1995
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing the opening of a canyon in Arizona.
SMITH BARNEY
ARIZONA
MUNICIPALS
FUND INC.
MAY 31, 1995
ARIZONA MUNICIPALS FUND INC.
DEAR SHAREHOLDER:
We are pleased to provide you with the annual report and portfolio of in-
vestments for Smith Barney Arizona Municipals Fund Inc. for the fiscal
year ended May 31, 1995. Although bond prices declined precipitously
during the first part of the Fund's fiscal year, the municipal market im-
proved substantially in late 1994 and into 1995, allowing the Fund to pro-
vide investors in Class A shares with a total return of 9.38% and Class B
shares with a total return of 8.78% for the twelve month period ended May
31, 1995. Investors in Class C shares, a newly-available class of shares,
earned a total return of 12.10% for the period between December 8, 1994
and May 31, 1995. Additional performance data for each class of shares
during this and previous reporting periods is available in the "Historical
Performance" section of this report.
ECONOMIC AND MARKET UPDATE
After implementing tighter monetary policy by raising the Federal funds
rate 300 basis points (three percentage points) over a 13-month period be-
ginning in February 1994, the Federal Reserve Board has succeeded in slow-
ing the rate of economic growth. Growth continued to slow during the sec-
ond quarter of 1995 with the decline in consumption expenditures intensi-
fying. The retail sector of the economy appears even softer and most
retail chains seem to have little pricing power. Even the automobile in-
dustry, which enjoyed a very strong 1994, has encountered weaker sales in
1995. Individuals financed a large portion of their purchases with debt
throughout 1994 and as a result individuals' debt levels are becoming a
source of concern. This is acting as a drag on consumption expenditures
and could continue to hamper consumption trends for the rest of 1995 as
consumers try to bring their debt levels down to more manageable levels.
The industrial side of the economy has benefited from strong overseas de-
mand but this also appears to be moderating based upon recent economic
statistics on industrial production. Although unemployment rates are rela-
tively low, the corporate sector continues to trim costs and cut payrolls
which could further reduce consumer spending. In summary, while we do not
anticipate a recession, we believe an economic slowdown exists that will
present more of a challenge to corporate profitability, especially in
those sectors of the economy that depend on the consumer.
D I V I D E N D P O L I C Y
Although not explicitly stated in the Prospectus, the Fund's policy is to
pay a level monthly dividend based on the income generated by the Fund's
portfolio holdings, our expectations regarding the municipal bond market
and the general direction of interest rates. The Fund's investment deci-
sions are guided by market conditions, and are not made with the intent of
maintaining artificially high dividends. We continually monitor both the
market and the Fund's income stream to ensure that our dividends approxi-
mate the actual earnings of the Fund.
After initially rising for most of 1994 as the Federal Reserve raised
short-term interest rates, longer-term interest rates have declined since
November as it has become apparent that the Federal Reserve is
successfully slowing the rate of economic growth and keeping inflation
under control. The municipal market had a spectacular rally during the
first five months of 1995 -- clearly evident in the strong performance of
the Fund's Class C shares. New bond issuance was at remarkably low levels
nationally. A defining moment for the municipal market occurred when Or-
ange County, California filed for bankruptcy in December of 1994 and cast
a pall on the entire market. Its impact on the broader market since then
has been minimal, but has strongly impacted the securities of the County
itself.
Arizona's economy continues to be strong as evidenced by the turnaround of
Maricopa County. As you will recall, just one year ago Maricopa County
suffered from a $67 million budget deficit. Through improved tax collec-
tion and reduced spending, that deficit has been replaced by a small sur-
plus. Bond issuance in Arizona has been extremely low and at some points
during the past twelve months has been virtually nonexistent, contributing
to increases in prices for the State's tax-exempt securities.
Some uncertainties surround the market, however. Among these are the many
flat tax proposals being championed by members of both political parties.
Management believes real legislative action is several years away and must
be revenue neutral to make any economic sense -- a very difficult balanc-
ing act to accomplish. These discussions have caused periodic weakness in
the municipal market during the past months and will no doubt continue to
cause periodic weakness over the next few years, which may create some at-
tractive investment opportunities.
PORTFOLIO STRATEGY
At the end of this fiscal year, approximately 96% of the Fund's portfolio
was rated investment grade (BBB/Baa and higher), by either Standard &
Poor's Corporation or Moody's Investors Service, Inc. The Fund invested
its assets primarily in education, general obligation, housing, and indus-
trial revenue bonds. This investment allocation is very similar to the one
we reported to you in the Fund's semiannual report. The average maturity
of the Fund was 19 years.
We look forward to reporting to you in the Fund's next report to inves-
tors. Should you have any questions about your investment in the Fund or
how other Smith Barney mutual funds may be useful in helping you reach
your financial goals, please speak with your Smith Barney Financial Con-
sultant.
Sincerely,
Heath B. McLendon Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman of the Board Vice President and
Investment Officer
July 20, 1995
HISTORICAL PERFORMANCE -- CLASS A SHARES
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Return of Capital Gains Dividends Total
May 31 Beginning Ending Capital Paid Paid Return*
<S> <C> <C> <C> <C> <C> <C>
1988 $ 9.60 $ 9.22 -- -- $0.59 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
1995 $ 9.82 $10.09 -- $0.06 $0.54 9.38
Total $0.06 $0.46 $4.91
Cumulative Total Return -- (6/1/87 through 5/31/95) 83.59%
<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 4.0%).
</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/or Expense and/or Expense and/or Expense and/or Expense
Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C>
Year Ended 5/31/95 9.38% 9.13% 5.00% 4.76%
Five Years Ended
5/31/95 8.41 7.97 7.53 7.09
Inception 6/1/87
through 5/31/95 7.89 6.20 7.34 5.66
<FN>
** All average annual total return figures shown reflect reinvestment
of dividends and capital gains at net asset value. The Fund com-
menced operations on June 1, 1987. The Fund waived fees and/or reim-
bursed expenses from June 1, 1987 to May 31, 1995. A shareholder's
actual return for a given class for periods during which waivers
and/or reimbursements were in effect would be the greater of the two
numbers shown.
*** Average annual total return figures assume the deduction of the max-
imum 4.0% sales charge.
NOTE: On November 6, 1992, existing shares of the Fund were desig-
nated Class A shares. Class A shares are subject to a maximum 4.0%
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.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.+
VS. LEHMAN MUNICIPAL BOND INDEX
June 1, 1987 -- May 31, 1995
DESCRIPTION OF MOUNTAIN CHART IN 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, 1995
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
INVESTED IN CLASS A INVESTMENT IN THE
SHARES OF THE LEHMAN MUNICIPAL
MONTH ENDED FUND BOND INDEX
<S> <C> <C>
05/31/87 -- $10,000
06/01/87 $ 9,600 --
09/87 $ 9,361 $10,038
12/87 $ 9,665 $10,487
03/88 $ 9,738 $10,847
06/88 $10,016 $11,057
09/88 $10,264 $11,340
12/88 $10,498 $11,551
03/89 $10,612 $11,627
06/89 $11,260 $12,316
09/89 $11,263 $12,324
12/89 $11,609 $12,798
03/90 $11,613 $12,855
06/90 $11,927 $13,155
09/90 $11,917 $13,163
12/90 $12,482 $13,731
03/91 $12,593 $14,040
06/91 $12,775 $14,341
09/91 $13,279 $14,898
12/91 $13,688 $15,399
03/92 $13,773 $15,445
06/92 $14,297 $16,031
09/92 $14,717 $16,458
12/92 $15,003 $16,758
03/93 $15,665 $17,380
06/93 $16,176 $17,948
09/93 $16,723 $18,555
12/93 $16,968 $18,815
03/94 $15,903 $17,782
06/94 $16,090 $17,979
09/94 $16,199 $18,102
12/94 $15,884 $17,842
03/95 $17,126 $19,104
05/95 $17,624 $19,737
<FN>
+ Illustration of $10,000 invested in Class A shares on June 1, 1987 as-
suming deduction of the maximum 4.0% sales charge at the time of invest-
ment and reinvestment of dividends and capital gains at net asset value
through May 31, 1995.
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 class has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results of Class A shares.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS B SHARES
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Return of Capital 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
1995 $ 9.82 $10.09 -- $0.06 $0.49 8.78
Total $0.01 $0.35 $1.27
Cumulative Total Return -- (11/6/92 through 5/31/95) 18.81%
<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/or Expense and/or Expense and/or Expense and/or Expense
Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C>
Year Ended 5/31/95 8.78% 8.52% 4.28% 4.03%
Inception 11/6/92
through 5/31/95 6.95 6.67 5.89 5.61
<FN>
** All average annual total return figures shown reflect reinvestment
of dividends and capital gains at net asset value. The Fund waived
and/or reimbursed expenses from November 6, 1992 to May 31, 1995. A
shareholder's actual return for periods during which waivers and/or
reimbursements were in effect would be the greater of the two num-
bers shown.
*** Average annual total return figures assume the deduction of the max-
imum applicable CDSC which is described in the prospectus.
NOTE: The Fund began offering Class B shares on November 6, 1992.
Class B shares are subject to a 4.50% 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.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.+
VS. LEHMAN MUNICIPAL BOND INDEX
November 6, 1992 -- May 31, 1995
DESCRIPTION OF MOUNTAIN CHART IN 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,
1995 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 INVESTED IN A 3.00% GROWTH OF $10,000
INVESTED IN CLASS B BACK-END LOAD INVESTMENT IN THE
SHARES OF THE OF CLASS B SHARES LEHMAN MUNICIPAL
MONTH ENDED FUND OF THE FUND BOND INDEX
<S> <C> <C> <C>
10/31/92 -- -- $10,000
11/06/92 $10,000 $10,000 --
11/92 $10,129 $10,129 $10,179
12/92 $10,243 $10,243 $10,283
03/93 $10,680 $10,680 $10,664
06/93 $11,014 $11,014 $11,013
09/93 $11,374 $11,374 $11,385
12/93 $11,528 $11,528 $11,545
03/94 $10,790 $10,790 $10,911
06/94 $10,901 $10,901 $11,032
09/94 $10,961 $10,961 $11,108
12/94 $10,732 $10,732 $10,948
03/95 $11,556 $11,556 $11,722
05/95 $11,881 $11,581 $12,111
<FN>
+ Illustration of $10,000 invested in Class B shares on November 6, 1992
assuming reinvestment of dividends and capital gains at net asset value
through May 31, 1995.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on May
31, 1995).
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 class has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results of Class B shares.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS C SHARES
<TABLE>
<CAPTION>
Net Asset Value
Period Ended Capital Dividends Total
May 31 Beginning Ending Gains Paid Paid Return*
<S> <C> <C> <C> <C> <C>
12/8/94-5/31/95 $9.28 $10.09 $0.06 $0.23 12.10%
Total $0.06 $0.23
Cumulative Total Return -- (12/8/94 through 5/31/95) 12.10%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the CDSC.
</TABLE>
AGGREGATE TOTAL RETURN** -- CLASS C SHARES
<TABLE>
<CAPTION>
Without CDSC With CDSC***
With Fee Without Fee With Fee Without Fee
Waiver Waiver Waiver Waiver
<S> <C> <C> <C> <C>
Inception (12/8/94)
through 5/31/95 12.10% 12.04% 11.10% 11.04%
<FN>
** All aggregate total return figures shown reflect the reinvestment of
dividends and capital gains distributions at net asset value. The Fund
waived fees for the period ended May 31, 1995. A shareholder's actual
return for the period during which waivers were in effect would be the
higher of the two numbers shown.
*** Aggregate total return figures shown assume the deduction of the maxi-
mum applicable CDSC which is described in the prospectus.
NOTE: The Fund began offering Class C shares on November 7, 1994 and
commenced selling these shares on December 8, 1994. Class C shares are
subject to a maximum 1.00% CDSC and annual service and distribution
fees of 0.15% and 0.55%, respectively, of the value of the average
daily net assets attributable to that class.
</TABLE>
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31, 1995
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Arizona Municipals Fund Inc. in-
vestment securities held at May 31, 1995 by industry classification. The
pie is broken in pieces representing industries in the following percent-
ages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
INDUSTRIAL CONTROL 10.5%
GENERAL OBLIGATION 22.5%
UTILITY 7.3%
TRANSPORTATION 2.8%
HOSPITAL 6.0%
OTHER BONDS AND NET OTHER ASSETS AND LIABILITIES 3.7%
POLLUTION CONTROL 5.5%
HOUSING 11.7%
EDUCATION 30.0%
</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 54.2%
Aa AA 23.7
A A 5.9
Baa BBB 12.1
Ba BB 1.4
NR NR 2.7
100.0%
</TABLE>
AVERAGE MATURITY 19.2 years
PORTFOLIO OF INVESTMENTS MAY 31, 1995
KEY TO INSURANCE ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
BIGI -- Bond Investors Guaranty Insurance
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 -- 101.6%
ARIZONA -- 99.4%
$ 60,000 Arizona State, Certificates of Partici-
pation,
(FSA Insured),
6.625% 9/1/08 Aaa AAA $ 64,575
Arizona State, Certificates of Partici-
pation, Series B:
520,000 (AMBAC Insured),
6.250% 9/1/10 Aaa AAA 547,950
1,200,000 (CAPGTY Insured),
5.000% 5/1/10 Aaa AAA 1,128,000
Arizona State, Municipal Financing
Project, Certificates of Participation,
Series 20, (BIGI Insured):
250,000 7.625% 8/1/06 Aaa AAA 298,438
50,000 (Escrowed to Maturity),
7.700% 8/1/10 Aaa AAA 59,562
265,000 Arizona State Transportation Board, Ex-
cise Tax Revenue, Maricopa County,
(MBIA Insured),
7.000% 7/1/05 Aaa AAA 287,525
1,500,000 Arizona State Transportation Board,
Highway Revenue, Series A,
6.000% 7/1/08 Aa AA 1,593,750
1,855,000 Arizona State University, (Revenue Re-
funding System),
6.000% 7/1/08 A1 AA 1,954,706
750,000 Arizona Student Loan Revenue Acquisi-
tion Authority, Series B,
6.600% 5/1/10 Aa NR 787,500
300,000 Avondale, Arizona, Municipal Develop-
ment Corporation, Municipal Facility
Revenue, (MBIA Insured),
6.625% 7/1/11 Aaa AAA 317,250
500,000 Casa Grande, Arizona, Excise Tax Reve-
nue,
6.200% 4/1/15 Aaa AAA 517,500
Casa Grande, Arizona, Industrial Devel-
opment Authority, Multifamily Housing
Center:
245,000 (Center Park Apartments),
7.125% 12/1/10 NR AAA 251,125
245,000 (Quail Gardens Apartments),
7.125% 12/1/10 NR AAA 251,125
1,000,000 Chandler, Arizona, Water & Sewer Reve-
nue Refunding, (FGIC Insured),
6.250% 7/1/13 Aaa AAA 1,038,750
450,000 Cochise County, Arizona, Certificates
of Participation, (FGIC Insured),
6.750% 8/1/03 Aaa AAA 460,125
750,000 Cochise County, Arizona, Unified School
District, (FGIC Insured),
7.500% 7/1/10 Aaa AAA 898,125
1,000,000 Coconino County, Arizona, Pollution
Control Corporation, Revenue Refunding,
Arizona Public Service Company, Series
A,
5.875% 8/15/28 Baa2 BBB 972,500
500,000 Coconino County, Arizona, School Dis-
trict No. 15,
6.150% 7/01/06 Baa1 NR 528,125
775,000 Douglas, Arizona, Housing Finance Cor-
poration,
7.000% 1/1/24 NR AAA 775,000
1,630,000 Gila County, Arizona, Industrial Devel-
opment Authority, Pollution Control,
(ASARCO 87),
8.900% 7/1/06 Baa2 BBB 1,780,775
250,000 Gilbert, Arizona, Improvement District
No. 011, (FGIC Insured),
7.600% 1/1/01 Aaa AAA 258,125
900,000 Glendale, Arizona, Municipal Property
Corporation, (MBIA Insured),
7.000% 7/1/09 Aaa AAA 972,000
2,000,000 Glendale, Arizona, Project 1993, Series
B, (FGIC Insured),
5.700% 7/1/14 Aaa AAA 1,997,500
1,000,000 Maricopa County, Arizona, Alhambra Ele-
mentary School District, Partially Pre-
refunded 7/1/03, (AMBAC Insured),
5.625% 7/1/23 Aaa AAA 1,013,750
500,000 Maricopa County, Arizona, Industrial
Development Authority, Health Centers,
Series A, (MBIA Insured),
7.000% 12/1/16 Aaa AAA 583,750
1,000,000 Maricopa County, Arizona, Hospital Rev-
enue Corporation, (Sun Health Corpora-
tion),
8.125% 4/1/12 Baa BB+ 1,072,500
Maricopa County, Arizona, Industrial
Development Authority, Hospital Facili-
ties Revenue:
400,000 (John C. Lincoln Hospital), (FSA In-
sured),
7.500% 12/1/13 Aaa AAA 447,000
95,000 (Mercy Health System Revenue), Series
A, Prerefunded 7/3/99, (MBIA Insured),
7.125% 7/1/07 Aaa AAA 105,806
420,000 Maricopa County, Arizona, Industrial
Development Authority, Statewide Single
Family Mortgage Revenue, (GNMA
Mortgage-Backed Securities Program),
8.050% 9/1/23 Aaa NR 445,725
255,000 Maricopa County, Arizona, Industrial
Development Authority, Statewide Single
Family Mortgage Revenue, Series A,
7.500% 8/1/12 Aa NR 268,069
1,000,000 Maricopa County, Arizona, Industrial
Development, Series A, Multifamily
Housing Revenue, (FHA Insured), Mort-
gage Loan,
5.900% 7/1/24 NR AAA 981,250
1,000,000 Maricopa County, Arizona, Pollution
Control Corporation, Public Service
Company, Series A, (Palo Verde
Project),
6.375% 8/15/23 Ba2 BB 965,000
1,050,000 Maricopa County, Arizona, School Dis-
trict #31, Series A, (AMBAC Insured),
6.100% 7/1/11 Aaa AAA 1,094,625
1,000,000 Maricopa County, Arizona, Union School
District #8, (Osborn Elementary),
7.500% 7/1/09 A1 A 1,185,000
Maricopa County, Arizona, Union School
District #11, (Peoria), Partially Pre-
refunded 7/1/01, (MBIA Insured):
1,000,000 6.400% 7/1/10 Aaa AAA 1,061,250
500,000 7.000% 7/1/10 Aaa AAA 549,375
650,000 Maricopa County, Arizona, Union School
District #14, (Creighton School Im-
provement Project 1990), Series C,
(FGIC Insured),
6.500% 7/1/08 Aaa AAA 724,750
Maricopa County, Arizona, Union School
District #80:
750,000 6.000% 7/1/13 Aaa AAA 770,625
1,000,000 (Chandler School), (FGIC Isured), (Par-
tially Escrowed to Maturity),
5.800% 7/1/12 Aaa AAA 1,013,750
100,000 Maricopa County, Arizona, Union School
District #98, (Fountain Hills), (FGIC
Insured),
6.625% 7/1/10 Aaa AAA 107,125
1,000,000 Maricopa County, Arizona, Union School
District #216, Partially Prerefunded
7/1/00, (FGIC Insured),
6.700% 7/1/11 Aaa AAA 1,101,250
1,000,000 Mohave County, Arizona, Industrial De-
velopment Authority, (Citizens Utility
Project), Series B,
7.050% 8/1/20 NR AAA 1,078,750
2,500,000 Navajo County, Arizona, Pollution Con-
trol Corporation,
5.875% 8/15/28 Baa2 BBB 2,431,250
500,000 Navajo County, Arizona, Union School
District #32, Series A, (Blue Ridge),
(CAPGTY Insured),
6.000% 7/1/09 Aaa AAA 514,375
505,000 Peoria, Arizona, Industrial Development
Authority, (Sierra Winds Life Care
Project),
6.500% 11/1/17 NR NR 505,000
Phoenix, Arizona, Civic Improvement
Corporation, Excise Tax Revenue, (New
City Hall Project):
1,750,000 5.500% 7/1/24 A1 AA- 1,680,000
1,250,000 5.100% 7/1/28 Aa AA+ 1,125,000
Phoenix, Arizona, Industrial Develop-
ment Authority:
500,000 6.300% 12/1/12 NR AAA 503,750
600,000 (John C. Lincoln Hospital & Health),
6.000% 12/1/10 NR BBB+ 578,250
35,000 Phoenix, Arizona, Industrial Develop-
ment Authority, Home Mortgage Revenue,
(GNMA Project), Series B,
7.700% 10/1/11 NR AAA 36,225
650,000 Phoenix, Arizona, Industrial Develop-
ment Authority, Mortgage Revenue,
(Chris Ridge Village Project), (FHA In-
sured),
6.750% 11/1/12 NR AAA 674,375
1,000,000 Phoenix, Arizona, Industrial Develop-
ment Authority, Multifamily Housing
Revenue, (Woodstone & Silver Springs),
6.250% 4/1/23 NR AA 1,011,250
1,555,000 Phoenix, Arizona, Refunding, Series C,
6.000% 7/1/09 Aa AA+ 1,632,750
400,000 Phoenix, Arizona, Special Assignment,
Central Avenue Improvement District,
7.000% 1/1/06 A A+ 423,000
1,000,000 Pima County, Arizona, Industrial Devel-
opment Authority, Industrial Revenue,
Refunding, (FSA Insured),
7.250% 07/15/10 Aaa AAA 1,111,250
70,000 Pima County, Arizona, Industrial Devel-
opment Authority, Health Care Corpora-
tion Revenue, (Carondelet State, St.
Joseph's and St. Mary's), Partially
Prerefunded 7/1/98,
(BIGI Insured),
8.000% 7/1/13 Aaa AAA 78,319
Pima County, Arizona, Industrial Devel-
opment Authority, Multifamily Revenue:
245,000 (Eastside Place Project),
7.125% 12/1/10 NR AAA 251,125
490,000 (Rancho Mirage Project),
7.050% 4/1/22 NR AA 499,188
1,500,000 Pima County, Arizona, Industrial Devel-
opment Authority, Single Family Mort-
gage Revenue,
6.750% 11/1/27 NR AAA 1,541,250
875,000 Pima County, Arizona, Industrial Devel-
opment Authority, (Tucson Medical Cen-
ter), Series A, (MBIA Insured),
5.400% 4/1/09 Aaa AAA 862,969
780,000 Pima County, Arizona, School District
#20, Series A, (AMBAC Insured),
5.900% 7/1/09 Aaa AAA 805,350
Pima County, Arizona, Unified School
District, (FGIC Insured):
500,000 5.875% 7/1/14 Aaa AAA 509,375
1,000,000 Series E, (Tucson Project 1989),
6.750% 7/1/10 Aaa AAA 1,126,250
1,000,000 Pima County, Arizona, Unified School
District #1, (Tucson), (FGIC Insured),
7.500% 7/1/10 Aaa AAA 1,202,500
700,000 Pinal County, Arizona, Industrial De-
velopment Authority, Industrial Devel-
opment Revenue, (Casa Grande Regional
Medical Center),
9.000% 12/1/13 NR NR 726,250
250,000 Prescott Valley, Arizona, Improvement
District, Sewer Collection System,
Roadway Repair,
7.900% 1/1/12 NR BBB 276,563
1,500,000 Salt River, Arizona, Agriculture Im-
provement & Power, (Electric System
Project), Series A,
6.000% 1/1/31 Aa AA 1,511,250
3,000,000 Salt River, Arizona, Linked Stripes &
Stars, (Agriculture Project),
5.050% 1/1/12 Aa AA 2,771,250
70,000 Scottsdale, Arizona, Industrial Devel-
opment Authority, Hospital Revenue,
(Scottsdale Memorial Hospital), Series
A, (AMBAC Insured),
8.500% 9/1/17 Aaa AAA 77,175
500,000 Scottsdale, Arizona, Mountain Communi-
cation Facilities, District 3, Series
A,
6.200% 7/1/17 NR A 496,875
245,000 Sierra Vista, Arizona, Industrial De-
velopment Authority, Multifamily FNMA,
(Steppes Apartment Project),
7.125% 12/1/10 NR AAA 251,431
Sierra Vista, Arizona, Municipal Prop-
erty Revenue, (AMBAC Insured):
355,000 6.000% 1/1/15 Aaa AAA 366,538
500,000 6.150% 1/1/11 Aaa AAA 515,625
Tempe, Arizona, Industrial Development
Authority, (Friendship Village):
350,000 Refunding, Series A,
6.200% 12/1/03 NR NR 340,812
250,000 Series A,
6.250% 12/1/04 NR NR 241,875
Tempe, Arizona, Unified High School
District, (FGIC Insured):
1,000,000 6.000% 7/01/10 Aaa AAA 1,038,750
1,000,000 6.000% 7/01/12 Aaa AAA 1,035,000
1,000,000 Tucson, Arizona, Certificates of Par-
ticipation,
6.375% 7/1/09 Baa1 AA 1,060,000
Tucson, Arizona, General Obligation
Bonds:
80,000 Partially Prerefunded 7/1/95, (FGIC In-
sured),
6.875% 7/1/14 A1 AA- 80,983
1,000,000 Series 1984-G, (FGIC Insured),
6.250% 7/1/18 Aaa AAA 1,042,500
1,275,000 Tucson, Arizona, Local Development Cor-
poration, (FGIC Insured),
6.250% 7/1/12 Aaa AAA 1,326,000
1,000,000 Tucson, Arizona, (Water Revenue Project
1984),
5.250% 7/1/18 A1 A+ 935,000
500,000 Yuma County, Arizona, Industrial Devel-
opment Authority, Multifamily Housing,
(Alexandra Sands Apartment Project),
(FHA Insured),
7.700% 12/1/29 NR AAA 519,375
66,025,434
PUERTO RICO -- 2.2%
300,000 Commonwealth of Puerto Rico, General
Obligation Bonds, Partially Prerefunded
7/1/98,
8.000% 7/1/08 Baa1 A 332,625
475,000 Commonwealth of Puerto Rico, Urban
Housing Revenue Bonds,
7.875% 10/1/04 Baa BBB 533,187
540,000 Puerto Rico Municipal Finance Agency,
Series A,
8.250% 7/1/08 Baa1 A- 596,700
1,462,512
VIRGIN ISLANDS -- 0.0%
15,000 Virgin Islands, Public Finance Author-
ity Revenue, Series A, (Escrowed to Ma-
turity),
7.300% 10/1/18 Aaa AAA 18,412
TOTAL INVESTMENTS (Cost $65,934,871*) 101.6% 67,506,358
OTHER ASSETS AND LIABILITIES (NET) (1.6) (1,060,470)
NET ASSETS 100.0% $66,445,888
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $65,934,871) (Note 1)
See accompanying schedule $67,506,358
Interest receivable 1,483,761
Receivable for Fund shares sold 134,065
TOTAL ASSETS 69,124,184
LIABILITIES:
Payable for investment securities purchased $ 2,001,650
Notes payable (Note 8) 297,327
Payable for Fund shares redeemed 147,421
Due to custodian 55,914
Dividends payable 41,120
Investment advisory fee payable (Note 2) 36,000
Administration fee payable (Note 2) 20,571
Distribution fee payable (Note 3) 9,794
Service fee payable (Note 3) 8,463
Custodian fees payable (Note 2) 4,600
Transfer agent fees payable (Note 2) 2,108
Accrued expenses and other payables 53,328
TOTAL LIABILITIES 2,678,296
NET ASSETS $66,445,888
NET ASSETS CONSIST OF:
Distributions in excess of net investment income $ (41,120)
Accumulated net realized loss on investments sold (246,184)
Unrealized appreciation of investments 1,571,487
Par value 6,582
Paid-in capital in excess of par value 65,155,123
TOTAL NET ASSETS $66,445,888
NET ASSET VALUE:
CLASS A SHARES
NET ASSET VALUE and redemption price per share
($43,221,774 / 4,281,585 shares of common stock
outstanding) $10.09
MAXIMUM OFFERING PRICE per share ($10.09 / 0.960)
(based on a sales charge of 4.00% of the offering
price on May 31, 1995) $10.51
CLASS B SHARES
NET ASSET VALUE and offering price per share+
($22,838,225 / 2,262,456 shares of common stock
outstanding) $10.09
CLASS C SHARES
NET ASSET VALUE and offering price per share+
($385,889 / 38,253 shares of common stock out-
standing) $10.09
<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, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $3,903,823
EXPENSES:
Investment advisory fee (Note 2) $ 220,638
Administration fee (Note 2) 126,079
Distribution fee (Note 3) 101,475
Service fee (Note 3) 94,559
Legal and audit fees 58,221
Custodian fees (Note 2) 26,411
Transfer agent fees (Notes 2 and 4) 19,942
Directors' fees and expenses (Note 2) 15,733
Other 76,667
Fees waived by investment adviser and administrator
(Note 2) (115,763)
TOTAL EXPENSES 623,962
NET INVESTMENT INCOME 3,279,861
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized loss on investments sold during the
year (246,183)
Net unrealized appreciation of investments during
the year 2,755,230
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,509,047
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,788,908
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
5/31/95 5/31/94
<S> <C> <C>
Net investment income $ 3,279,861 $ 3,098,625
Net realized gain/(loss) on investments sold
during the year (246,183) 1,016,134
Net unrealized appreciation/(depreciation) of
investments during the year 2,755,230 (3,755,771)
Net increase in net assets resulting from opera-
tions 5,788,908 358,988
Less distributions:
Distributions from net investment income:
Class A (2,271,075) (2,296,168)
Class B (964,048) (685,607)
Class C (4,012) --
Distributions in excess of net investment in-
come:
Class A (105,933) (31,362)
Class B (44,967) (9,364)
Class C (187) --
Distributions from net realized gain on invest-
ments:
Class A (286,216) (898,488)
Class B (130,136) (321,560)
Class C (6) --
Distributions in excess of net realized gain on
investments:
Class A (428) --
Class B (195) --
Class C (0)* --
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A (2,630,208) 3,081,032
Class B 2,859,318 12,457,664
Class C 376,696 --
Net increase in net assets 2,587,511 11,655,135
NET ASSETS:
Beginning of year 63,858,377 52,203,242
End of year (including distributions in excess
of net investment income of $41,120 and
$40,726, respectively) $66,445,888 $ 63,858,377
<FN>
* Amount represents less than $1.00.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
5/31/95 5/31/94#
<S> <C> <C>
Net asset value, beginning of year $ 9.82 $ 10.40
Income from investment operations:
Net investment income+ 0.54 0.54
Net realized and unrealized gain/(loss) on in-
vestments 0.33 (0.38)
Total from investment operations 0.87 0.16
Less distributions:
Dividends from net investment income (0.52) (0.52)
Distributions in excess of net investment in-
come (0.02) (0.01)
Distributions from net realized capital gains (0.06) (0.21)
Distributions in excess of net realized capital
gains (0.00)** --
Distributions from capital -- --
Total distributions (0.60) (0.74)
Net asset value, end of year $ 10.09 $ 9.82
Total return++ 9.38% 1.33%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $43,222 $44,552
Ratio of operating expenses to average net as-
sets+++ 0.82% 0.83%
Ratio of net investment income to average net
assets 5.37% 5.24%
Portfolio turnover rate 21% 49%
<FN>
* The Fund commenced operations on June 1, 1987. Any shares outstanding
prior to November 6, 1992 were designated as Class A shares.
** Amount represents less than $0.01 per share.
+ Net investment income before voluntary waiver of fees and/or reim-
bursement of expenses by affiliates for the years ended May 31, 1995,
1994, 1993, 1992, 1991, 1990, 1989 and 1988 were $0.50, $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 indi-
cated and does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees and/or re-
imbursement of expenses by affiliates for the years ended May 31,
1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1988 were 1.01%, 1.05%,
1.10%, 0.90%, 1.13%, 2.13%, 6.20% and 2.58%, respectively.
# 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 net investment income method
did not accord with results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
5/31/93 5/31/92 5/31/91 5/31/90 5/31/89 5/31/88*
<S> <C> <C> <C> <C> <C>
$ 9.84 $ 9.63 $ 9.49 $ 9.66 $ 9.22 $ 9.60
0.58 0.59 0.68 0.71 0.82 0.40
0.65 0.32 0.14 (0.12) 0.31 (0.19)
1.23 0.91 0.82 0.59 1.13 0.21
(0.57) (0.60) (0.68) (0.71) (0.69) (0.40)
-- -- -- -- -- (0.19)
(0.08) (0.06) -- (0.05) -- --
-- -- -- -- -- --
(0.02) (0.04) -- -- -- --
(0.67) (0.70) (0.68) (0.76) (0.69) (0.59)
$ 10.40 $ 9.84 $ 9.63 $ 9.49 $ 9.66 $ 9.22
12.92% 9.86% 8.92% 6.31% 12.70% 2.32%
$44,055 $38,759 $28,373 $18,167 $4,903 $1,626
0.77% 0.68% 0.14% 0.03% 0.34% 0.16%
5.66% 6.02% 7.06% 7.34% 7.23% 3.95%
44% 44% 49% 86% 63% 53%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
5/31/95 5/31/94# 5/31/93*
<S> <C> <C> <C>
Net asset value, beginning of year $ 9.82 $ 10.40 $ 9.97
Income from investment operations:
Net investment income+ 0.49 0.49 0.31
Net realized and unrealized gain/(loss)
on investments 0.33 (0.37) 0.50
Total from investment operations 0.82 0.12 0.81
Less distributions:
Dividends from net investment income (0.47) (0.48) (0.29)
Distributions in excess of net invest-
ment income (0.02) (0.01) --
Distributions from net realized capital
gains (0.06) (0.21) (0.08)
Distributions in excess of net realized
capital gains (0.00)## -- --
Distributions from capital -- -- (0.01)
Total distributions (0.55) (0.70) (0.38)
Net asset value, end of year $ 10.09 $ 9.82 $10.40
Total return++ 8.78% 0.84% 8.31%
Ratios to average net assets/supplemen-
tal data:
Net assets, end of year (in 000's) $22,838 $19,306 $8,149
Ratio of operating expenses to average
net assets+++ 1.33% 1.35% 1.33%**
Ratio of net investment income to aver-
age net assets 4.85% 4.73% 5.10%**
Portfolio turnover rate 21% 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 years ended May 31, 1995,
1994, and the period ended May 31, 1993 were $0.46, $0.47 and $0.29,
respectively.
++ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees and/or re-
imbursement of expenses by affiliates for the years ended May 31,
1995, 1994, and for the period ended May 31, 1993 were 1.52%, 1.57%
and 1.66%, respectively.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this pe-
riod since use of the undistributed net investment income method did
not accord with results of operations.
## Amount represents less than $0.01 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
5/31/95*
<S> <C>
Net asset value, beginning of period $ 9.28
Income from investment operations:
Net investment income+ 0.24
Net realized and unrealized gain on investments 0.86
Total from investment operations 1.10
Less distributions:
Distributions from net investment income (0.22)
Distributions in excess of net investment income (0.01)
Distributions from net realized capital gains (0.06)
Distributions in excess of net realized capital gains (0.00)#
Distributions from capital --
Total distributions (0.29)
Net asset value, end of period $10.09
Total return++ 12.10%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 386
Ratio of operating expenses to average net assets+++ 1.38%**
Ratio of net investment income to average net assets 4.81%**
Portfolio turnover rate 21%
<FN>
* The Fund commenced selling Class C shares on December 8, 1994.
** Annualized.
+ Net investment income before voluntary waiver of fees by affilitates
for the period ended May 31, 1995 was $0.23.
++ Total return represents aggregate total return for the period indi-
cated and does not reflect any applicable sales charge.
+++ Annualized expense ratios before voluntary waiver of fees by
affilitates for the period ended May 31, 1995 was 1.56%.
# Amount represents less than $0.01 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Arizona Municipals Fund Inc. (formerly known as "Smith Barney
Shearson Arizona Municipals Fund Inc.") (the "Fund") was incorporated
under the laws of the State of Maryland on May 4, 1987. The Fund is a di-
versified, open-end management investment company registered with the Se-
curities and Exchange Commission under the Investment Company Act of 1940,
as amended (the "1940 Act"). Effective November 7, 1994, the Fund began
offering Class C and Class Y shares and continued to offer Class A and
Class B shares. As of May 31, 1995, no Class Y shares have been sold.
Class A shares are sold with a front-end sales charge. Class B and Class C
shares may be subject to a contingent deferred sales charge ("CDSC") upon
redemption. Class B shares will convert automatically to Class A shares
eight years after the date of original purchase. Class Y shares are avail-
able to investors making an initial investment of at least $5 million and
are not subject to any sales charges, service or distribution fees. All
classes of shares have identical rights and privileges except with respect
to the effect of the respective sales charges to each class, the distribu-
tion and/or service fees borne by each class, expenses allocable exclu-
sively 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 con-
sistently followed by the Fund in the preparation of its financial state-
ments.
Portfolio valuation: Securities are valued by The Boston Company
Advisors, Inc. ("Boston Advisors"), an indirect wholly owned subsidiary of
Mellon Bank Corporation ("Mellon"), 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 monthly. 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 4.00% nondeductible excise tax on
certain 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 car-
ryovers, it is the policy of the Fund not to distribute such gains. Income
distributions and capital gain distributions on a Fund level are deter-
mined in accordance with income tax regulations which may differ from gen-
erally accepted accounting principles. These differences are primarily due
to differing treatments of income and gains on various investment securi-
ties held by the Fund, timing differences and differing characterization
of distributions made by the Fund as a whole. Permanent differences in-
curred during the Fund's fiscal year resulting from distributions in ex-
cess of net investment income and capital gains have been reclassified to
paid-in-capital at year end.
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.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Mutual Funds Management Inc. ("SBMFM") (for-
merly known as "Smith, Barney Advisers, Inc."). Under the Advisory Agree-
ment, the Fund pays a monthly fee at the following annual rates: 0.35% of
the value of the Fund's average daily net assets up to $500 million and
0.32% of the value of the Fund's average daily net assets in excess of
$500 million.
The Fund has also entered into an administration agreement (the
"Administration Agreement") with SBMFM. Under the Administration Agree-
ment, the Fund pays SBMFM a monthly fee at the following annual rates:
0.20% of the value of the Fund's average daily net assets up to $500 mil-
lion and 0.18% of the value of the Fund's average daily net assets in
excess of $500 million.
The Fund and SBMFM have also entered into a sub-administration agreement
(the "Sub-Administration Agreement") with Boston Advisors. Under the
Sub-Administration Agreement, SBMFM pays Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM
and Boston Advisors.
From time to time, SBMFM may voluntarily waive a portion or all of the
fees otherwise payable to it. For the year ended May 31, 1995, SBMFM vol-
untarily waived advisory fees of $73,668 and administrative fees of
$42,095.
Smith Barney, Inc. ("Smith Barney") acts as exclusive distributor of the
Fund's shares. For the year ended May 31, 1995, Smith Barney received from
investors $50,874 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 certain Class A, Class B and Class C shares. In circumstances
in which the CDSC is imposed, the amount of the charge will vary depending
on the number of years since the date of purchase. For the year ended May
31, 1995, Smith Barney received from shareholders $99 and $29,071 in CDSC
on the redemption of Class A and Class B shares, respectively.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Fund for serving 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 affiliates $1,000 per
annum plus $100 per meeting attended and each Director emeritus who is not
an officer, director or employee of Smith Barney or any of its affiliates
$500 per annum plus $50 per meeting attended. The Fund reimburses each Di-
rector for travel and out-of-pocket expenses incurred to attend such meet-
ings.
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, the Fund has adopted a services
and distribution plan (the "Plan"). Under this Plan, the Fund compensates
Smith Barney for servicing shareholder accounts for Class A, Class B and
Class C shareholders, and covers expenses incurred in distributing Class B
and Class C shares. Smith Barney is paid an annual service fee with re-
spect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.15% of the value of the average daily net assets of each respec-
tive class of shares. Smith Barney is also paid an annual distribution fee
with respect to Class B and Class C shares at the annual rate of 0.50% and
0.55%, respectively, of the value of the average daily net assets of each
class. For the year ended May 31, 1995, the Fund incurred $64,130, $30,291
and $138 in service fees for Class A, Class B and Class C shares, respec-
tively. For the year ended May 31, 1995, the Fund incurred $100,968 and
$507 in distribution fees for Class B and Class C shares, respectively.
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 $11,418, $8,495 and $29 for Class A, Class B and
Class C shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, during the year ended May 31, 1995,
amounted to $14,131,105 and $12,886,054, respectively.
At May 31, 1995, aggregate gross unrealized appreciation for all securi-
ties in which there was an excess of value over tax cost amounted to
$2,308,342 and the aggregate unrealized depreciation for all securities in
which there was an excess of tax cost over value amounted to $736,855.
6. COMMON STOCK
At May 31, 1995, 500 million shares of $.001 par value common stock
divided into four classes, (Class A, Class B, Class C and Class Y), were
authorized. Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1995 MAY 31, 1994
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 759,234 $ 7,271,081 714,159 $ 7,417,542
Issued as reinvestment of
dividends 154,771 1,492,162 194,047 2,027,833
Redeemed (1,170,667) (11,393,451) (606,934) (6,364,343)
Net increase/(decrease) (256,662) $ (2,630,208) 301,272 $ 3,081,032
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1995 MAY 31, 1994
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 520,204 $ 5,024,441 1,228,851 $ 12,898,167
Issued as reinvestment of
dividends 67,418 649,684 60,003 625,441
Redeemed (292,062) (2,814,807) (105,729) (1,065,944)
Net increase 295,560 $ 2,859,318 1,183,125 $ 12,457,664
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1995*
CLASS C SHARES: Shares Amount
<S> <C> <C>
Sold 37,852 $372,710
Issued as reinvestment of dividends 401 3,986
Net increase 38,253 $376,696
<FN>
* The Fund commenced selling Class C shares on December 8, 1994.
</TABLE>
As of May 31, 1995, no Class Y shares had been sold.
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. NOTES PAYABLE
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Bank of America, N.A. (formerly known as Continental
Bank N.A.) under an Amended and Restated Line of Credit Agreement (the
"Agreement") dated April 30, 1992 and renewed effective May 31, 1994, pri-
marily for temporary or emergency purposes, including the meeting of re-
demption requests that otherwise might require the untimely disposition of
securities. Under this Agreement the Fund may borrow up to the lesser of
$25 million or 25% of its net assets. However, pursuant to the Fund's pro-
spectus, the Fund may only borrow up to 10% of its total net assets. Under
the terms of the Agreement, as amended, the Fund and the other affiliated
entities are charged an aggregate commitment fee of $100,000 which is al-
located equally among each of the participants. The Agreement requires,
among other provisions, each participating fund to maintain a ratio of net
assets (not including funds borrowed pursuant to the Agreement) to aggre-
gate amount of indebtedness pursuant to the Agreement of no less than 5 to
1. At May 31, 1995, the Fund had outstanding borrowings of $297,327 under
this Agreement. During the year ended May 31, 1995, the Fund had an aver-
age outstanding daily balance of $44,658 with interest rates ranging from
5.125% to 6.625%. Interest expense totalled $2,728 for the year ended May
31, 1995 and is offset against interest income on the Fund's Statement of
Operations.
9. CAPITAL LOSS CARRYFORWARD
As of May 31, 1995, the Fund had available for Federal income tax purposes
an unused capital loss carryforward of $103,472 expiring in the year 2003.
In accordance with tax law, the Fund has elected to defer the recognition
of losses occurring between October 31, 1994 and May 31, 1995 until the
first day of the following fiscal year. The amount of such deferral is
$142,711 of capital losses. These losses for tax purposes will be deemed
to occur on June 1, 1995.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
We have audited the accompanying statement of assets and liabilities, in-
cluding the portfolio of investments of Smith Barney Arizona Municipals
Fund Inc. (formerly Smith Barney Shearson Arizona Municipals Fund Inc.) as
of May 31, 1995, and the related statement of operations, statement of
changes in net assets and financial highlights for Class A and Class B
shares for the year then ended and the financial highlights for Class C
shares for the period from December 8, 1994 to May 31, 1995. These finan-
cial 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 audit. The
statement of changes in net assets for the year ended May 31, 1994 and the
financial highlights for each of the years or periods in the eight-year
period ended May 31, 1994 were audited by other auditors whose report
thereon, dated July 13, 1994, expressed an unqualified opinion on that
statement and those financial highlights.
We conducted our audit 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, 1995 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 audit
provides 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, 1995, and the
results of its operations, changes in its net assets and financial high-
lights for the year or period then ended as specified in the first para-
graph above, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
June 30, 1995
TAX INFORMATION (UNAUDITED) FISCAL YEAR ENDED MAY 31, 1995
During the fiscal year ended May 31, 1995, the Fund paid $416,358 of Long
Term Capital Gains to its shareholders.
Of the dividends paid by the Fund from net investment income for the year
ended May 31, 1995, 100% is tax-exempt for regular Federal income tax pur-
poses.
The above figures 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.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Wilkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS) This is the increase (or decrease) in the market
value (price) of a security in your portfolio. If a stock or bond appreci-
ates in price, there is a capital gain; if it depreciates, there is a cap-
ital loss. A capital gain or loss is "realized" upon the sale of a secu-
rity; if net capital gains exceed net capital losses, there may be a capi-
tal gain distribution to shareholders.
CDSC (CONTINGENT DEFERRED SALES CHARGE) One kind of back-end load, a CDSC
is imposed if shares are redeemed during the first few years of ownership.
The CDSC may be expressed as a percentage of either the original purchase
price or the redemption proceeds. Most CDSCs decline over time, and some
will not be charged if shares are redeemed after a certain period of time.
DIVIDEND This is income generated by securities in a portfolio and dis-
tributed after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge applied to an investment
at the time of initial purchase.
NET ASSET VALUE (NAV) Net Asset Value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on
a given day. The total value of your investment would be the NAV multi-
plied by the number of shares you own.
DISTRIBUTION RATE This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to sharehold-
ers. A fund's distribution rate is usually expressed as an annualized per-
cent of the fund's offering price.
SEC YIELD This standardized calculation of a mutual fund's yield is based
on a formula developed by the Securities and Exchange Commission (SEC) to
allow funds to be compared on an equal basis. It is an annualized yield
based on the portfolio's potential earnings from dividends, interest and
yield to maturity of its holdings, and it reflects the payments of all
portfolio expenses for the most recent 30-day period. Mutual funds are re-
quired to use this figure when stating yield.
TOTAL RETURN Total return measures a fund's performance, taking into ac-
count the combination of dividends paid and the gain or loss in the value
of the securities held in the portfolio. It may be expressed on an average
annual basis or cumulative basis (total change over a given period). In
addition, total return may be expressed with or without the effects of
sales charges or the reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the
average annual total return according to the standardized calculation de-
veloped by the SEC. The SEC average annual total return calculation in-
cludes the effects of all fees and sales charges and assumes the reinvest-
ment of all dividends and capital gains.
ARIZONA
MUNICIPALS
FUND INC.
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
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Jessica Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney Arizona Municipals Fund Inc. It is not authorized for dis-
tribution to prospective investors unless accompanied or preceded by an
effective Prospectus for the Fund which contains information concerning
the Fund's investment policies, fees and expenses as well as other perti-
nent information.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 115, 208, 477, 462
FD2223 7/95
