<PAGE>
- --------------------------------------------------------------------------------
A N N U A L R E P O R T
1996
1996
1996
1996
1996
SMITH BARNEY
ARIZONA
MUNICIPALS
FUND INC.
------------------------------------------
May 31, 1996
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
<PAGE>
- ----------------------------------------------
Smith Barney Arizona Municipals Fund Inc.
- ----------------------------------------------
DEAR SHAREHOLDER:
We are pleased to provide you with the annual report for
the Smith Barney Arizona Municipals Fund Inc. for the
year ended May 31, 1996. For your convenience, we have
summarized the period's prevailing economic and market
conditions, and outlined the investment strategy employed
by the Fund during this time. A detailed summary of
performance and current holdings for the Fund can be found in
the appropriate sections that follow in the annual report.
MARKET AND ECONOMIC OVERVIEW
Interest rates declined steadily over the latter part of 1995 in
response to low inflation and very sluggish economic growth. During
the first five months of 1996, however, interest rates rose sharply
as economic reports pointed to much stronger growth than was
expected and as concerns over the stalemated federal budget
negotiations continued.
In recent months, the volatility of the municipal bond market has
increased and municipal bond yields have reached their highest
levels in over a year. However, despite continued uncertainty over
the direction of short-term interest rates, there have been some
signs of a possible municipal bond market turnaround as the higher
yields offered by municipal bonds have begun to attract a growing
number of individual and institutional investors.
ARIZONA ECONOMIC HIGHLIGHTS
Arizona has experienced significant economic growth over the past several years.
The Grand Canyon State is among the fastest-growing in the nation, with job
growth increasing steadily, and the unemployment rate declining. One factor
supporting Arizona's expansion is its low business costs, which are below the
national average. In addition, Arizona's proximity to southern California makes
it a prime relocation destination for Californians seeking a lower cost of
living. Several leading technology manufacturers such as Hughes Missile
Systems and Intel, have expanded their Arizona operations. As a result of
this growth, state revenues have increased, and a number of tax reductions
have been implemented. The personal income tax-rate has been reduced from
approximately 6.9%
1
<PAGE>
<PAGE>
to 5.6%. Moreover, there has been a surge in new construction, not only
in housing but in cultural facilities as well. Construction has begun on a
major league baseball stadium and a new science center in downtown Phoenix,
with nearly $1 billion spent on new construction in the downtown-Phoenix
area alone since 1991.
Although Arizona's economy and population continue to expand, the state may
begin to experience the problems that some Northeastern states experienced in
the 1980's. The increase in new housing and commercial building starts, and the
inflow of more residents has had a negative impact on Arizona's air quality. In
addition, because of drought conditions over the past three years and population
pressures, the state has begun to ask its citizens to conserve water. However,
despite the challenges that growth poses, we remain positive about Arizona's
future prospects.
ARIZONA MUNICIPALS FUND INC.'S PERFORMANCE
AND INVESTMENT STRATEGY
For the fiscal year ended May 31, 1996, the Smith Barney Arizona Municipal Fund
Inc. generated a total return of 3.82% for Class A shares, slightly
outperforming its Lipper Analytical Services, Inc. peer group average of 3.43%
for the same period. (Lipper Analytical Services, Inc. is a major fund tracking
organization.) The Fund paid dividends totaling $0.52 per share for Class A
shares over the past twelve months; based on a net asset value of $9.95 as of
May 31, 1996, this equates to an annual yield of 5.23%. For an Arizona state
resident in the top combined federal and effective state income tax bracket of
42.98%, the tax-free yield of 5.23% is equivalent to a taxable yield of 9.17%.
In terms of investment strategy, the Fund continues to focus on high-coupon and
high-quality issues. Maintaining competitive dividend payments to our
shareholders is an important aspect of the Fund's investment approach. As of May
31, 1996 nearly 94% of the Fund was invested in investment grade (BBB/Baa and
higher) securities, as measured by Standard and Poor's Corporation or Moody's
Investor Service, Inc, with 56.2% of the Fund's investments rated triple-A.
(Standard and Poor's and Moody's are major credit rating and reporting
agencies.) The Fund's largest holdings are concentrated in general obligation
bonds (24.9%), followed by industrial revenue bonds (16.3%), housing (12.3%),
and education bonds (11.7%). The Fund's average weighted maturity as of
May 31, 1996 was 18 years.
2
<PAGE>
<PAGE>
MUNICIPAL BOND MARKET OUTLOOK
While the day-to-day volatility in the fixed income markets is likely to
continue, the sharp increase in interest rates recently has made long-term
municipal bonds more attractive on a relative basis. In our view, competitive
pressures in the global economy and changing demographics should help to keep
inflation in check and keep wages from going up. (Labor costs constitute roughly
two-thirds of the total cost of all finished goods.) With long-term municipal
bonds providing roughly 90% of the yield available on comparable maturity
Treasury securities, we believe investors are well compensated for the potential
risks.
It was not too long ago that the 'flat tax' issue was touted as potentially the
biggest issue of the upcoming Presidential election in November. The exit of
Republican candidate Steve Forbes from the Presidential race has caused the flat
tax to recede from the political debate. However, between now and November, tax
reform again could move into the political spotlight as the campaign
intensifies. Nevertheless, we believe there is little chance that radical tax
reforms will be enacted. In our view, the municipal bond market remains quite
attractive and the Arizona Municipals Fund is well positioned to meet the
challenges presented by the current environment.
Thank you for investing in the Smith Barney Arizona Municipals Fund Inc. We look
forward to helping you achieve your investment goals.
Sincerely,
/s/HEATH B. MCLENDON /s/LAWRENCE T. MCDERMOTT
Heath B. McLendon Lawrence T. McDermott
Chairman and Vice President and
Chief Executive Officer Investment Officer
June 13, 1996
3
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/31/96 $ 10.09 $ 9.95 $0.52 $0.00 $0.00 3.82%
5/31/95 9.82 10.09 0.54 0.06 0.00 9.38
5/31/94 10.40 9.82 0.53 0.21 0.00 1.33
5/31/93 9.84 10.40 0.57 0.08 0.02 12.92
5/31/92 9.63 9.84 0.60 0.06 0.04 9.86
5/31/91 9.49 9.63 0.68 0.00 0.00 8.92
5/31/90 9.66 9.49 0.71 0.05 0.00 6.31
5/31/89 9.22 9.66 0.69 0.00 0.00 12.70
Inception*- 5/31/88 9.60 9.22 0.59 0.00 0.00 2.32`D'
- ---------------------------------------------------------------------------------------------------------------
Total $5.43 $0.46 $0.06
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/31/96 $ 10.09 $ 9.95 $0.47 $0.00 $0.00 3.30%
5/31/95 9.82 10.09 0.49 0.06 0.00 8.78
5/31/94 10.40 9.82 0.49 0.21 0.00 0.84
Inception*- 5/31/93 9.97 10.40 0.29 0.08 0.01 8.31`D'
- ---------------------------------------------------------------------------------------------------------------
Total $1.74 $0.35 $0.01
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS C SHARES
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/31/96 $ 10.09 $ 9.95 $0.47 $0.00 $0.00 3.26%
Inception*- 5/31/95 9.28 10.09 0.23 0.06 0.00 12.10`D'
- ---------------------------------------------------------------------------------------------------------------
Total $0.70 $0.06 $0.00
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
4
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Without Sales Charge(1)
------------------------------------
Class A Class B Class C
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Year Ended 5/31/96 3.82% 3.30% 3.26%
- -------------------------------------------------------------------------------------------
Five Years Ended 5/31/96 7.38 N/A N/A
- -------------------------------------------------------------------------------------------
Inception* through 5/31/96 7.42 5.91 10.39
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
------------------------------------
Class A Class B Class C
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Year Ended 5/31/96 (0.33)% (1.20)% 2.26%
- -------------------------------------------------------------------------------------------
Five Years Ended 5/31/96 6.50 N/A N/A
- -------------------------------------------------------------------------------------------
Inception* through 5/31/96 6.94 5.42 10.39
- -------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
Without Sales Charge(1)
<S> <C>
- --------------------------------------------------------------------------------------
Class A (Inception* through 5/31/96) 90.57%
- --------------------------------------------------------------------------------------
Class B (Inception* through 5/31/96) 22.71
- --------------------------------------------------------------------------------------
Class C (Inception* through 5/31/96) 15.75
- --------------------------------------------------------------------------------------
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ('CDSC') with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gains distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.00% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year after
purchase and thereafter by 1.00% per year until no CDSC is incurred. Class C
shares reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within one year from initial purchase.
* Inception dates for Class A, B and C shares are June 1, 1987, November 6,
1992 and December 8, 1994, respectively.
`D' Total return is not annualized, as it may not be representative of the total
return for the year.
5
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (UNAUDITED)
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY ARIZONA MUNICIPALS FUND VS.
THE LEHMAN MUNICIPAL BOND FUND INDEX`D'
- --------------------------------------------------------------------------------
June 1987 -- May 1996
[PERFORMANCE GRAPH]
`D' Hypothetical illustration of $10,000 invested in Class A shares at inception
on June 1, 1987, assuming deduction of the maximum 4.00% sales charge at the
time of investment and reinvestment of dividends and capital gains, if any,
at net asset value through May 31, 1996. The Lehman Municipal Bond Fund
Index is a broad based, total return index comprised of 8,000 actual bonds
which are all investment grade, fixed rate, long-term maturities (greater
than two years) and are selected from issues larger than $50 million dated
since January, 1994. The index is unmanaged and is not subject to the same
management and trading expenses as a mutual fund. The performance of the
Fund's other classes may be greater or less than the Class A shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31, 1996
INDUSTRY BREAKDOWN
[PERFORMANCE GRAPH]
SUMMARY OF INVESTMENTS BY COMBINED RATINGS
<TABLE>
<CAPTION>
STANDARD & PERCENTAGE OF
MOODY'S AND/OR POOR'S TOTAL INVESTMENTS
- --------------------------------------------------------------
<S> <C> <C> <C>
Aaa AAA 56.2%
Aa AA 17.3
A A 7.2
Baa BBB 12.9
Ba BB 1.5
VMIG 1/P-1 A-1+ 2.1
NR NR 2.8
-----
100.0%
-----
-----
</TABLE>
7
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C> <C>
EDUCATION -- 11.7%
$1,050,000 AAA Maricopa County School District No. 31, Series A,
AMBAC-Insured, 6.100% due 7/1/11 $1,069,688
1,000,000 AAA Maricopa County School District No. 40, Glendale
School Improvement, AMBAC-Insured, 6.300% due
7/1/11 1,040,000
750,000 AAA Maricopa County School District No. 80,
FGIC-Insured:
Chandler School, 6.000% due 7/1/13 763,125
1,000,000 AAA Partially Escrowed to Maturity with U.S.
Government Securities, 5.800% due 7/1/12(a) 1,008,750
1,000,000 AAA Maricopa County Union High School, FGIC-Insured,
District No. 213, Tempory School Improvement,
6.000% due 7/1/10 1,032,500
780,000 AAA Pima County School District No. 20, Series A,
AMBAC-Insured, 5.900% due 7/1/09 797,550
Pima County Unified School District No. 1,
FGIC-Insured, Series E, Tucson Project 1989:
1,000,000 AAA 6.750% due 7/1/10 1,113,750
500,000 AAA 5.875% due 7/1/14 497,500
- -------------------------------------------------------------------------------------
7,322,863
- -------------------------------------------------------------------------------------
GENERAL OBLIGATION -- 24.9%
520,000 AAA Arizona State COP, AMBAC-Insured, 6.250% due
9/1/10 542,750
50,000 AAA Arizona State Municipal Financing Program, COP,
Series 20, BIG-Insured, (Escrowed to Maturity
with U.S. Government Securities),
7.700% due 8/1/10(a) 58,313
250,000 AAA Arizona State Municipal Financing Program, COP,
Series 20, BIG-Insured, 7.625% due 8/1/06 290,937
450,000 AAA Cochise County COP, MBIA-Insured, 6.750% due
8/1/03 457,695
750,000 AAA Cochise County Unified School District,
FGIC-Insured, 7.500% due 7/1/10 882,186
1,000,000 A1* Maricopa County Union School District No. 8,
Osborn Elementary, 7.500% due 7/1/09 1,163,750
Maricopa County Union School District No. 11,
Peoria, MBIA-Insured, (Partially
Pre-Refunded - Escrowed to
Maturity with U.S. Government Securities to
7/1/01 Call @ 101):
1,000,000 AAA 6.400% due 7/1/10(a) 1,048,750
500,000 AAA 7.000% due 7/1/10(a) 541,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C> <C>
GENERAL OBLIGATION -- 24.9% (CONTINUED)
$ 650,000 AAA Maricopa County Union School District No. 14,
Creighton School Improvement Project 1990,
Series C, FGIC-Insured, 6.500% due 7/1/08 $ 703,625
1,000,000 AAA Maricopa County Elementary School District 68,
Alhambra Refunding and Improvement, 5.625% due
7/1/13 1,013,750
100,000 AAA Maricopa County Union School District No. 98,
Fountain Hills, FGIC-Insured, 6.625% due
7/1/10 106,125
1,000,000 AAA Maricopa County Union School District No. 216,
(Partially Pre-Refunded - Escrowed with U.S.
Government Securities to 7/1/01 Call @ 101),
FGIC-Insured,
6.700% due 7/1/11(a) 1,085,000
500,000 AAA Navajo County Union School District No. 32, Blue
Ridge, Series A, CGIC-Insured, 6.000% due
7/1/09 505,000
1,555,000 AA+ Phoenix Refunding, Series C, 6.000% due 7/1/09 1,659,965
1,400,000 AA+ Phoenix Refunding GO, Series A, 6.250% due
7/1/17 1,485,750
1,000,000 AAA Pima County Unified School District No. 1,
Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,186,250
300,000 A Puerto Rico Commonwealth GO, (Partially
Pre-Refunded - Escrowed with U.S. Government
Securities to 7/1/98 Call @ 102), 8.000% due
7/1/08(a) 323,250
500,000 A Scottsdale Mountain Communication Facilities,
District No. 3, Series A, 6.200% due 7/1/17 487,500
Tucson GO:
1,000,000 AAA Series 1984-G, FGIC-Insured, 6.250% due 7/1/18 1,025,000
1,000,000 AA Series 1994-B, 5.750% due 7/1/19 980,000
15,000 AAA Virgin Island Public Finance Authority Revenue,
Series A, (Escrowed to Maturity with U.S.
Government Securities), 7.300% due 10/1/18(a) 18,112
- -------------------------------------------------------------------------------------
15,565,583
- -------------------------------------------------------------------------------------
HOSPITAL -- 7.7%
1,000,000 Baa* Maricopa County Hospital Revenue Corp., Sun
Health Corp., 8.125% due 4/1/12 1,092,500
Maricopa County IDA:
400,000 AAA Hospital Facilities Revenue, John C. Lincoln
Hospital, FSA-Insured, 7.500% due 12/1/13 439,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------
<C> <S> <C> <C>
HOSPITAL -- 7.7% (CONTINUED)
$ 90,000 AAA Hospital Facilities Revenue, Mercy Health
System Revenue, MBIA-Insured,
(Pre-Refunded -- Escrowed with U.S.
Government Securities to 7/3/99 Call @ 102),
7.125% due 7/1/07(b) $ 98,438
500,000 AAA Series A, MBIA-Insured, 7.000% due 12/1/16 568,750
1,100,000 BBB+ Phoenix IDA, John C. Lincoln Hospital & Health,
6.000% due 12/1/10 1,017,500
Pima County IDA Health Care Corp. Revenue,
Carondelet State, St. Joseph's and St. Mary's,
BIG-Insured:
5,000 AAA 8.000% due 7/1/13(a) 5,414
65,000 AAA Pre-Refunded -- Escrowed with U.S.
Government
Securities to 7/1/98 Call @ 102,
8.000% due 7/1/13(a) 71,012
Scottsdale IDR, Scottsdale Hospital,
AMBAC-Insured:
1,500,000 AAA 5.625% due 9/1/12 1,456,875
70,000 AAA 8.500% due 9/1/17 74,725
- -------------------------------------------------------------------------------------
4,824,714
- -------------------------------------------------------------------------------------
HOUSING -- 12.3%
Casa Grande IDA, Multi-Family Housing Center:
235,000 AAA Center Park Apartments, 7.125% due 12/1/10 238,532
245,000 AAA Quail Gardens Apartments, 7.125% due 12/1/10 248,682
760,000 AAA Douglas Housing Finance Corp., 7.000% due 1/1/24 798,950
Maricopa County IDA, Statewide Single-Family
Mortgage Revenue:
410,000 Aaa* GNMA Mortgage-Backed, 8.050% due 9/1/23(b) 428,963
210,000 Aa* Series A, 7.500% due 8/1/12 221,550
Phoenix IDA:
650,000 AAA Mortgage Revenue, (Chris Ridge Village
Project), FHA-Insured, 6.750% due 11/1/12 670,313
1,000,000 AA Multi-Family Housing Revenue, Woodstone &
Silver Springs, 6.250% due 4/1/23 1,000,000
500,000 AAA 6.300% due 12/1/12(b) 505,000
Pima County IDA, Multi-Family Housing Revenue:
245,000 AAA Eastside Place Project, 7.125% due 12/1/10 248,824
485,000 AA Rancho Mirage Project, 7.050% due 4/1/22(b) 488,637
1,500,000 AAA Pima County IDA, Single-Family Mortgage Revenue,
6.750% due 11/1/27(b) 1,543,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
HOUSING -- 12.3% (CONTINUED)
$ 475,000 BBB Puerto Rico Urban Housing Revenue Bonds,
7.875% due 10/1/04 $ 523,686
245,000 AAA Sierra Vista IDA, Multi-Family Housing,
FNMA-Insured, (Steppes Apartment Project),
7.125% due 12/1/10 246,554
500,000 AAA Yuma County IDA, Multi-Family Housing,
(Alexandra
Sands Apartments Project), FHA-Insured,
7.700% due 12/1/29(b) 513,750
- -------------------------------------------------------------------------------------
7,676,566
- -------------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT -- 16.3%
900,000 AAA Glendale Municipal Property Corp., MBIA-Insured,
7.000% due 7/1/09 952,875
995,000 AAA Maricopa County IDA, Series A, Multi-Family
Housing Revenue, Mortgage Loan, FHA-Insured,
5.900% due 7/1/24 970,125
Mohave County IDA:
955,000 AAA Hospital Systems, MBIA-Insured, 5.625% due
9/1/11 938,287
1,000,000 AAA (Citizens Utility Project), Series B, 7.050%
due 8/1/20 1,080,000
750,000 NR Navajo County IDA, IDR, 7.400% due 4/1/26 755,625
1,000,000 AAA Pima County IDA, Industrial Revenue Refunding,
FSA-Insured, 7.250% due 7/15/10 1,080,000
1,500,000 A Pinal County, IDR-Browning Ferris,
5.000% due 2/01/06 1,426,875
Tempe IDR, Friendship Village:
350,000 NR Refunding Series A, 6.200% due 12/1/03 346,938
250,000 NR Series A, 6.250% due 12/1/04 246,875
1,000,000 AA Tucson COP, 6.375% due 7/1/09 1,043,750
1,275,000 AAA Tucson Local Development Corp. Lease Revenue,
FGIC-Insured, 6.250% due 7/1/12 1,326,000
- -------------------------------------------------------------------------------------
10,167,350
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
<S> <C> <C> <C>
LIFE CARE SYSTEMS -- 2.7%
$ 487,000 NR Peoria IDA, (Sierra Winds Life Care Project),
6.500% due 11/1/17 $ 355,510
1,375,000 AAA Phoenix IDA, Christian Care FHA Mortgage,
MBIA-Insured, 6.000% due 7/1/20 1,350,937
- -------------------------------------------------------------------------------------
1,706,447
- -------------------------------------------------------------------------------------
MISCELLANEOUS -- 7.6%
750,000 AA* Arizona Student Loan Revenue Acquisition
Authority,
Series B, 6.600% due 5/1/10(b) 780,937
500,000 AAA Casa Grande Excise Tax Revenue, 6.200% due
4/1/15 513,125
250,000 AAA Gilbert Improvement District No. 11,
FGIC-Insured, 7.600% due 1/1/01 258,012
1,250,000 AA+ Phoenix Civic Improvement, (New City Hall
Project), 5.100% due 7/1/28 1,089,063
400,000 A+ Phoenix Special Assignment, Central Avenue
Improvement District, 7.000% due 1/1/06 415,000
540,000 A- Puerto Rico Municipal Finance Agency, Series A,
8.250% due 7/1/08 580,500
250,000 AA Salt River Agriculture Improvement & Power,
(Electric System Project), Series A, 6.000%
due 1/1/31 247,189
Sierra Vista Municipal Property Corp.,
AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 362,100
500,000 AAA 6.150% due 1/1/15 510,625
- -------------------------------------------------------------------------------------
4,756,551
- -------------------------------------------------------------------------------------
POLLUTION CONTROL -- 9.5%
1,000,000 BBB Coconino County Pollution Control Corp., Revenue
Refunding, Arizona Public Service Co., Series A,
5.875% due 8/15/28 926,250
1,630,000 BBB Gila County IDA, Pollution Control, 8.900% due
7/1/06 1,736,666
1,000,000 BB Maricopa County Pollution Control Corp., Public
Service Co., Series A, (Palo Verde Project),
6.375% due 8/15/23 945,000
2,500,000 Baa1* Navajo County Pollution Control Corp.,
5.875% due 8/15/28 2,315,625
- -------------------------------------------------------------------------------------
5,923,541
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED) MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
PUBLIC FACILITIES -- 0.1%
$ 60,000 AAA Arizona State COP, FSA-Insured, 6.625% due
9/1/08 $ 64,425
- -------------------------------------------------------------------------------------
UTILITY -- 2.1%
1,000,000 AAA Chandler Water & Sewer Revenue Refunding,
FGIC-Insured, 6.250% due 7/1/13 1,040,000
250,000 BBB Prescott Valley Improvement District, Sewer
Collection
System, Roadway Repair, 7.900% due 1/1/12 271,250
- -------------------------------------------------------------------------------------
1,311,250
- -------------------------------------------------------------------------------------
SHORT-TERM(C) -- 2.1%
1,000,000 A-1+ Maricopa County, PCR Series 1994D, 3.600% due
5/1/24 1,000,000
300,000 A-1+ Pinal County, PCR-Newmont, 3.750% due 12/1/09 300,000
- -------------------------------------------------------------------------------------
1,300,000
- -------------------------------------------------------------------------------------
TRANSPORTATION -- 0.4%
265,000 AAA Arizona State Transportation Board, Excise Tax
Revenue, Maricopa County, MBIA-Insured, 7.000%
due 7/1/05 289,513
- -------------------------------------------------------------------------------------
WATER & SEWER -- 2.6%
1,750,000 AA- Phoenix Civic Improvement Corp., Excise Tax
Revenue, (New City Hall Project), 5.500% due
7/1/24 1,616,561
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $61,734,143**) $62,525,364
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
(a) Pre-Refunded bonds escrowed by U.S. Government Securities and bonds escrowed
to maturity by U.S. Government Securities are considered by the investment
adviser to be triple-A rated even if issuer has not applied for new ratings.
(b) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Variable rate obligation payable at par on demand at anytime on no more than
seven days notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 14 and 15 for definition of ratings and certain security
descriptions.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
BOND RATINGS
All ratings are by Standard & Poor's Corporation ('Standard & Poor's'), except
those identified by an asterisk (*) are rated by Moody's Investors Services
('Moody's'). The definitions of the applicable rating symbols are set forth
below:
Standard & Poor's -- Ratings from 'AA' to 'BB' may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
<TABLE>
<S> <C>
AAA -- Bonds rated 'AAA' have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Bonds rated 'AA' have a very strong capacity to pay interest and repay
principal and differs from the highest rated issue only in a small degree.
A -- Bonds rated 'A' have a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB -- Bonds rated 'BB' have less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'BBB - ' rating.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating from
'Aa' to 'Baa,' where 1 is the highest and 3 the lowest ranking within its
generic category.
Aaa -- Bonds that are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as 'gilt edge.' Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds that are rated 'Aa' are judged to be of high quality by all
standards. Together with the 'Aaa' group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A -- Bonds that are rated 'A' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa -- Bonds that are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
</TABLE>
14
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES RATINGS
<TABLE>
<S> <C>
SP-1 -- Standard & Poor's highest rating indicating very strong or strong capacity
to pay principal and interest; those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate demand
obligation (VRDO) rating indicating that the degree of safety regarding
timely payment is either overwhelming or very strong; those issues
determined to possess overwhelming safety characteristics are denoted with
a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having a demand feature -- VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to the
advent of the VMIG 1 rating.
</TABLE>
- --------------------------------------------------------------------------------
SECURITY DESCRIPTIONS
<TABLE>
<S> <C> <C> <C>
ABAG -- Association of Bay Area HFA -- Housing Finance Authority
Governors
AIG -- American International IDA -- Industrial Development
Guaranty
AMBAC -- American Municipal Bond Authority
Assurance Corporation IDB -- Industrial Development
Board
BAN -- Bond Anticipation Notes IDR -- Industrial Development
BIG -- Bond Investors Guaranty Revenue
CGIC -- Capital Guaranty Insurance INFLOS -- Inverse Floaters
Company ISD -- Independent School District
CHFCLI -- California Health Facility LOC -- Letter of Credit
Construction Loan Insurance MBIA -- Municipal Bond Investors
CONNIE LEE -- College Construction Loan Assurance Corporation
Insurance Association MVRICS -- Municipal Variable Rate
lnverse
COP -- Certificate of Coupon Security
Participation
EDA -- Economic Development PCR -- Pollution Control Revenue
Authority
ETM -- Escrowed To Maturity PSF -- Permanent School Fund
FLAIRS -- Floating Adjustable RAN -- Revenue Anticipation Notes
Interest
Rate Securities RIBS -- Residual Interest Bonds
FGIC -- Financial Guaranty RITES -- Residual Interest
Insurance Tax-Exempt
Company Securities
FHA -- Federal Housing TAN -- Tax Anticipation Notes
Administration
FHLMC -- Federal Home Loan Mortgage TECP -- Tax-Exempt Commercial Paper
Corporation TOB -- Tender Option Bonds
FNMA -- Federal National Mortgage TRAN -- Tax and Revenue
Anticipation
Association Notes
FRTC -- Floating Rate Trust SYCC -- Structured Yield Curve
Certificates
FSA -- Federal Savings Association Certificate
GIC -- Guaranteed Investment VA -- Veterans Administration
Contract
GNMA -- Government National VRDD -- Variable Rate Daily Demand
Mortgage
Association VRWE -- Variable Rate Wednesday
GO -- General Obligation Demand
HDC -- Housing Development
Corporation
</TABLE>
15
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $61,734,143) $62,525,364
Cash 46,614
Interest receivable 1,398,500
Receivable for Fund shares sold 100,000
Receivable for securities sold 5,000
- -------------------------------------------------------------------------------------
TOTAL ASSETS 64,075,478
- -------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 113,650
Distribution fees payable 18,099
Investment advisory fees payable 12,710
Administration fees payable 7,183
Accrued expenses 83,850
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 235,492
- -------------------------------------------------------------------------------------
TOTAL NET ASSETS $63,839,986
- -------------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 6,414
Capital paid in excess of par value 63,452,743
Undistributed net investment income 45,841
Accumulated net realized loss from security transactions (456,233)
Net unrealized appreciation of investments 791,221
- -------------------------------------------------------------------------------------
TOTAL NET ASSETS $63,839,986
- -------------------------------------------------------------------------------------
SHARES OUTSTANDING:
Class A 4,111,170
----------------------------------------------------------------------------------
Class B 2,247,635
----------------------------------------------------------------------------------
Class C 55,696
- -------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $9.95
----------------------------------------------------------------------------------
Class B * $9.95
----------------------------------------------------------------------------------
Class C ** $9.95
----------------------------------------------------------------------------------
CLASS A MAXIMIUM PUBLIC OFFERING PRICE PER SHARE
(net asset value plus 4.17% of net asset value per share) $10.36
- -------------------------------------------------------------------------------------
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed less than one year from initial purchase (See Note 4).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $4,036,809
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 4) 218,249
Administration fees (Note 4) 134,359
Distribution fees (Note 4) 218,458
Audit and legal 47,800
Registration fees 47,000
Shareholder and system servicing fees 37,291
Shareholder communications 33,000
Director's fees 12,900
Pricing service fees 10,500
Custody 5,395
Other 16,458
- -------------------------------------------------------------------------------------
TOTAL EXPENSES 781,410
Less: Investment advisory and administration fee waiver (Note 4) (110,410)
- -------------------------------------------------------------------------------------
NET EXPENSES 671,000
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,365,809
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 5):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 19,687,541
Cost of securities sold 19,897,590
- -------------------------------------------------------------------------------------
NET REALIZED LOSS (210,049)
- -------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 1,590,085
End of year 791,221
- -------------------------------------------------------------------------------------
DECREASE IN NET UNREALIZED APPRECIATION (798,864)
- -------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (1,008,913)
- -------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $ 2,356,896
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,365,809 $ 3,279,861
Net realized loss (210,049) (246,183)
Increase (decrease) in net unrealized appreciation (798,864) 2,755,230
- -------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 2,356,896 5,788,908
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 3):
Net investment income (3,278,848) (3,239,135)
Overdistribution of net investment income -- (151,087)
Net realized gains -- (416,358)
Overdistribution of net realized gains -- (623)
- -------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (3,278,848) (3,807,203)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 7,187,662 12,668,232
Net asset value of shares issued for reinvestment
of dividends 1,838,662 2,145,832
Cost of shares reacquired (10,710,274) (14,208,258)
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (1,683,950) 605,806
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,605,902) 2,587,511
NET ASSETS:
Beginning of year 66,445,888 63,858,377
- -------------------------------------------------------------------------------------
END OF YEAR* $63,839,986 $66,445,888
- -------------------------------------------------------------------------------------
* Includes undistributed (overdistributed) net
investment income: $45,841 $(41,120)
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Arizona Municipals Fund Inc. ('Fund'), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
non-diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on the trade date; (b) securities
are valued at the mean between the quoted bid and ask prices by an independent
pricing service; (c) securities maturing within 60 days are valued at cost plus
accreted discount or minus amortized premium, as applicable; (d) gains or losses
on the sale of securities are calculated by using the specific identification
method; (e) interest income, adjusted for amortization of premium and accretion
of original issue discount, is recorded on the accrual basis; market discount is
recognized upon the disposition of the security; (f) dividends and distributions
to shareholders are recorded on the ex-dividend date; (g) direct expenses are
charged to the Fund and each class; management fees and general fund expenses
are allocated on the basis of relative net assets; (h) the Fund intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (i) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ; and (j) certain prior year
numbers have been restated to reflect current year's presentation. Net
investment income, net realized gains, and net assets were not affected by this
change.
2. FUND CONCENTRATION
Since the Fund invests primarily in obligations of issuers within Arizona,
it is subject to possible concentration risks associated with economic,
political or legal developments or industrial or regional matters specifically
affecting Arizona.
3. EXEMPT-INTEREST DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax and from
19
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
4. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND AFFILIATED TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ('SBMFM'), a subsidiary of Smith
Barney Holdings Inc. ('SBH'), acts as investment adviser to the Fund. Effective
November 17, 1995, the investment advisory fee declined from 0.35% to 0.30%. The
fee is calculated at an annual rate based on the Fund's average daily net assets
and is paid by the Fund to SBMFM. This fee is calculated daily and paid monthly.
For the year ended May 31, 1996, SBMFM waived $64,184 of its investment advisory
fees.
SBMFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets up to $500
million and 0.18% of the average daily net assets in excess of $500 million.
This fee is calculated daily and paid monthly. For the year ended May 31, 1996,
SBMFM waived $46,226 of its administration fees.
In addition, The Boston Company Advisors, Inc. ('Boston Advisors'), an
indirect wholly owned subsidiary of Mellon Bank Corporation, acted as
sub-administrator to the Fund. SBMFM paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of June 19, 1995 this relationship was terminated.
Smith Barney Inc. ('SB'), another subsidiary of SBH, acts as distributor of
the Fund's shares. For the year ended May 31, 1996, SB received sales charges of
approximately $62,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ('CDSC') of 4.50% on Class B
shares if redemption occurs less than one year from initial purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00% per year
until no CDSC is incurred. Class C shares have a 1.00% CDSC if redemption occurs
within the first year from the date such investment was made. For the year ended
May 31, 1996, CDSCs paid to SB for Class B shares were approximately $55,000.
20
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
its Class A, B and C shares calculated at the annual rate of 0.15% of the
average daily net assets for each class. In addition, the Fund pays a
distribution fee with respect to its Class B and C shares calculated at the
annual rate of 0.50% and 0.55%, respectively, of the average daily net assets
for each class. For the year ended May 31, 1996, total Distribution Plan fees
were:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Distribution Plan Fees $65,532 $149,271 $3,655
- ----------------------------------------------------------------------------------------
</TABLE>
All officers and one Director of the Fund are employees of SB.
5. INVESTMENTS
During the year ended May 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------
Purchases $14,470,980
- ---------------------------------------------------------------------------------------
Sales 19,687,541
- ---------------------------------------------------------------------------------------
</TABLE>
At May 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------
Gross unrealized appreciation $1,767,252
Gross unrealized depreciation (976,031)
- ---------------------------------------------------------------------------------------
Net unrealized appreciation $ 791,221
- ---------------------------------------------------------------------------------------
</TABLE>
6. CAPITAL LOSS CARRYFORWARD
At May 31, 1996, the Fund had for Federal income tax purposes approximately
$159,000 of capital loss carryforwards available to offset future capital gains.
To the extent that these carryforward losses are used to offset capital gains,
it is probable that the gains so offset will not be distributed.
21
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amount of expiration for the carryforward are indicated below.
Expirations occurs on May 31, of the year indicated:
<TABLE>
<CAPTION>
2003 2004
<S> <C> <C>
- ----------------------------------------------------------------------------------------
Carryforward Amounts $103,000 $56,000
- ----------------------------------------------------------------------------------------
</TABLE>
7. SHARES OF BENEFICIAL INTEREST
As of May 31, 1996, the Fund has an unlimited number of shares of beneficial
interest authorized with par value of $0.001 per share. The Fund has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, specifically related to the distribution of its shares.
At May 31, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Total Paid-in Capital $39,643,313 $23,262,512 $553,332
- -------------------------------------------------------------------------------------------
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
----------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
CLASS A
Shares sold 410,532 $ 4,152,260 759,234 $ 7,271,081
Shares issued on reinvestment 122,100 1,231,440 154,771 1,492,162
Shares redeemed (703,048) (7,080,186) (1,170,667) (11,393,451)
- ----------------------------------------------------------------------------------------------
Net Decrease (170,416) $(1,696,486) (256,662) $ (2,630,208)
- ----------------------------------------------------------------------------------------------
CLASS B
Shares sold 284,163 $ 2,881,142 520,204 $ 5,024,441
Shares issued on reinvestment 57,991 584,879 67,418 649,684
Shares redeemed (356,975) (3,630,088) (292,062) (2,814,807)
- ----------------------------------------------------------------------------------------------
Net Increase (Decrease) (14,821) $ (164,067) 295,560 $ 2,859,318
- ----------------------------------------------------------------------------------------------
CLASS C
Shares sold 15,412 $ 154,260 37,852 $ 372,710
Shares issued on reinvestment 2,031 22,343 401 3,986
- ----------------------------------------------------------------------------------------------
Net Increase 17,443 $ 176,603 38,253 $ 376,696
- ----------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES 1996 1995 1994(1) 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $10.09 $ 9.82 $10.40 $ 9.84 $9.63
- ------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.53 0.54 0.54 0.58 0.59
Net realized and unrealized
gain (loss) (0.15) 0.33 (0.38) 0.65 0.32
- ------------------------------------------------------------------------------------------------
Total Income From Operations 0.38 0.87 0.16 1.23 0.91
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.52) (0.52) (0.52) (0.57) (0.60)
Overdistribution of net
investment income -- (0.02) (0.01) -- --
Net realized gains -- (0.06) (0.21) (0.08) (0.06)
Overdistribution of net
realized gains -- (0.00)* -- -- --
Capital -- -- -- (0.02) (0.04)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.60) (0.74) (0.67) (0.70)
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.95 $10.09 $ 9.82 $10.40 $9.84
- ------------------------------------------------------------------------------------------------
TOTAL RETURN 3.82% 9.38% 1.33% 12.92% 9.86%
- ------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $40,917 $43,222 $44,552 $44,055 $38,759
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.82% 0.82% 0.83% 0.77% 0.68%
Net investment income 5.20 5.37 5.24 5.66 6.02
- ------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 22% 21% 49% 44% 44%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) The investment adviser has waived all or part of its fees for the five years
ended May 31, 1996. If such fees were not waived, the per share effect on
net investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------------------- --------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.02 $0.04 $0.02 $0.04 $0.02 0.99% 1.01% 1.05% 1.10% 0.90%
</TABLE>
* Amount represents less than $0.01.
23
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS B SHARES 1996 1995 1994(1) 1993(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.09 $ 9.82 $10.40 $ 9.97
- ---------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3) 0.48 0.49 0.49 0.31
Net realized and unrealized gain (loss) (0.15) 0.33 (0.37) 0.50
- ---------------------------------------------------------------------------------------------
Total Income From Operations 0.33 0.82 0.12 0.81
- ---------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.47) (0.47) (0.48) (0.29)
Overdistribution of net investment income -- (0.02) (0.01) --
Net realized gains -- (0.06) (0.21) (0.08)
Overdistribution of net realized gains -- (0.00)* -- --
Capital -- -- -- (0.01)
- ---------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.55) (0.70) (0.38)
- ---------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.95 $10.09 $ 9.82 $10.40
- ---------------------------------------------------------------------------------------------
TOTAL RETURN 3.30% 8.78% 0.84% 8.31%`DD'
- ---------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $22,369 $22,838 $19,306 $8,149
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 1.33% 1.33% 1.35% 1.33%`D'
Net investment income 4.69 4.85 4.73 5.10`D'
- ---------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 22% 21% 49% 44%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) For the period from November 6, 1992 (inception date) to May 31, 1993.
(3) The investment adviser has waived all or part of its fees for the three
years ended May 31, 1996 and the period ended May 31, 1993. If such fees
were not waived, the per share effect on net investment income and expense
ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waivers
-------------------------------- ----------------------------
1996 1995 1994 1993 1996 1995 1994 1993
----- ----- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B $0.02 $0.03 $0.02 $0.02 1.50% 1.52% 1.57% 1.66`D'
</TABLE>
* Amount represents less than $0.01.
`DD' Total return is not annualized, as it may not be representative of the
total return for the year.
`D' Annualized.
24
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS C SHARES 1996 1995(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.09 $ 9.28
- ----------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.48 0.24
Net realized and unrealized gain (loss) (0.15) 0.86
- ----------------------------------------------------------------------------------------
Total Income From Operations 0.33 1.10
- ----------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.47) (0.22)
Overdistribution of net investment income -- (0.01)
Net realized gains -- (0.06)
Overdistribution of net realized gains -- (0.00)*
- ----------------------------------------------------------------------------------------
Total Distributions (0.47) (0.29)
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.95 $10.09
- ----------------------------------------------------------------------------------------
TOTAL RETURN 3.26% 12.10%`DD'
- ----------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $554 $386
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 1.39% 1.38%`D'
Net investment income 4.63 4.81`D'
- ----------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 22% 21%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) For the period from December 8, 1994 (inception date) to May 31, 1995.
(2) The investment adviser has waived all or part of its fees for the year ended
May 31, 1996 and the period ended May 31, 1995. If such fees were not
waived, the per share effect on net investment income and expense ratios
would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waivers
---------------------------- -----------------------
1996 1995 1996 1995
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Class C $ 0.02 $ 0.01 1.56% 1.56%`D'
</TABLE>
* Amount represents less than $0.01.
`DD' Total return is not annualized, as it may not be representative of the
total return for the year.
`D' Annualized.
25
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Smith Barney Arizona Municipals Fund
Inc. as of May 31, 1996, the related statement of operations for the year then
ended, and the statement of changes in net assets and financial highlights for
each of the years in the two-year period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The financial highlights for each of
the years or periods in the three 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 financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996 by correspondence with the custodian and brokers. As to securities sold
but not delivered, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1996, and the results of
its operations, changes in its net assets and financial highlights for the year
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
July 12, 1996
26
<PAGE>
<PAGE>
Smith Barney Arizona Municipals Fund Inc.
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
For the year ended May 31, 1996, 100% of the dividends paid by the Fund from
net investment income were tax-exempt for regular Federal income tax purposes.
27
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as `D'
The double dagger symbol shall be expressed as `DD'
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
<PAGE>
SMITH BARNEY
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, Chairman
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Larry T. McDermott
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
[LOGO]
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
TRANSFER AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Arizona Municipals Fund Inc. It is not authorized for distribution
to prospective investors unless accompanied or preceded by a current Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
SMITH BARNEY ARIZONA
MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
FD2223 7/96
