<PAGE>
================================================================================
SEMI-ANNUAL REPORT
================================================================================
Smith Barney
Arizona
Municipals
Fund Inc.
---------------------------------------------
November 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
=========================================
Smith Barney Arizona Municipals Fund Inc.
=========================================
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Arizona
Municipals Fund Inc. ("Fund") for the period ended November 30, 1997. 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.
Performance Update
For the six months ended November 30, 1997, the Class A shares of the Fund
posted a total return of 5.17%. In comparison, the average for Arizona
tax-exempt funds was 5.03% for the same period according to Lipper Analytical
Services, Inc. ("Lipper"). (Lipper is a major independent fund-tracking
organization.) For performance information on the Fund's other share classes,
please turn to page four.
During the six months covered by this report, the Fund distributed income
dividends totaling $0.27 and a capital gain distribution of $0.05 for Class A
shares. Based on the net asset value ("NAV") of $10.42 as of November 30, 1997
and current monthly income dividend rate of $0.0445 for Class A shares, this
equates to an annualized distribution rate of 5.12%. For an Arizona state
resident in the combined federal and state tax bracket of 41.06%, the tax-free
yield of 5.12% is equivalent to a taxable yield of 8.69%. (This figure assumes
an investor is in the 31% federal income tax bracket.)
Market and Economic Overview
Municipal bonds generally performed well during the reporting period, benefiting
from a combination of a strong U.S. economy and low inflation. On the political
front, Congress passed the Taxpayer Reform Act of 1997, which provided targeted
tax relief and attempted to encourage more individual savings. But, in our view,
the most significant development for both stock and bond investors alike was
Asia's financial crisis in the fall of 1997.
For most of the reporting period, bond investors remained focused on how the
Federal Reserve Board ("Fed") would respond to a strengthening U.S. economy.
Yields on the 30-year U.S. Treasury bond, a key measure of interest rates, were
confined to a fairly narrow trading range as investors attempted to reconcile
the apparent contradiction between strong economic growth and low inflation.
Despite the lowest unemployment rate in more than twenty years, signs of
inflationary pressures were nearly absent and the bond market rallied sending
interest rates lower. Nevertheless, the Fed maintained its vigilance
1
<PAGE>
against inflation and although it chose to ultimately remain on the sidelines,
it did indicate a bias toward tightening monetary policy at each of its meetings
in May, July, August and September.
In October, financial markets around the world were transformed almost overnight
as Asia's financial crisis, which had been developing since the summer, deepened
and eventually led to the sudden collapse of stock and bond markets throughout
the region. The dramatic decline of Asian financial markets caught many
investors by surprise and sentiment began to shift away from stocks in favor of
bonds as investors sought out "safe" havens. In the weeks that followed, the
U.S. Treasury bond market became one of the preferred alternatives for investors
seeking shelter from the "Asian contagion." The resulting rally in the
government bond market, along with an unusually heavy bond issuance, caused
municipal bonds to underperform U.S. Treasurys in November.
Arizona Economic Highlights
Arizona continues to enjoy phenomenal economic growth for the third year in a
row. Arizona's economic strength has been matched with even greater population
growth. Over the past century, Arizona has consistently ranked among the top
five fastest growing states for every decade except for two. This remarkable
expansion has boosted tax revenues, created budget surpluses and helped to lower
income taxes. However, the Valley of the Sun has experienced some growing pains
as it struggles to keep pace with the surging infrastructural demand for more
highways and schools.
The problem of shortage of classroom space has been compounded by a recent
federal court ruling mandating Arizona to divide resources more equitably among
school districts. As a result, we believe that the state may be forced to expand
municipal debt to fund not only the increased education needs, but for other
vital infrastructure projects as well.
Arizona municipal bonds tend to be of shorter maturity (usually between one to
ten years) than other states and therefore usually offer lower yields as well.
But because of our extensive municipal bond research capabilities and
underwriting strength, we have generally been able to identify and buy bonds
with yields that often exceed the typical Arizona municipal issue.
Fund's Investment Strategy
The Fund seeks to provide Arizona investors with as high a level of current
income exempt from federal and Arizona state income taxes as is consistent with
prudent investment management and preservation of capital. The Fund invests
primarily in investment-grade municipal securities.
Over the period covered by this report, the Fund continued to focus on
high-quality issues and remained broadly diversified across various sectors. As
of November 30, 1997, approximately 89% of the Fund's holdings were rated
2
<PAGE>
investment grade. (Investment-grade bonds are those rated Aaa, Aa, A and Baa by
Moody's Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's
Ratings Service, or have an equivalent rating by any nationally recognized
statistical rating organization, or determined by the manager to be of
equivalent quality.) In addition, 52.3% of the Fund's portfolio was invested in
AAA-rated bonds, the highest rating. At the end of the reporting period, the
Fund's average weighted maturity was roughly 19 years.
As of November 30, 1997, the Fund's largest holdings are concentrated in
industrial development bonds (18.4%), general obligation bonds (18.1%) and
housing bonds (12.3%). Going forward, we expect to place even more emphasis on
housing bonds and hospital bonds (which represented nearly 9.2% of the Fund's
holdings as of November 30, 1997). We continue to favor housing bonds because,
in our opinion, they offer greater yield potential without significant added
risk. Moreover, we believe that ongoing reform among many hospitals has improved
their efficiency and bottom lines, making select hospital bonds even more
attractive investment opportunities.
Municipal Bond Market Outlook
We remain positive on the prospects for municipal bonds in the coming months.
Although the final impact of Asia's financial crisis on U.S. markets is not yet
clear, we believe that the excess production capacity that now exists in Asia
should help to offset rising prices in the U.S. However, the U.S. bond market
could experience some short-term selling pressure should the Japanese, the
largest foreign holder of U.S. government bonds, decide to sell their U.S. debt
holdings in order to restructure their still shaky financial industry.
Municipal bond issuance in 1997 was the second largest and the market's ability
to absorb these securities is an indication of healthy investor appetite for
tax-free investments. Insurance companies were among the largest buyers of these
bonds, but we believe that more and more individual investors are beginning to
recognize the attractive investment opportunities that exist in tax-free
municipal bonds.
In closing, thank you for your investment in the Smith Barney Arizona Municipals
Fund Inc. We look forward to helping you pursue your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman Vice President and
Investment Officer
December 23, 1997
3
<PAGE>
================================================================================
Historical Performance -- Class A Shares
================================================================================
<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>
11/30/97 $10.21 $10.42 $0.27 $0.05 $0.00 5.17%+
- -------------------------------------------------------------------------------------------------------------
5/31/97 9.95 10.21 0.53 0.00 0.00 8.06
- -------------------------------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.52 0.00 0.00 3.82
- -------------------------------------------------------------------------------------------------------------
5/31/95 9.82 10.09 0.54 0.06 0.00 9.38
- -------------------------------------------------------------------------------------------------------------
5/31/94 10.40 9.82 0.53 0.21 0.00 1.33
- -------------------------------------------------------------------------------------------------------------
5/31/93 9.84 10.40 0.57 0.08 0.02 12.92
- -------------------------------------------------------------------------------------------------------------
5/31/92 9.63 9.84 0.60 0.06 0.04 9.86
- -------------------------------------------------------------------------------------------------------------
5/31/91 9.49 9.63 0.68 0.00 0.00 8.92
- -------------------------------------------------------------------------------------------------------------
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 $6.23 $0.51 $0.06
=============================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class B Shares
================================================================================
<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>
11/30/97 $10.21 $10.42 $0.24 $0.05 $0.00 4.90%+
- -------------------------------------------------------------------------------------------------------------
5/31/97 9.95 10.21 0.48 0.00 0.00 7.53
- -------------------------------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.47 0.00 0.00 3.30
- -------------------------------------------------------------------------------------------------------------
5/31/95 9.82 10.09 0.49 0.06 0.00 8.78
- -------------------------------------------------------------------------------------------------------------
5/31/94 10.40 9.82 0.49 0.21 0.00 0.84
- -------------------------------------------------------------------------------------------------------------
Inception*- 5/31/93 9.97 10.40 0.29 0.08 0.01 8.31+
=============================================================================================================
Total $2.46 $0.40 $0.01
=============================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class C Shares
================================================================================
<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>
11/30/97 $10.21 $10.42 $0.24 $0.05 $0.00 4.88%+
- -------------------------------------------------------------------------------------------------------------
5/31/97 9.95 10.21 0.47 0.00 0.00 7.49
- -------------------------------------------------------------------------------------------------------------
5/31/96 10.09 9.95 0.47 0.00 0.00 3.26
- -------------------------------------------------------------------------------------------------------------
Inception*- 5/31/95 9.28 10.09 0.23 0.06 0.00 12.10+
=============================================================================================================
Total $1.41 $0.11 $0.00
=============================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
4
<PAGE>
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
---------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six Months Ended 11/30/97+ 5.17% 4.90% 4.88%
- --------------------------------------------------------------------------------
Year Ended 11/30/97 6.91 6.38 6.34
- --------------------------------------------------------------------------------
Five Years Ended 11/30/97 6.99 6.45 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 11/30/97 8.11 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 11/30/97 7.63 6.63 9.34
================================================================================
<CAPTION>
With Sales Charge(2)
---------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six Months Ended 11/30/97+ 0.92% 0.40% 3.88%
- --------------------------------------------------------------------------------
Year Ended 11/30/97 2.63 1.88 5.34
- --------------------------------------------------------------------------------
Five Years Ended 11/30/97 6.12 6.29 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 11/30/97 7.66 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 11/30/97 7.21 6.63 9.34
================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (11/30/87 through 11/30/97) 118.04%
- --------------------------------------------------------------------------------
Class B (Inception* through 11/30/97) 38.43
- --------------------------------------------------------------------------------
Class C (Inception* through 11/30/97) 30.49
================================================================================
</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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B and C shares are June 1, 1987, November 6,
1992 and December 8, 1994, respectively.
5
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of
Smith Barney Arizona Municipals Fund Inc. vs.
the Lehman Brothers Municipal Bond Index+
- --------------------------------------------------------------------------------
November 1987 -- November 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Arizona Municipals Fund Inc. Lehman Brothers Municipal Bond Index
----------------------------------------- ------------------------------------
<S> <C> <C>
11/87 $ 9,600 $10,000
5/88 $ 9,885 $10,543
5/89 $11,140 $11,756
5/90 $11,842 $12,617
5/91 $12,899 $13,899
5/92 $14,171 $15,253
5/93 $16,001 $17,078
5/94 $16,213 $17,500
5/95 $17,733 $19,095
5/96 $18,411 $18,919
5/97 $19,895 $20,486
11/97 $20,923 $21,592
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on November
30, 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, 1997. The Lehman Brothers Municipal
Bond Index is a broad based, total return index comprised of investment
grade, fixed rate municipal bonds selected from issues larger than $50
million issued since January 1991. The 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>
================================================================================
Portfolio Highlights (unaudited) November 30, 1997
================================================================================
Industry Breakdown
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
General Obligation 18.1%
Education 10.7%
Water & Sewer 1.7%
Utility 4.8%
Pollution Control 10.6%
Miscellaneous 11.2%
Life Care Systems 3.0%
Industrial Development 18.4%
Housing 12.3%
Hospitals 9.2%
</TABLE>
Summary of Investments by Combined Ratings
<TABLE>
<CAPTION>
Standard & Percentage of
Moody's and/or Poor's Total Investments
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aaa AAA 52.3%
Aa AA 20.3
A A 7.2
Baa BBB 9.0
Ba BB 4.1
B B 1.6
VMIG 1 A-1 0.8
NR NR 4.7
------
100.0%
======
</TABLE>
7
<PAGE>
================================================================================
Schedule of Investments (unaudited) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Education -- 10.7%
$ 1,050,000 AAA Maricopa County School District No. 31,
Series A, AMBAC-Insured, 6.100% due 7/1/11 $1,123,500
1,000,000 AAA Maricopa County School District No. 40,
Glendale School Improvement, AMBAC-Insured,
6.300% due 7/1/11 1,093,750
595,000 AAA Maricopa County School District No. 66,
(Roosevelt Elementary School Project), Series B,
FGIC-Insured, 5.250% due 7/1/17 593,513
1,000,000 AAA Maricopa County School District No. 80, FGIC-Insured,
(Partially Pre-Refunded--Escrowed with U.S. government
securities to 7/1/06 Call @ 100), 5.800% due 7/1/12 (a) 1,050,000
1,000,000 AA Maricopa County Union High School District No. 210,
(Phoenix Project), Series B, 5.375% due 7/1/13 1,025,000
1,000,000 AAA Maricopa County Union High School District No. 213,
Temporary School Improvement, FGIC-Insured,
6.000% due 7/1/10 1,081,250
500,000 AAA Pinal County School District No. 43, Series A,
FGIC-Insured, 5.850% due 7/1/15 530,000
- -----------------------------------------------------------------------------------------------------------
6,497,013
- -----------------------------------------------------------------------------------------------------------
General Obligation -- 18.1%
520,000 AAA Arizona State COP, AMBAC-Insured, 6.250% due 9/1/10 565,500
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 (a) 291,875
1,000,000 AAA Maricopa County Elementary School District 68,
Alhambra, AMBAC-Insured, (Partially Pre-Refunded
--Escrowed with U.S. government securities to
7/1/03 Call @ 102), 5.625% due 7/1/13 (a) 1,040,000
Maricopa County GO:
School District No. 8, Osborne Elementary, FGIC-Insured:
1,000,000 A1* 7.500% due 7/1/09 1,225,000
600,000 AAA 5.875% due 7/1/14 637,500
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 (a) 1,071,250
500,000 AAA 7.000% due 7/1/10 (a) 548,750
650,000 AAA School District No. 14, (Creighton School Improvement
Project 1990), Series C, FGIC-Insured, (Partially
Escrowed to maturity with U.S. government
securities), 6.500% due 7/1/08 (a) 753,188
100,000 AAA School District No. 98, Fountain Hills, FGIC-Insured,
6.625% due 7/1/10 107,875
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
General Obligation -- 18.1% (continued)
$ 1,000,000 AAA School District No. 216, FGIC-Insured, (Partially
Pre-Refunded--Escrowed with U.S. government
securities to 7/1/00 Call @ 101), 6.700% due 7/1/11 (a) $ 1,071,250
1,400,000 AA+ Phoenix GO, Refunding, Series A, 6.250% due 7/1/17 1,618,750
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,256,250
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) 312,192
500,000 A Scottsdale Mountain Communication Facilities, GO,
District No. 3, Series A, 6.200% due 7/1/17 517,500
- -----------------------------------------------------------------------------------------------------------
11,016,880
- -----------------------------------------------------------------------------------------------------------
Hospitals -- 9.2%
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 Baa1* 5.900% due 4/1/09 1,561,875
1,000,000 Baa1* 6.125% due 4/1/18 1,048,750
Maricopa County IDA, Series A, Samaritan Health Services:
210,000 AAA John C. Lincoln Hospital, FSA-Insured,
7.500% due 12/1/13 231,788
500,000 AAA MBIA-Insured, 7.000% due 12/1/16 610,000
1,000,000 AAA Mohave County Authorized Hospital Systems,
MBIA-Insured, 5.700% due 9/1/15 1,038,750
1,070,000 AAA Phoenix IDA, Hospital Revenue, John C. Lincoln Hospital,
FSA-Insured, 5.400% due 12/1/10 1,122,163
- -----------------------------------------------------------------------------------------------------------
5,613,326
- -----------------------------------------------------------------------------------------------------------
Housing -- 12.3%
Casa Grande IDA, Multi-Family Housing, FNMA-Collateralized:
235,000 AAA Center Park Apartments, 7.125% due 12/1/10 235,000
240,000 AAA Quail Gardens Apartments, 7.125% due 12/1/10 240,000
745,000 AAA Douglas Housing Finance Corp., FHA-Insured,
7.000% due 1/1/24 799,944
355,000 Aaa* Maricopa County IDA, Statewide Single-Family
Mortgage Revenue, GNMA-Collateralized,
8.050% due 9/1/23 (b) 376,300
Phoenix IDA:
650,000 AAA Mortgage Revenue, (Chris Ridge Village Project),
FHA-Insured, 6.750% due 11/1/12 689,000
1,000,000 AA Multi-Family Housing Revenue,
Woodstone & Silver Springs, 6.250% due 4/1/23 1,050,000
455,000 AAA Single-Family Mortgage Revenue,
GNMA/FNMA/FHLMC-Collateralized,
6.300% due 12/1/12 (b) 487,988
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Housing -- 12.3% (continued)
Pima County IDA, Multi-Family Housing Revenue:
$ 475,000 AA Rancho Mirage Project, 7.050% due 4/1/22 (b) $ 495,188
Single-Family Mortgage Revenue, GNMA-Collateralized:
940,000 AAA 6.750% due 11/1/27 (b)(c) 1,009,325
800,000 AAA 6.250% due 11/1/30 (b) 845,000
475,000 BBB Puerto Rico Urban Housing Revenue Bonds,
7.875% due 10/1/04 511,813
245,000 AAA Sierra Vista IDA, Multi-Family Housing,
(Steppes Apartment Project), FNMA-Collateralized,
7.125% due 12/1/10 249,180
500,000 AAA Yuma County IDA, Multi-Family Housing, (Alexandra
Sands Apartment Project), FHA-Insured,
7.700% due 12/1/29 (b) 526,250
- -----------------------------------------------------------------------------------------------------------
7,514,988
- -----------------------------------------------------------------------------------------------------------
Industrial Development -- 18.4%
900,000 AAA Glendale Municipal Property Corp., IDA,
MBIA-Insured, 7.000% due 7/1/09 946,125
2,805,000 AAA Maricopa County IDA, Series A, Multi-Family Housing
Revenue, Mortgage Loan, FHA-Insured,
5.900% due 7/1/24 2,896,156
1,000,000 AA+ Mohave County IDA, (Citizens Utility Project),
Series B, 7.050% due 8/1/20 (c) 1,072,500
750,000 NR Navajo County, IDA, IDR, 7.400% due 4/1/26 (b) 826,875
Pima County IDA, Industrial Revenue Refunding:
830,000 AAA FSA-Insured, 7.250% due 7/15/10 928,563
1,000,000 B Tucson Electric Power Co. Project, Series B,
6.000% due 9/1/29 (c) 1,013,750
500,000 AAA Puerto Rico Commonwealth Infrastructure Financing
Authority, AMBAC-Insured, 5.000% due 7/1/28 483,125
Tempe IDA, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 356,563
250,000 NR 6.250% due 12/1/04 254,375
1,000,000 AA Tucson COP, 6.375% due 7/1/09 1,081,250
1,275,000 AAA Tucson Local Development Finance Corp., Lease Revenue,
FGIC-Insured, 6.250% due 7/1/12 1,375,406
- -----------------------------------------------------------------------------------------------------------
11,234,688
- -----------------------------------------------------------------------------------------------------------
Life Care Systems -- 3.0%
421,000 NR Peoria IDA, (Sierra Winds Life Care Project),
6.500% due 11/1/17 421,000
1,375,000 AAA Phoenix IDA, Christian Care, FHA-Mortgage,
MBIA-Insured, 6.000% due 7/1/20 1,431,719
- -----------------------------------------------------------------------------------------------------------
1,852,719
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Miscellaneous -- 10.4%
$ 750,000 Aa* Arizona Student Loan Revenue Acquisition Authority,
Series B, 6.600% due 5/1/10 (b) $ 813,750
500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
6.200% due 4/1/15 536,250
1,250,000 AA+ Phoenix Civic Improvement Corp., (New City Hall Project),
5.100% due 7/1/28 1,215,625
400,000 A+ Phoenix Special Assignment, Central Avenue
Improvement District, 7.000% due 1/1/06 406,676
2,500,000 AA Salt River Agricultural Project, Series A, 5.000% due 1/1/20 2,431,250
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 382,513
500,000 AAA 6.150% due 1/1/15 536,250
- -----------------------------------------------------------------------------------------------------------
6,322,314
- -----------------------------------------------------------------------------------------------------------
Pollution Control -- 10.6%
Coconino County Pollution Control Corp., Revenue Refunding:
1,000,000 A- Arizona Public Service Co., Series A,
5.875% due 8/15/28 1,036,250
Nevada Power Co.:
1,000,000 BBB- 6.375% due 10/1/36 (b) 1,063,750
1,000,000 BBB- Series B, 5.800% due 11/1/32 1,011,250
2,500,000 BB+ Maricopa County PCR, Arizona Public Service Co.,
5.750% due 11/1/22 2,500,000
850,000 A- Navajo County PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28 880,813
- -----------------------------------------------------------------------------------------------------------
6,492,063
- -----------------------------------------------------------------------------------------------------------
Short Term (d) -- 0.8%
500,000 A-1+ Maricopa PCR, Arizona Public Service Co., Series D,
3.900% due 5/1/24 500,000
- -----------------------------------------------------------------------------------------------------------
Utility -- 4.8%
1,000,000 AAA Chandler Water & Sewer Revenue Refunding,
FGIC-Insured, 6.250% due 7/1/13 1,077,500
1,500,000 Aa* Phoenix Civic Improvement Corp., Water Systems Revenue,
6.000% due 7/1/19 1,571,250
250,000 BBB Prescott Valley Improvement District,
Sewer Collection System, Roadway Repair,
7.900% due 1/1/12 279,688
- -----------------------------------------------------------------------------------------------------------
2,928,438
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Water & Sewer -- 1.7%
$ 1,000,000 NR Gilbert Wastewater Systems Revenue,
6.875% due 4/1/16 $ 1,016,250
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $57,796,506**) $ 60,988,679
===========================================================================================================
</TABLE>
(a) Pre-Refunded bond escrowed with U.S. government securities and bond
escrowed to maturity with U.S. government securities are considered by the
investment adviser to be triple-A rated even if issuer has not applied for
new ratings.
(b) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Security is segregated by Custodian for open market purchase commitment.
(d) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 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 "B" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standings within the major rating
categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments.
B -- Bonds rated "B" have a greater vulnerability to default but
currently have the capacity to meet interest payments and
principal payments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
Moody's -- 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 Security Ratings
================================================================================
SP-1 -- Standard & Poor's highest rating indicating very strong capacity
to pay principal and interest; those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+)
sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of
safety regarding timely payment is either overwhelming or very
strong; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having a demand feature -- VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to
the advent of the VMIG 1 rating.
================================================================================
Security Descriptions
================================================================================
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- AMBAC Idemnity Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance
CHFCLI -- California Health Facility Construction Loan Insurance
CONNIE LEE -- College Construction Loan Insurance Association
COP -- Certificate of Participation
EDA -- Economic Development Authority
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FLAIRS -- Floating Adjustable Interest Rate Securities
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Financial Security Assurance
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters Company
ISD -- Independent School District
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCR -- Pollution Control Revenue
PSF -- Permanent School Fund
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
VA -- Veterans Administration
VRDD -- Variable Rate Daily Demand
VRWE -- Variable Rate Wednesday Demand
14
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) November 30, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $57,796,506) $60,988,679
Cash 76,596
Receivable for securities sold 2,070,053
Interest receivable 1,118,711
Receivable for Fund shares sold 604,433
- -------------------------------------------------------------------------------
Total Assets 64,858,472
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 2,979,058
Dividends payable 251,419
Investment advisory fees payable 14,758
Administrative fees payable 9,893
Distribution fees payable 4,313
Accrued expenses 69,701
- -------------------------------------------------------------------------------
Total Liabilities 3,329,142
- -------------------------------------------------------------------------------
Total Net Assets $61,529,330
===============================================================================
NET ASSETS:
Par value of capital shares $5,904
Capital paid in excess of par value 58,365,438
Overdistributed net investment income (40,697)
Accumulated net realized gain from security transactions 6,512
Net unrealized appreciation of investments 3,192,173
- -------------------------------------------------------------------------------
Total Net Assets $61,529,330
===============================================================================
Shares Outstanding:
Class A 3,947,546
----------------------------------------------------------------------------
Class B 1,877,862
----------------------------------------------------------------------------
Class C 78,939
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.42
----------------------------------------------------------------------------
Class B* $10.42
----------------------------------------------------------------------------
Class C** $10.42
----------------------------------------------------------------------------
Class A Maximium Public Offering Price Per Share
(net asset value plus 4.17% of net asset value per share) $10.85
===============================================================================
</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, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $1,720,859
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 95,748
Investment advisory fees (Note 4) 88,680
Administration fees (Note 4) 59,120
Audit and legal 20,494
Shareholder communications 16,366
Registration fees 16,182
Shareholder and system servicing fees 13,250
Directors' fees 6,748
Pricing service fees 5,338
Custody 1,730
Other 2,019
- --------------------------------------------------------------------------------
Total Expenses 325,675
- --------------------------------------------------------------------------------
Net Investment Income 1,395,184
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 9,721,311
Cost of securities sold 9,400,609
- --------------------------------------------------------------------------------
Net Realized Gain 320,702
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 1,992,317
End of period 3,192,173
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,199,856
- --------------------------------------------------------------------------------
Net Gain on Investments 1,520,558
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $2,915,742
================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended November 30, 1997 (unaudited)
and the Year Ended May 31, 1997
<TABLE>
<CAPTION>
November 30 May 31
===============================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $1,395,184 $3,057,413
Net realized gain 320,702 410,175
Increase in net unrealized appreciation 1,199,856 1,201,096
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,915,742 4,668,684
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 3):
Net investment income (1,482,136) (3,056,999)
Net realized gains (268,132) --
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,750,268) (3,056,999)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 5,601,490 4,666,382
Net asset value of shares issued
for reinvestment of dividends 870,265 1,730,984
Cost of shares reacquired (4,120,282) (13,836,654)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 2,351,473 (7,439,288)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 3,516,947 (5,827,603)
NET ASSETS:
Beginning of period 58,012,383 63,839,986
- -------------------------------------------------------------------------------
End of period* $61,529,330 $58,012,383
===============================================================================
* Includes undistributed (overdistributed)
net investment income of: $(40,697) $46,255
===============================================================================
</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 trade date; (b) securities are
valued at the mean between the quoted bid and ask prices provided by an
independent pricing service; (c) securities maturing within 60 days are valued
at cost plus accreted discount or minus amortized premium, which approximates
value; (d) gains or losses on the sale of securities are calculated by using the
specific identification method; (e) interest income, adjusted for amortization
of premium and accretion of original issue discount, is recorded on an accrual
basis; market discount is recognized upon the disposition of the security; (f)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (g) direct expenses are charged to each class; management fees and general
fund expenses are allocated on the basis of relative net assets; (h) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (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.
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.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
18
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
4. Investment Advisory Agreement, Administration
Agreement And Affiliated Transactions
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH"), acts as investment adviser to the Fund. The Fund pays MMC an
investment advisory fee calculated at an annual rate of 0.30% of average daily
net assets. This fee is calculated daily and paid monthly.
MMC 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 SSBH, acts as distributor
of the Fund's shares. For the six months ended November 30, 1997, SB received
sales charges of approximately $38,000 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 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 have a 1.00% CDSC if redemption occurs
within one year from initial purchase. For the six months ended November 30,
1997, CDSCs paid to SB for Class B shares were approximately $28,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to its Class A, B and C shares calculated at an annual rate of 0.15% of the
average daily net assets for each class. In addition, the Fund pays a
distribution fee with respect to its Class B and C shares calculated at an
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, 1997, total Distribution
Plan fees were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $28,980 $63,839 $2,929
================================================================================
</TABLE>
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, 1997, 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 $12,349,386
- --------------------------------------------------------------------------------
Sales 9,721,311
================================================================================
</TABLE>
At November 30, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
===============================================================================
<S> <C>
Gross unrealized appreciation $3,201,803
Gross unrealized depreciation (9,630)
- -------------------------------------------------------------------------------
Net unrealized appreciation $3,192,173
===============================================================================
</TABLE>
6. Capital Loss Carryforward
At May 31, 1997, the Fund had, for Federal income tax purposes,
approximately $46,000 of capital loss carryforwards available to offset future
capital gains expiring May 31, 2004. 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.
7. Capital Shares
At November 30, 1997, 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, 1997, 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 $38,088,505 $19,495,047 $787,790
================================================================================
</TABLE>
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, 1997 May 31, 1997
---------------------- ----------------------
Shares Amount Shares Amount
========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 406,764 $ 4,249,234 268,503 $ 2,733,912
Shares issued on reinvestment 56,033 583,468 116,288 1,179,656
Shares redeemed (167,322) (1,740,355) (843,890) (8,560,723)
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) 295,475 $ 3,092,347 (459,099) $(4,647,155)
========================================================================================
Class B
Shares sold 127,338 $ 1,323,184 167,834 $ 1,703,600
Shares issued on reinvestment 25,836 269,040 51,651 523,844
Shares redeemed (222,588) (2,315,386) (519,844) (5,271,747)
- ----------------------------------------------------------------------------------------
Net Decrease (69,414) $ (723,162) (300,359) $(3,044,303)
========================================================================================
Class C
Shares sold 2,798 $ 29,072 22,633 $ 228,870
Shares issued on reinvestment 1,706 17,757 2,709 27,484
Shares redeemed (6,192) (64,541) (411) (4,184)
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) (1,688) $ (17,712) 24,931 $ 252,170
========================================================================================
</TABLE>
21
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares
1997(1) 1997 1996 1995 1994(2) 1993
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.21 $9.95 $10.09 $9.82 $10.40 $9.84
- -------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.26 0.53 0.53 0.54 0.54 0.58
Net realized and
unrealized gain (loss) 0.27 0.26 (0.15) 0.33 (0.38) 0.65
- -------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.53 0.79 0.38 0.87 0.16 1.23
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.27) (0.53) (0.52) (0.54) (0.53) (0.57)
Net realized gains (0.05) -- -- (0.06) (0.21) (0.08)
Capital -- -- -- -- -- (0.02)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.32) (0.53) (0.52) (0.60) (0.74) (0.67)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.42 $10.21 $9.95 $10.09 $9.82 $10.40
- -------------------------------------------------------------------------------------------------------------------------
Total Return 5.17%++ 8.06% 3.82% 9.38% 1.33% 12.92%
- -------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $41,143 $37,304 $40,917 $43,222 $44,552 $44,055
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 0.91%+ 0.88% 0.82% 0.82% 0.83% 0.77%
Net investment income 4.84+ 5.17 5.20 5.37 5.24 5.66
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 17% 27% 22% 21% 49% 44%
=========================================================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) The investment adviser has waived all or part of its fees for the four
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 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.02 $0.04 $0.02 $0.04 0.99% 1.01% 1.05% 1.10%
</TABLE>
++ 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 1997(1) 1997 1996 1995 1994(2) 1993(3)
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.21 $9.95 $10.09 $9.82 $10.40 $9.97
- ---------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.23 0.48 0.48 0.49 0.49 0.31
Net realized and
unrealized gain (loss) 0.27 0.26 (0.15) 0.33 (0.37) 0.50
- ---------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.50 0.74 0.33 0.82 0.12 0.81
- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.24) (0.48) (0.47) (0.49) (0.49) (0.29)
Net realized gains (0.05) -- -- (0.06) (0.21) (0.08)
Capital -- -- -- -- -- (0.01)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.29) (0.48) (0.47) (0.55) (0.70) (0.38)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.42 $10.21 $9.95 $10.09 $9.82 $10.40
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 4.90%++ 7.53% 3.30% 8.78% 0.84% 8.31%++
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $19,564 $19,886 $22,369 $22,838 $19,306 $8,149
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.43%+ 1.39% 1.33% 1.33% 1.35% 1.33%+
Net investment income 4.32+ 4.66 4.69 4.85 4.73 5.10+
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 17% 27% 22% 21% 49% 44%
===========================================================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(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 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%+
</TABLE>
++ 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>
<CAPTION>
Class C Shares 1997(1) 1997 1996 1995(2)
================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.21 $9.95 $10.09 $9.28
- ------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.23 0.47 0.48 0.24
Net realized and unrealized gain (loss) 0.27 0.26 (0.15) 0.86
- ------------------------------------------------------------------------------------------------
Total Income From Operations 0.50 0.73 0.33 1.10
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.24) (0.47) (0.47) (0.23)
Net realized gains (0.05) -- -- (0.06)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.29) (0.47) (0.47) (0.29)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.42 $10.21 $9.95 $10.09
- ------------------------------------------------------------------------------------------------
Total Return 4.88%++ 7.49% 3.26% 12.10%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $822 $822 $554 $386
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.46%+ 1.42% 1.39% 1.38%+
Net investment income 4.29+ 4.63 4.63 4.81+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 17% 27% 22% 21%
================================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (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>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
Smith Barney SMITH BARNEY
Arizona Municipals ------------
Fund Inc.
A Member of TraverlersGroup[LOGO]
Directors Investment Adviser
and Administrator
Herbert Barg Mutual Management Corp.
Alfred J. Bianchetti
Martin Brody Distributor
Dwight B. Crane Smith Barney Inc.
Burt N. Dorsett
Elliot S. Jaffe Custodian
Stephen E. Kaufman PNC Bank, N.A.
Joseph J. McCann
Heath B. McLendon, Chairman Transfer Agent
Cornelius C. Rose, Jr. First Data Investor Services Group, Inc.
P.O. Box 9134
James J. Crisona, Emeritus Boston, MA 02205-9134
Officers
Heath B. McLendon
President and This report is submitted for the general
Chief Executive Officer information of the shareholders of Smith
Barney Arizona Municipals Fund Inc. It
Lewis E. Daidone is not authorized for distribution to
Senior Vice President prospective investors unless accompanied
and Treasurer or preceded by a current Prospectus for
the Fund, which contains information
Lawrence T. McDermott concerning the Fund's investment
Vice President and policies and expenses as well as other
Investment Officer pertinent information.
Thomas M. Reynolds
Controller Smith Barney Arizona Municipals Fund Inc.
388 Greenwich Street
Christina T. Sydor New York, New York 10013
Secretary www.smithbarney.com
FD0820 1/98
