<PAGE>
SEMI-ANNUAL REPORT
SMITH BARNEY
ARIZONA
MUNICIPALS
FUND INC.
- --------------------------------
November 30, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
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SMITH BARNEY ARIZONA MUNICIPALS FUND INC.
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Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Arizona Municipals Fund for the period ended November 30, 1996. In this report,
we summarize the period's prevailing economic and market conditions and outline
our portfolio strategy. A detailed summary of the Fund's performance can be
found in the appropriate sections that follow in the semi-annual report.
For the six months ended November 30, 1996, the Class A shares of the Arizona
Municipals Fund had a total return of 6.30%. This compares favorably to the
average return of 6.24% for Arizona tax-exempt funds as reported by Lipper
Analytical Services, Inc. (Lipper is an independent fund tracking
organization.) Over the six-month period covered by this report, the Fund
distributed dividends totaling $0.259 per share for Class A shares; based on its
net asset value (NAV) of $10.31 as of November 30, 1996 and current dividend
rate of $0.0445 per share, this equates to an annualized distribution rate of
5.18%. For an Arizona state resident in the combined federal and state income
tax bracket of 41.60%, the tax free yield of 5.18% is equivalent to a taxable
yield of 8.87%.
Market and Economic Overview
Throughout 1996, the U.S. economy has continued to enjoy a healthy recovery
which began over six years ago. The national unemployment rate has fallen from
around 7.50% in 1992, to just over 5.00% in 1996. Consumer price inflation has
remained virtually unchanged since the end of 1991, and producer prices still
appear to be declining on a long-term basis. Although there were little signs
of inflation in 1996, the strength of the U.S. economy, particularly during the
first two quarters of 1996, caused inflation fears to rise among many investors
throughout most of the year. In addition, the debate over whether or not the
Federal Reserve Board (the Fed) would raise interest rates continued to linger
over the U.S. bond markets, which added to bond market volatility between April
and September. However, during the third quarter of 1996, U.S. economic growth
moderated, fears of inflation subsided, and interest rates broke out of the
trading range of 6.75% to 7.20% that had existed since April. As of November
30, 1996, the yield on the 30-year Treasury was 6.36%. The recent bond market
rally was fueled by data that seem to suggest inflation is virtually non-
existent in the U.S. economy, as well as the announcement that the Fed left
rates unchanged at its most recent Federal Open Market Committee meeting.
1
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Municipal bond yields have also declined recently as many investors became
comforted by the fact that any radical tax reform that could have resulted from
the November elections was purely political rhetoric. Looking ahead into 1997,
we believe that any future tax reform will be moderate at best. While some may
say that municipal bonds are now "rich" relative to Treasuries, as opposed to
being "inexpensive" throughout the first half of the year, we disagree. In our
view, municipal bonds are now more fairly priced relative to Treasuries.
Arizona Economic Highlights
Arizona continues to attract high numbers of new residents which has helped the
State's economy keep its strong growth momentum. In fact, the State recorded
the second largest increase in population in 1995 at 3.50%, and in 1996
Arizona's population is forecast to rise 3.00%. New residents have helped
increase retail sales and kept the housing market strong despite higher mortgage
rates. In addition, new state residents have provided a growing labor pool for
new employment. So far this year, Arizona ranks fourth in the nation in terms
of new jobs created, and manufacturing jobs are expected to increase in coming
years as a result of new semiconductor plants currently under construction in
the Phoenix area. However, despite Arizona's healthy economy, there have been
recent signs that the State's growth rate may not be sustainable at current
levels. For example, the unemployment rate in Arizona is in line with the
national rate of just over 5.00%, and just this past year alone, the State's
labor force grew by 4.10%. In addition to tighter labor markets, consumer
prices in Arizona have risen to their highest levels in 14 years, and consumer
loan delinquencies are increasing. We expect that these factors should cause
economic growth in Arizona to gradually slow during 1997.
Fund's Investment Strategy
The Arizona Municipals Fund's investment strategy continues to focus on higher
coupon bonds in order to maintain an attractive level of dividend income exempt
from Federal and Arizona state income taxes. In fact, the Fund raised its
monthly dividend as of October 1996 from $0.0425 per share to $0.0445 per share
for Class A shares and also raised the dividends in each of the Fund's other
classes by an equivalent amount. In addition, we strive to maintain a high
quality portfolio. The Fund has over 97% of its assets invested in investment
grade securities, of which approximately 60% are rated triple-A.
Given the rate of population growth in Arizona, we are positive on housing and
education bonds, and have recently increased our holdings in these sectors. As
of November 30, 1996 the majority of the Fund's assets were allocated among the
following types of municipal bond issues: general obligation bonds (27.3%),
industrial development revenue bonds (16.7%), housing bonds
2
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(12.2%), and education bonds (10.4%). The Fund's average weighted maturity as
of November 30, 1996 was approximately 19 years.
Municipal Bond Market Outlook
Throughout 1995 and 1996, the supply of new municipal bond issues was low
relative to the number of bonds that were retired. Going forward, the calling
and maturing of municipal bonds will begin to slow down, but the market in our
view will not see a large increase in municipal bond issuance. However, during
the recent November elections, 90% of bond issues that were ballot initiatives
were approved, as opposed to the 50% approval rate of two years ago. Therefore,
at some point in time, we believe an increase in municipal bond issuance will
occur, but not at the levels seen in years past. Nevertheless, we believe that
supply and demand trends should remain intact over the next couple of years.
In our opinion, another factor that could have a future impact on the bond
markets is the "Boskin Commission's" recent report on the Consumer Price Index
(CPI). The report suggests that the U.S. government has overstated the annual
inflation rate by approximately 1.10%, and recommends that the best approach to
improve the CPI might be through legislative action. If Congress and the
administration take steps to improve the accuracy of the CPI, we believe it will
be positive for the bond markets which tend to perform better in a lower-
inflation environment.
On a short-term basis, we expect to see the recent bond market rally to
continue, at least into the first quarter of 1997. In our view, the Fed should
remain on the sidelines for now, but may be compelled to raise short-term
interest rates during the first quarter of 1997 if the fourth quarter U.S.
economic numbers show any signs of inflation.
In closing, thank you for investing in the Smith Barney Arizona Municipals Fund.
We look forward to continuing to help you achieve your financial 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
December 16, 1996
3
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Capital Returns(1)
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/96 $ 9.95 $10.31 $0.26 $0.00 $0.00 6.30%+
- -----------------------------------------------------------------------------------------
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
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5/31/94 10.40 9.82 0.53 0.21 0.00 1.33
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5/31/93 9.84 10.40 0.57 0.08 0.02 12.92
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5/31/92 9.63 9.84 0.60 0.06 0.04 9.86
- -----------------------------------------------------------------------------------------
5/31/91 9.49 9.63 0.68 0.00 0.00 8.92
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5/31/90 9.66 9.49 0.71 0.05 0.00 6.31
- -----------------------------------------------------------------------------------------
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+
=========================================================================================
Total $5.69 $0.46 $0.06
=========================================================================================
</TABLE>
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Historical Performance -- Class B Shares
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<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Capital Returns(1)
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/96 $ 9.95 $10.31 $0.23 $0.00 $0.00 6.04%+
- -----------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.47 0.00 0.00 3.30
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5/31/95 9.82 10.09 0.49 0.06 0.00 8.78
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5/31/94 10.40 9.82 0.49 0.21 0.00 0.84
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Inception*- 5/31/93 9.97 10.40 0.29 0.08 0.01 8.31+
=========================================================================================
Total $1.97 $0.35 $0.01
=========================================================================================
</TABLE>
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Historical Performance -- Class C Shares
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<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Capital Returns(1)
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/96 $ 9.95 $10.31 $0.23 $0.00 $0.00 6.01%+
- -----------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.47 0.00 0.00 3.26
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Inception*- 5/31/95 9.28 10.09 0.23 0.06 0.00 12.10+
=========================================================================================
Total $0.93 $0.06 $0.00
=========================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
4
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Average Annual Total Return
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<TABLE>
<CAPTION>
Without Sales Charge(1)
----------------------------
Class A Class B Class C
=====================================================================
<S> <C> <C> <C>
Six Months Ended 11/30/96+ 6.30% 6.04% 6.01%
- ---------------------------------------------------------------------
Year Ended 11/30/96 5.40 4.89 4.93
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Five Years Ended 11/30/96 7.70 N/A N/A
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Inception* through 11/30/96 7.71 6.48 10.88
=====================================================================
<CAPTION>
With Sales Charge(2)
----------------------------
Class A Class B Class C
=====================================================================
<S> <C> <C> <C>
Six Months Ended 11/30/96+ 2.09% 1.54% 5.01%
- ---------------------------------------------------------------------
Year Ended 11/30/96 1.17 0.39 3.93
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Five Years Ended 11/30/96 6.82 N/A N/A
- ---------------------------------------------------------------------
Inception* through 11/30/96 7.25 6.48 10.88
=====================================================================
</TABLE>
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Cumulative Total Return
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<TABLE>
<CAPTION>
Without Sales Charge(2)
=====================================================================
<S> <C>
Class A (Inception* through 11/30/96) 102.58%
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Class B (Inception* through 11/30/96) 30.13
- ---------------------------------------------------------------------
Class C (Inception* through 11/30/96) 22.71
=====================================================================
</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 charges 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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
<PAGE>
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of
Smith Barney Arizona Municipals Fund vs.
the Lehman Municipal Bond Fund Index+
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June 1987 -- November 1996
[GRAPHIC]
Smith Barney Lehman
Arizona Municipals Fund Municipal Bond Fund Index
6/1/87 $ 9,600 $10,000
5/88 9,822 10,897
5/89 11,070 12,151
5/90 11,768 13,041
5/91 12,818 14,356
5/92 14,082 15,766
5/93 15,900 17,652
5/94 16,111 18,088
5/95 17,622 19,737
5/96 18,295 19,555
11/30/96 19,448 20,824
+ 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 November 30, 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>
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Portfolio Highlights (unaudited) November 30, 1996
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Industry Breakdown
[GRAPHIC]
General Obligation 27.3%
Education 10.4
Water & Sewer 2.8
Utility 4.7
Short-Term 0.8
Pollution Control 7.7
Miscellaneous 7.5
Life Care Systems 2.9
Industrial Development 16.7
Housing 12.2
Hospital 7.0
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 60.0%
Aa AA 18.1
A A 5.7
Baa BBB 12.5
VMIG 1 A-1+ 0.8
NR NR 2.9
------
100.0%
======
</TABLE>
7
<PAGE>
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Schedule of Investments (unaudited) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
<S> <C> <C> <C>
Education -- 10.4%
$1,050,000 AAA Maricopa County School District No. 31, Series A,
AMBAC-Insured, 6.100% due 7/1/11 $1,111,688
1,000,000 AAA Maricopa County School District No. 40,
Glendale School Improvement, AMBAC-Insured,
6.300% due 7/1/11 1,081,250
Maricopa County School District No. 80, FGIC-Insured:
750,000 AAA Chandler School, 6.000% due 7/1/13 798,750
1,000,000 AAA Partially Pre-Refunded -- Escrowed with
U.S. Government Securities to 7/1/06 Call @ 100,
5.800% due 7/1/12 1,041,250
1,000,000 AAA Maricopa County Union High School, FGIC-Insured,
District No. 213, Temporary School Improvement,
6.000% due 7/1/10 1,067,500
780,000 AAA Pima County School District No. 20, Series A,
AMBAC-Insured, 5.900% due 7/1/09 825,825
500,000 AAA Pinal County School District No. 43, Series A,
5.850% due 7/1/15 522,500
- -----------------------------------------------------------------------------------------------
6,448,763
- -----------------------------------------------------------------------------------------------
General Obligation -- 27.3%
520,000 AAA Arizona State COP, AMBAC-Insured, 6.250% due 9/1/10 559,650
250,000 AAA Arizona State Municipal Financing Program, COP, Series 20,
BIG-Insured, (Escrowed to Maturity with U.S.
Government Securities), 7.625% due 8/1/06 290,313
450,000 AAA Cochise County COP, MBIA-Insured, 6.750% due 8/1/03 458,100
750,000 AAA Cochise County Unified School District, FGIC-Insured,
7.500% due 7/1/10 915,000
1,000,000 AAA Maricopa County Elementary School District 68,
Alhambra, Refunding and Improvement,
5.625% due 7/1/13 1,018,750
Maricopa County School District. No. 8, Osborn Elementary:
1,000,000 A1* 7.500% due 7/1/09 1,210,000
1,000,000 AAA 5.875% due 7/1/14 1,053,750
Maricopa County School District. No. 11, Peoria,
MBIA-Insured, (Partially Pre-Refunded -- Escrowed with
U.S. Government Securities to 7/1/01 Call @ 101):
1,000,000 AAA 6.400% due 7/1/10 1,068,750
500,000 AAA 7.000% due 7/1/10 550,625
650,000 AAA Maricopa County School District No. 14, Creighton
School Improvement Project 1990, Series C,
FGIC-Insured, 6.500% due 7/1/08 736,938
100,000 AAA Maricopa County School District No. 98 Fountain Hills,
FGIC-Insured, 6.625% due 7/1/10 108,000
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
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Schedule of Investments (unaudited) (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
<S> <C> <C> <C>
General Obligation -- 27.3% (continued)
$1,000,000 AAA Maricopa County School District No. 216, FGIC-Insured,
(Partially Pre-Refunded -- Escrowed with U.S.
Government Securities to 7/1/01 Call @ 101),
6.700% due 7/1/11 $1,092,000
750,000 AAA Mohave County School District No. 1, FGIC-Insured,
5.900% due 7/1/15 785,620
500,000 AAA Navajo County School District No. 32, Blue Ridge,
Series A, CGIC-Insured, 6.000% due 7/1/09 526,875
Phoenix GO Refunding:
1,400,000 AA+ Series A, 6.250% due 7/1/17 1,601,250
1,555,000 AA+ Series C, 6.000% due 7/1/09 1,727,994
1,000,000 AAA Pima County Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,230,000
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) 321,375
500,000 A Scottsdale Mountain Communication Facilities,
District No. 3, Series A, 6.200% due 7/1/17 508,125
1,000,000 AAA Tucson GO, Series 1984-G, FGIC-Insured,
6.250% due 7/1/18 1,070,000
30,000 AAA Virgin Island Public Finance Authority Revenue,
Series A, (Escrowed to Maturity with
U.S. Government Securities), 7.300% due 10/1/18 36,825
- -----------------------------------------------------------------------------------------------
16,870,440
- -----------------------------------------------------------------------------------------------
Hospital -- 7.0%
1,000,000 Baa* Maricopa County Hospital Revenue, Sun Health Corp.,
8.125% due 4/1/12 1,103,750
Maricopa County IDA, Series A, Samaritan Health Services
MBIA-Insured:
500,000 AAA 7.000% due 12/1/16 602,500
400,000 AAA John C. Lincoln Hospital, FSA-Insured,
7.500% due 12/1/13 448,000
1,000,000 AAA Mohave County, Authorized Hospital Systems,
MBIA-Insured, 5.700% due 9/1/15 1,017,500
1,100,000 BBB+ Phoenix IDA, Hospital Revenue, John C. Lincoln Hospital &
Health, 6.000% due 12/1/10 1,071,125
70,000 AAA Scottsdale IDA, Hospital Revenue, Scottsdale Memorial
Hospital, Series A, AMBAC-Insured, 8.500% due 9/1/17 73,499
- -----------------------------------------------------------------------------------------------
4,316,374
- -----------------------------------------------------------------------------------------------
Housing -- 12.2%
Casa Grande IDA, Multi-Family Housing:
235,000 AAA Center Park Apartments, 7.125% due 12/1/10 237,999
245,000 AAA Quail Gardens Apartments, 7.125% due 12/1/10 248,126
755,000 AAA Douglas Housing Finance Corp., 7.000% due 1/1/24 803,131
380,000 Aaa* Maricopa County IDA, Statewide Single-Family Mortgage
Revenue, GNMA-Collateralized, 8.050% due 9/1/23 (b) 400,900
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
<S> <C> <C> <C>
Housing -- 12.2% (continued)
Phoenix IDA:
$ 650,000 AAA Mortgage Revenue, (Chris Ridge Village Project)
FHA-Insured, 6.750% due 11/1/12 $ 679,250
1,000,000 AA Multi-Family Housing Revenue, Woodstone & Silver
Springs 6.250% due 4/1/23 1,025,000
500,000 AAA Single-Family Mortgage Revenue, GNMA/FNMA/FHLMC-
Collateralized, 6.300% due 12/1/12 (b) 518,750
Pima County IDA, Multi-Family Housing Revenue:
245,000 AAA Eastside Place Project, FNMA-Collateralized,
7.125% due 12/1/10 251,238
485,000 AA Rancho Mirage Project, 7.050% due 4/1/22 (b) 495,913
1,500,000 AAA Single-Family Mortgage Revenue, GNMA-Collateralized,
6.750% due 11/1/27 (b)(c) 1,571,250
475,000 BBB Puerto Rico Urban Housing Revenue Bonds,
7.875% due 10/1/04 523,094
245,000 AAA Sierra Vista IDA, Multi-Family Housing, (Steppes
Apartment Project), FNMA-Insured, 7.125% due 12/1/10 246,139
500,000 AAA Yuma County IDA, Multi-Family Housing, (Alexandra
Sands Apartment Project), FHA-Insured,
7.700% due 12/1/29(b) 527,500
- -----------------------------------------------------------------------------------------------
7,528,290
- -----------------------------------------------------------------------------------------------
Industrial Development -- 16.7%
900,000 AAA Glendale Municipal Property Corp., MBIA-Insured,
7.000% due 7/1/09 959,625
990,000 AAA Maricopa County IDA, Series A, Multi-Family Housing
Revenue, Mortgage Loan, FHA-Insured,
5.900% due 7/1/24 996,188
Maricopa County IDA, Temple Grove Apartments Project,
Series A, GNMA-Collateralized:
1,000,000 AAA 6.150% due 7/20/28 1,006,250
1,000,000 AAA 6.200% due 1/20/39 1,006,250
1,000,000 AAA Mohave County IDA, (Citizens Utility Project),
Series B, 7.050% due 8/1/20 1,092,500
750,000 NR Navajo County IDA, IDR, 7.400% due 4/1/26 781,875
830,000 AAA Pima County IDA, Industrial Revenue Refunding,
FSA-Insured, 7.250% due 7/15/10 923,375
500,000 A Pinal County IDA, Solid Waste Disposal, (Browning Ferris
Industries, Inc. Project), 5.000% due 2/1/06 496,250
Tempe IDA, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 351,750
250,000 NR 6.250% due 12/1/04 250,938
1,000,000 AA Tucson COP, 6.375% due 7/1/09 1,075,000
1,275,000 AAA Tucson Local Development Finance Corp.,
Lease Revenue, FGIC-Insured, 6.250% due 7/1/12 1,364,250
- -----------------------------------------------------------------------------------------------
10,304,251
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===============================================================================================
<S> <C> <C> <C>
===============================================================================================
Life Care Systems--2.9%
$ 460,000 NR Peoria IDA, (Sierra Winds Life Care Project),
6.500% due 11/1/17 $ 414,000
1,375,000 AAA Phoenix IDA, Christian Care FHA-Mortgage,
MBIA-Insured, 6.000% due 7/1/20 1,411,094
- -----------------------------------------------------------------------------------------------
1,825,094
- -----------------------------------------------------------------------------------------------
Miscellaneous--7.5%
750,000 AA* Arizona Student Loan Revenue Acquisition Authority,
Series B, 6.600% due 5/1/10 (b) 796,875
500,000 AAA Casa Grande Excise Tax Revenue, 6.200% due 4/1/15 530,625
250,000 AAA Gilbert Improvement District No. 011, FGIC-Insured,
7.600% due 1/1/01 258,150
1,250,000 AA+ Phoenix Civic Improvement Corp., (New City Hall Project),
5.100% due 7/1/28 1,182,813
400,000 A+ Phoenix Special Assignment, Central Avenue
Improvement District, 7.000% due 1/1/06 414,580
540,000 A- Puerto Rico Municipal Finance Agency, Series A,
8.250% due 7/1/08 583,200
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/15 374,525
500,000 AAA 6.150% due 1/1/11 529,375
- -----------------------------------------------------------------------------------------------
4,670,143
- -----------------------------------------------------------------------------------------------
Pollution Control--7.7%
Coconino County Pollution Control Corp.,
Revenue Refunding:
1,000,000 BBB Arizona Public Service Co., Series A,
5.875% due 8/15/28 1,007,500
1,000,000 BBB- Nevada Power Co., 6.375% due 10/1/36 1,018,750
1,630,000 BBB Gila County IDA, Pollution Control, 8.900% due 7/1/06 1,715,510
1,000,000 Baa1* Navajo County Pollution Control Corp., Arizona Public
Service Co., 5.875% due 8/15/28 1,007,500
- -----------------------------------------------------------------------------------------------
4,749,260
- -----------------------------------------------------------------------------------------------
Utility--4.7%
1,000,000 AAA Chandler Water & Sewer Revenue Refunding,
FGIC-Insured, 6.250% due 7/1/13 1,070,000
1,500,000 Aa* Phoenix Civic Improvement Corp., Water Systems
Revenue, 6.000% due 7/1/19 1,563,750
250,000 BBB Prescott Valley Improvement District,
Sewer Collection System, Roadway Repair,
7.900% due 1/1/12 280,938
- -----------------------------------------------------------------------------------------------
2,914,688
- -----------------------------------------------------------------------------------------------
Short-Term (d)--0.8%
500,000 A-1+ Maricopa PCR, Arizona Public Service Co., Series D,
3.600% due 5/1/24 500,000
- -----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
<S> <C> <C>
================================================================================================
Water & Sewer--2.8%
$1,750,000 AA- Phoenix Civic Improvement Corp., Water Systems
Revenue, 5.500% due 7/1/24 $ 1,732,500
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--100%
(Cost--$58,976,027**) $61,859,803
================================================================================================
</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 the issuer has not applied
for new ratings.
(b) Income from these issuses is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Security segregated by Custodian for open market purchase commitment.
(d) 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 13 and 14 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("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.
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.
13
<PAGE>
- --------------------------------------------------------------------------------
Short-Term Securities Ratings
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governors
AIG -- American International Guaranty
AMBAC -- American Municipal Bond Assurance Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance
CHFCLI -- California Health Facility Construction Loan Insurance
CONNIE LEE -- College Construction Loan Insurance Association
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed To Maturity
FLAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters Company
ISD -- Independent School District
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate lnverse Coupon Security
PCR -- Pollution Control Revenue
PSF -- Permanent School Fund
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
SYCC -- Structured Yield Curve Certificate
VA -- Veterans Administration
VRDD -- Variable Rate Daily Demand
VRWE -- Variable Rate Wednesday Demand
14
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $58,976,027) $61,859,803
Cash 3,410
Interest receivable 1,343,479
Receivable for Fund shares sold 4,877
- -------------------------------------------------------------------------------
Total Assets 63,211,569
- -------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 262,271
Administration fees payable 22,235
Investment advisory fees payable 16,270
Distribution fees payable 5,513
Accrued expenses 59,112
- -------------------------------------------------------------------------------
Total Liabilities 365,401
- -------------------------------------------------------------------------------
Total Net Assets $62,846,168
===============================================================================
NET ASSETS:
Par value of capital shares $ 6,094
Capital paid in excess of par value 60,235,403
Undistributed net investment income 57,409
Accumulated net realized loss from security transactions (336,514)
Net unrealized appreciation of investments 2,883,776
- -------------------------------------------------------------------------------
Total Net Assets $62,846,168
===============================================================================
Shares Outstanding:
Class A 3,951,857
- -------------------------------------------------------------------------------
Class B 2,074,943
- -------------------------------------------------------------------------------
Class C 67,412
- -------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.31
- -------------------------------------------------------------------------------
Class B* $10.31
- -------------------------------------------------------------------------------
Class C** $10.31
- -------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.17% of net assets value per share) $10.74
===============================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within 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.
15
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 1,898,749
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 103,421
Investment advisory fees (Note 4) 94,347
Administration fees (Note 4) 62,898
Audit and legal 21,557
Shareholder communications 16,545
Shareholder and system servicing fees 14,774
Registration fees 11,353
Directors' fees 6,467
Pricing service fees 5,307
Custody 1,572
Other 1,456
- -------------------------------------------------------------------------------
Total Expenses 339,697
- -------------------------------------------------------------------------------
Net Investment Income 1,559,052
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 10,545,376
Cost of securities sold 10,425,657
- -------------------------------------------------------------------------------
Net Realized Gain 119,719
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 791,221
End of period 2,883,776
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 2,092,555
- -------------------------------------------------------------------------------
Net Gain on Investments 2,212,274
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 3,771,326
===============================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1996 (unaudited)
and the Year Ended May 31, 1996
<TABLE>
<CAPTION>
November 30 May 31
<S> <C> <C>
===============================================================================
OPERATIONS:
Net investment income $ 1,559,052 $ 3,365,809
Net realized gain (loss) 119,719 (210,049)
Increase (decrease) in net unrealized
appreciation 2,092,555 (798,864)
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,771,326 2,356,896
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 3):
Net investment income (1,547,484) (3,278,848)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,547,484) (3,278,848)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 2,152,654 7,187,662
Net asset value of shares issued for
reinvestment of dividends 719,877 1,838,662
Cost of shares reacquired (6,090,191) (10,710,274)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (3,217,660) (1,683,950)
- -------------------------------------------------------------------------------
Decrease in Net Assets (993,818) (2,605,902)
NET ASSETS:
Beginning of period 63,839,986 66,445,888
- -------------------------------------------------------------------------------
End of period* $62,846,168 $ 63,839,986
===============================================================================
* Includes undistributed net investment income of: $ 57,409 $ 45,841
===============================================================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 regular Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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. The Fund
pays SBMFM an investment advisory fee calculated at the annual rate of 0.30% of
average daily net assets. This fee is calculated daily and paid monthly.
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.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
the Fund's shares. For the six months ended November 30, 1996, SB received sales
charges of approximately $18,000 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 six months
ended November 30, 1996, CDSCs paid to SB for Class B shares were approximately
$45,000.
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 six months ended November 30, 1996, total Distribution
Plan fees were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $30,346 $70,902 $2,173
================================================================================
All officers and one Director of the Fund are employees of SB.
19
<PAGE>
- -------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- -------------------------------------------------------------------------------
5. Investments
During the six months ended November 30, 1996, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
===============================================================================
Purchases $ 8,493,452
- -------------------------------------------------------------------------------
Sales 10,545,376
===============================================================================
At November 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
===============================================================================
Gross unrealized appreciation $2,960,786 *
Gross unrealized depreciation (77,010)*
- -------------------------------------------------------------------------------
Net unrealized appreciation $2,883,776 *
===============================================================================
* Substantially the same for Federal income tax purposes.
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.
The amount of expiration for the carryforward are indicated below.
Expirations occurs on May 31 of the year indicated:
2003 2004
===============================================================================
Carryforward Amounts $103,000 $56,000
===============================================================================
7. Capital Shares
At November 30, 1996, the Fund had 500 million shares of capital stock
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 November 30, 1996, total paid-in capital amounted to the following for
each class:
Class A Class B Class C
===============================================================================
Total Paid-in Capital $38,047,964 $21,521,497 $672,036
===============================================================================
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1996 May 31, 1996
-------------------- -----------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
================================================================================
CLASS A
Shares sold 129,995 $ 1,315,454 410,532 $ 4,152,260
Shares issued on reinvestment 48,748 491,051 122,100 1,231,440
Shares redeemed (338,056) (3,401,854) (703,048) (7,080,186)
- --------------------------------------------------------------------------------
Net Decrease (159,313) $(1,595,349) (170,416) $(1,696,486)
================================================================================
CLASS B
Shares sold 71,770 $ 724,200 284,163 $ 2,881,142
Shares issued on reinvestment 21,739 218,938 57,991 584,879
Shares redeemed (266,201) (2,684,153) (356,975) (3,630,088)
- --------------------------------------------------------------------------------
Net Decrease (172,692) $(1,741,015) (14,821) $ (164,067)
================================================================================
CLASS C
Shares sold 11,145 $ 113,000 15,412 $ 154,260
Shares issued on reinvestment 982 9,888 2,031 22,343
Shares redeemed (411) (4,184) -- --
- --------------------------------------------------------------------------------
Net Increase 11,716 $ 118,704 17,443 $ 176,603
================================================================================
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1996 1995 1994(2) 1993 1992
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.95 $ 10.09 $ 9.82 $ 10.40 $ 9.84 $ 9.63
- --------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(3) 0.26 0.53 0.54 0.54 0.58 0.59
Net realized and
unrealized gain (loss) 0.36 (0.15) 0.33 (0.38) 0.65 0.32
- --------------------------------------------------------------------------------------------------
Total Income From Operations 0.62 0.38 0.87 0.16 1.23 0.91
- --------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.26) (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 (0.26) (0.52) (0.60) (0.74) (0.67) (0.70)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 10.31 $ 9.95 $ 10.09 $ 9.82 $ 10.40 $ 9.84
- --------------------------------------------------------------------------------------------------
TOTAL RETURN 6.30%+++ 3.82% 9.38% 1.33% 12.92% 9.86%
- --------------------------------------------------------------------------------------------------
NET ASSETS, END OF
PERIOD (000S) $40,756 $40,917 $43,222 $44,552 $44,055 $38,759
- --------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) 0.90%+ 0.82% 0.82% 0.83% 0.77% 0.68%
Net investment income 5.14+ 5.20 5.37 5.24 5.66 6.02
- --------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 14% 22% 21% 49% 44% 44%
==================================================================================================
</TABLE>
(1) For the six months ended November 30, 1996 (unaudited).
(2) 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.
(3) 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.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class B Shares 1996(1) 1996 1995 1994(2) 1993(3)
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.95 $ 10.09 $ 9.82 $ 10.40 $ 9.97
- --------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.23 0.48 0.49 0.49 0.31
Net realized and unrealized gain (loss) 0.36 (0.15) 0.33 (0.37) 0.50
- --------------------------------------------------------------------------------------------------------
Total Income From Operations 0.59 0.33 0.82 0.12 0.81
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.23) (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 (0.23) (0.47) (0.55) (0.70) (0.38)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End Of Period $ 10.31 $ 9.95 $ 10.09 $ 9.82 $ 10.40
- --------------------------------------------------------------------------------------------------------
Total Return 6.04%+++ 3.30% 8.78% 0.84% 8.31%+++
- --------------------------------------------------------------------------------------------------------
Net Assets, End Of Period (000S) $21,395 $22,369 $22,838 $19,306 $ 8,149
- --------------------------------------------------------------------------------------------------------
Ratios To Average Net Assets:
Expenses(4) 1.41%+ 1.33% 1.33% 1.35% 1.33%+
Net investment income 4.63+ 4.69 4.85 4.73 5.10+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 14% 22% 21% 49% 44%
========================================================================================================
</TABLE>
(1) For the six months ended November 30, 1996 (unaudited).
(2) 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.
(3) For the period from November 6, 1992 (inception date) to May 31, 1993.
(4) 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 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 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%+
</TABLE>
* Amount represents less than $0.01.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<S> <C> <C> <C>
Class C Shares 1996(1) 1996 1995(2)
===================================================================================
Net Asset Value, Beginning of Period $9.95 $10.09 $9.28
- -----------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.23 0.48 0.24
Net realized and unrealized gain (loss) 0.36 (0.15) 0.86
- -----------------------------------------------------------------------------------
Total Income From Operations 0.59 0.33 1.10
- -----------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.23) (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 (0.23) (0.47) (0.29)
- -----------------------------------------------------------------------------------
Net Asset Value, End of Period $10.31 $9.95 $10.09
- -----------------------------------------------------------------------------------
Total Return 6.01%+++ 3.26% 12.10%+++
- -----------------------------------------------------------------------------------
Net Assets, End of Period (000s) $695 $554 $386
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.45%+ 1.39% 1.38%+
Net investment income 4.59+ 4.63 4.81+
- -----------------------------------------------------------------------------------
Portfolio Turnover Rate 14% 22% 21%
===================================================================================
</TABLE>
(1) For the six months ended November 30, 1996 (unaudited).
(2) For the period from December 8, 1994 (inception date) to May 31, 1995.
(3) 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 the 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%+
</TABLE>
* Amount represents less than $0.01.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<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
Lawrence T. McDermott
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- --------------------------------
A Member of TravelersGroup[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
FD0820 1/97
