's shares. For the year ended May 31, 1994, Smith Barney received from
investors $77,285 representing commissions (sales charges) on sales of
Class A shares.
A CDSC is generally payable by a shareholder in connection with the re-
demption of Class B shares within five years after the date of purchase.
In circumstances in which the CDSC is imposed, the amount of the charge
ranges between 4.5% and 1% of net asset value depending on the number of
years since the date of purchase. For the year ended May 31, 1994, Smith
Barney received from shareholders $19,460 in CDSCs on the redemption of
Class B shares.
No officer, director or employee of Smith Barney or of any parent or sub-
sidiary of Smith Barney receives any compensation from the Fund for serv-
ing as a Director or officer of the Fund. The Fund pays each Director who
is not an officer, director, or employee of Smith Barney or any of its af-
filiates $1,000 per annum plus $100 per meeting attended and reimburses
each such Director for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Fund's custodian. The Shareholder Services Group,
Inc., a subsidiary of First Data Corporation, serves as the Fund's trans-
fer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a dis-
tribution agreement with the Fund, and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, as amended, the Fund has
adopted a Services and Distribution Plan (the "Plan"). Under this Plan,
the Fund compensates Smith Barney for servicing shareholder accounts for
both Class A and Class B shareholders, and covers expenses incurred in
distributing Class B shares. Smith Barney is paid an annual service fee
with respect to Class A and Class B shares of the Fund at the rate of .15%
of the value of the average daily net assets of each respective class of
shares. Smith Barney is also paid an annual distribution fee with respect
to Class B shares at the rate of .50% of the value of the average daily
net assets attributable to those shares. For the year ended May 31, 1994,
the Fund incurred $68,366 in service fees for Class A shares. During the
year ended May 31, 1994, the Fund incurred $22,765 and $75,884 in service
fees and distribution fees, respectively, for Class B shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class
of shares are charged to that class' operations. In addition to the above
servicing and distribution fees, class specific operating expenses include
transfer agent fees of $16,209 and $7,667 for Class A and Class B shares,
respectively.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, during the year ended May 31, 1994,
amounted to $43,254,116 and $29,312,795, respectively.
At May 31, 1994, aggregate gross unrealized appreciation for all securi-
ties in which there was an excess of value over tax cost amounted to
$1,336,945, and aggregate unrealized depreciation for all securities in
which there was an excess of tax cost over value amounted to $2,520,688.
6. COMMON STOCK
At May 31, 1994, 500 million shares of $.001 par value common stock
divided into two classes, (Class A and Class B), were authorized. Changes
in common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
5/31/94 5/31/93
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 714,159 $ 7,417,542 683,261 $
6,953,280
Issued as reinvestment of
dividends 194,047 2,027,833 175,026
1,775,062
Redeemed (606,934) (6,364,343) (558,906)
(5,671,492)
Net increase 301,272 $ 3,081,032 299,381 $
3,056,850
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
5/31/94 5/31/93
CLASS B SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
Sold 1,228,851 $ 12,898,167 779,596 $
7,983,536
Issued as reinvestment of
dividends 60,003 625,441 6,873
70,770
Redeemed (105,729) (1,065,944) (2,698)
(27,303)
Net increase 1,183,125 $ 12,457,664 783,771 $
8,027,003
<FN>
* The Fund commenced selling Class B shares on November 6, 1992. Any
shares outstanding prior to November 6, 1992 were designated as Class A
shares.
</TABLE>
7. CONCENTRATION OF CREDIT
The Fund primarily invests in debt obligations issued by the State of
Arizona and its political subdivisions, agencies and public authorities to
obtain funds for various public purposes. The Fund is more susceptible to
factors adversely affecting issuers of Arizona municipal securities than
is a municipal bond fund that is not concentrated in these issuers to the
same extent.
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated
Line of Credit Agreement (the "Agreement") dated April 30, 1992, primarily
for temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of securi-
ties. The Fund may borrow up to the lesser of $25 million or 10% of its
net assets. Interest is payable either at the bank's Money Market Rate or
the London Interbank Offered Rate (LIBOR) plus .375% on an annualized
basis. The Fund and the other affiliated entities are charged an aggregate
commitment fee of $125,000 which is allocated equally among each of the
participants. The Agreement requires, among other provisions, each partic-
ipating fund to maintain a ratio of net assets (not including funds bor-
rowed pursuant to the Agreement) to aggregate amount of indebtedness pur-
suant to the Agreement of no less than 5 to 1. At May 31, 1994, the Fund
had no outstanding borrowings under this Agreement. During the year ended
May 31, 1994, the Fund had an average outstanding daily balance of $26,575
with interest rates ranging from 3.00% to 3.69%. Interest expense totalled
$916 for the year ended May 31, 1994.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC.:
We have audited the accompanying statement of assets and liabilities of
Smith Barney Shearson Arizona Municipals Fund Inc., including the schedule
of portfolio investments, as of May 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These fi-
nancial 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 fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 1994 by correspondence with the custodian
and brokers. 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 Shearson Arizona Municipals Fund Inc. as of May 31, 1994,
the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the fi-
nancial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles.
Coopers & Lybrand
Boston, Massachusetts
July 13, 1994
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED MAY 31, 1994
The amount of long term capital gain for the fiscal year ended May 31,
1994 was as follows:
The Fund ............................................... $741,395
Of the dividends paid by the Fund from net investment income for the year
ended May 31, 1994, 100% is tax-exempt for regular Federal income tax pur-
poses.
The above figure may differ from those cited elsewhere in this report due
to differences in the calculations of income and capital gains for Securi-
ties and Exchange Commission (book) purposes and Internal Revenue Service
(tax) purposes.
ARIZONA MUNICIPALS FUND INC.
DIRECTORS
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
James J. Crisona
Robert A. Frankel
Dr. Paul Hardin
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Lawrence T. McDermott
Vice President and
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney Shearson Arizona Municipals Fund Inc. It is not authorized
for distribution to prospective investors unless accompanied or preceded
by an effective Prospectus for the Fund which contains information con-
cerning the Fund's investment policies, fees and expenses as well as other
pertinent information.
[Logo]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 115, 208
FD2223 G4
