<PAGE>
================================================================================
Smith Barney
Arizona
Municpals
Fund Inc.
Annual Report
May 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day. (sm)
================================================================================
<PAGE>
Smith Barney [PHOTO] [PHOTO]
Arizona
Municipals
Fund Inc.
HEATH B. LAWRENCE T.
MCLENDON MCDERMOTT
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Arizona
Municipals Fund Inc. ("Fund") for the period ended May 31, 1998. 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 period ended May 31, 1998, the Class A shares of the Fund posted a total
return of 9.00%. In comparison, the average for Arizona tax-exempt funds was
8.73% for the same period according to Lipper Analytical Services, Inc. (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 twelve months covered by this report, the Fund distributed income
dividends totaling $0.52 and a capital gain distribution of $0.05 per Class A
share. Based on its net asset value ("NAV") of $10.54 as of May 31, 1998 and
current monthly dividend rate of $0.0425 per share, this equates to annualized
distribution rate of 4.84%. For an Arizona State resident in the combined
federal and state tax bracket of 39.58%, the tax-free yield of 4.84% is
equivalent to a taxable yield of 8.01%. (This figure assumes an investor is in
the 36% federal income tax bracket.)
Market and Economic Overview
Interest rates continued to decline overall during the course of the reporting
period. However, the bond markets did experience volatility as investors
responded to a conflicting combination of low inflation and falling
unemployment. The Federal Reserve Board ("Fed") last raised the federal-funds
rate by 0.25% in March 1997, but has since chosen to remain on the sidelines.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 1
<PAGE>
(The federal-funds rate is the interest rate banks charge each other for
overnight loans and a closely watched indicator of the direction of interest
rates.) However, the persistent strength of the U.S. economy heightened fears
among many investors that the Fed would raise short-term interest rates.
Since the end of October, one of the dominant themes in the financial markets
has been the Asian financial crisis and the extent of the impact it will have on
the U.S. economy. We expect at least a modest dampening effect on growth in the
first part of the year with inflation continuing to trend lower in spite of wage
pressures resulting from an extremely tight labor market.
Since Asia's problems surfaced last summer, many investors have gravitated to
"safe haven" investments such as U.S. Treasurys. Foreign investors, who have
nothing to gain by investing in municipal bonds since they are not eligible to
reap the benefits of tax-exempt bond funds, have been big buyers of U.S.
Treasury notes and bonds lately.
Arizona Economic Highlights
Arizona continued to be one of the fastest-growing states during the reporting
period. Job growth in the major urban areas of Arizona has been impressive. The
North American Free Trade Agreement ("NAFTA") has helped the state by opening up
major markets for Arizona-made goods. In addition, Arizona's high technology
industries have increased their presence in the state and that has helped to
broaden the diversification of its economy.
Because of the large amount of state issuance the market for Arizona bonds has
become less expensive relative to the national market and we think Arizona bonds
are currently very attractive. During the reporting period, the Fund focussed on
two specific issues -- the city of Mesa and the Phoenix Civic Center. We favored
these bonds because of their attractive yields and 10-year call protection.
(Call protection is the length of time during which a security cannot be
redeemed by the issuer.)
Investment Strategy
The Fund seeks to provide Arizona investors with the maximum amount of income
exempt from Federal and Arizona state income taxes as is consistent with the
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 May 31, 1998, approximately 94% of the Fund's holdings were rated investment
grade. (Investment-grade bonds are those rated in one of the four highest
ratings categories by any nationally recognized statistical rating organization,
or determined by the
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
manager to be of equivalent quality.) In addition, 62% 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 May 31, 1998, the Fund's largest holdings are concentrated in general
obligation bonds (23.5%), industrial development bonds (14.2%) and housing bonds
(10.6%).
Municipal Bond Market Outlook
Municipal bond issuance in 1997 was the second largest in history and the
market's ability to absorb these securities was an indication of the 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. Moreover, a heavy supply of bond issues
usually depresses prices which, in turn, provide us with a favorable opportunity
to purchase longer-term bonds and enhance the call protection and the relative
performance of the funds we manage.
Going forward, we remain positive on the prospects for the municipal bond
market. We expect a moderately expanding U.S. economy with the Fed maintaining
its vigilance against higher inflationary pressures. Therefore, our outlook for
municipal bonds over the next six months remains optimistic.
In closing, thank you for your investment in the Smith Barney Arizona Municipals
Fund Inc. We look forward to helping you achieve your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman Vice President and
Investment Officer
June 23, 1998
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Smith Barney Arizona Municipals Fund Inc. 3
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Historical Performance -- Class A Shares
================================================================================
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/98 $10.21 $10.54 $ 0.52 $ 0.05 $ 0.00 9.00%
- --------------------------------------------------------------------------------
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
================================================================================
Total $5.89 $0.51 $0.06
================================================================================
<CAPTION>
================================================================================
Historical Performance -- Class B Shares
================================================================================
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/98 $10.21 $10.54 $0.47 $0.05 $0.00 8.46%
- --------------------------------------------------------------------------------
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 $2.69 $0.40 $0.01
================================================================================
================================================================================
Historical Performance -- Class C Shares
================================================================================
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/98 $10.21 $10.53 $0.47 $0.05 $0.00 8.30%
- --------------------------------------------------------------------------------
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 $1.64 $0.11 $0.00
================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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4 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Return
================================================================================
Without Sales Charge(1)
--------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 5/31/98 9.00% 8.46% 8.30%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/98 6.27 5.73 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/98 8.17 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 5/31/98 7.62 6.65 8.95
================================================================================
<CAPTION>
With Sales Charge(2)
--------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 5/31/98 4.60% 3.96% 7.30%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/98 5.41 5.57 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 5/31/98 7.74 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 5/31/98 7.23 6.65 8.95
================================================================================
<CAPTION>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (5/31/88 through 5/31/98) 119.39%
- --------------------------------------------------------------------------------
Class B (Inception* through 5/31/98) 43.12
- --------------------------------------------------------------------------------
Class C (Inception* through 5/31/98) 34.75
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales 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.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 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 and
Lipper Arizona Municipal Fund Average+
- --------------------------------------------------------------------------------
May 1988 -- May 1998
[THE FOLLOWING DATA WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATTER]
<TABLE>
<CAPTION>
Smith Barney Arizona Lehamn Brothers Municipal Lipper Arizona Municipal
Municpals Fund Inc. Bond Index Fund Average
-------------------- ------------------------- ------------------------
<S> <C> <C> <C>
5/88 9,604 10,000 10,000
5/89 10,824 11,151 11,315
5/90 11,506 11,967 11,990
5/91 12,533 13,174 13,013
5/92 13,769 14,468 14,320
5/93 15,547 16,199 16,115
5/94 15,753 16,599 16,373
5/95 17,231 18,112 17,847
5/96 17,889 18,939 18,479
5/97 19,331 20,507 19,916
5/98 21,071 22,432 21,654
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on May 31,
1988, assuming deduction of the maximum 4.00% sales charge at the time of
investment and reinvestment of dividends and capital gains, if any, at net
asset value through May 31, 1998. 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 Lipper Arizona Municipal Fund Average is composed
of the Fund's peer group of mutual funds (39 funds as of May 31, 1998). 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 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Portfolio Highlights (unaudited) May 31, 1998
================================================================================
Industry Breakdown
[THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATTER]
<TABLE>
<S> <C>
Hospitals 10.2%
General Obligations 23.5%
Education 8.8%
Water & Sewer 3.1%
Utility 10.6%
Housing 10.6%
Industrial Development 14.2%
Life Care Systems 2.7%
Miscellaneous 11.2%
Pollution Control 5.1%
</TABLE>
Summary of Investments by Combined Ratings
Standard & Percentage of
Moody's and/or Poor's Total Investments
- -------------------------------------------------------------------------------
Aaa AAA 62.0%
Aa AA 16.2
A A 9.1
Baa BBB 6.6*
B B 1.5
VMIG 1 A-1 0.3
NR NR 4.3
-----
100.0%
=====
* 2.3% of investments were rated by Fitch Investors Services, Inc.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 7
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Schedule of Investments May 31, 1998
==========================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Education -- 8.8%
$1,050,000 AAA Maricopa County School District No. 31,
Series A, AMBAC-Insured, 6.100% due 7/1/11 $1,145,812
1,000,000 AAA Maricopa County School District No. 40,
Glendale School Improvement, AMBAC-Insured,
6.300% due 7/1/11 1,117,500
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 1,066,250
1,000,000 AA Maricopa County Unified High School District No. 210,
(Phoenix Project), Series B, 5.375% due 7/1/13 1,038,750
500,000 AAA Pinal County School District No. 43,
Series A, FGIC-Insured, 5.850% due 7/1/15 538,750
1,000,000 AAA Tempe Unified High School District No. 213,
Temporary School Improvement, FGIC-Insured,
(Partially Pre-Refunded -- Escrowed with state and
local government securities to 7/1/04 Call @ 101),
6.000% due 7/1/10 1,085,000
- ------------------------------------------------------------------------------------------
5,992,062
- ------------------------------------------------------------------------------------------
General Obligation -- 23.5%
520,000 AAA Arizona State COP, AMBAC-Insured,
6.250% due 9/1/10 567,450
250,000 AAA Arizona State Municipal Financing Program,
COP, Series 20, BIG-Insured, (Escrowed to Maturity
with U.S. government securities), 7.625% due 8/1/06 291,562
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 1,056,250
Maricopa County GO:
School District No. 8, Osborne Elementary:
1,000,000 A1* 7.500% due 7/1/09 1,260,000
600,000 AAA FGIC-Insured, 5.875% due 7/1/14 650,250
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 1,070,000
500,000 AAA 7.000% due 7/1/10 544,375
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 7/1/08 756,437
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Schedule of Investments (continued) May 31, 1998
==========================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
General Obligation -- 23.5% (continued)
$ 100,000 AAA School District No. 98, Fountain Hills, FGIC-Insured,
(Partially Pre-Refunded-- Escrowed with
U.S. government securities to 7/1/01 Call @ 101),
6.625% due 7/1/10 $ 107,625
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 1,061,250
3,000,000 AAA Mesa GO, FGIC-Insured, 5.000% due 7/1/18 2,981,250
1,400,000 AA+ Phoenix GO, Refunding, Series A, 6.250% due 7/1/17 1,622,250
200,000 A-1+ Phoenix GO, Series 95-2, 3.950% due 6/1/20(a) 200,000
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,271,250
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 7/1/08 306,891
5,000,000 A Puerto Rico Commonwealth GO, Capital Appreciation,
Public Improvement, zero coupon to yield 4.950% due
7/1/18(b) 1,800,000
500,000 A Scottsdale Mountain Communication Facilities, GO,
District No. 3, Series A, 6.200% due 7/1/17 523,125
- ------------------------------------------------------------------------------------------
16,069,965
- ------------------------------------------------------------------------------------------
Hospitals -- 10.2%
1,500,000 AAA Maricopa County Hospital District No. 1,
AMBAC-Insured, 5.000% due 6/1/21 1,481,250
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 Baa1* 5.900% due 4/1/09 1,576,875
1,000,000 Baa1* 6.125% due 4/1/18 1,062,500
500,000 AAA Maricopa County IDA, Series A, Samaritan Health
Services, MBIA-Insured, 7.000% due 12/1/16 627,500
1,000,000 AAA Mohave County Authorized Hospital Systems,
MBIA-Insured, 5.700% due 9/1/15 1,061,250
1,070,000 AAA Phoenix IDA, Hospital Revenue, John C. Lincoln Hospital,
FSA-Insured, 5.400% due 12/1/10 1,143,562
- ------------------------------------------------------------------------------------------
6,952,937
- ------------------------------------------------------------------------------------------
Housing -- 10.6%
2,500,000 AAA Maricopa County IDA, Multi-Family Housing Revenue
(National Health Facilities II Project), Series A,
FSA-Insured, 5.100% due 1/1/33 2,446,875
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 1,060,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 9
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Schedule of Investments (continued) May 31, 1998
==========================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Housing -- 10.6% (continued)
$ 420,000 AAA Single-Family Mortgage Revenue,
GNMA/FNMA/FHLMC-Collateralized,
6.300% due 12/1/12(c) $ 453,075
Pima County IDA, Multi-Family Housing Revenue:
465,000 AA Rancho Mirage Project, 7.050% due 4/1/22(c) 486,506
Single-Family Mortgage Revenue, GNMA-Collateralized:
910,000 AAA 6.750% due 11/1/27(c) 980,525
800,000 AAA 6.250% due 11/1/30(c) 854,000
245,000 AAA Sierra Vista IDA, Multi-Family Housing,
(Steppes Apartment Project), FNMA-Collateralized,
7.125% due 12/1/10 245,612
- ------------------------------------------------------------------------------------------
7,215,593
- ------------------------------------------------------------------------------------------
Industrial Development -- 14.2%
900,000 AAA Glendale Municipal Property Corp., IDA,
MBIA-Insured, 7.000% due 7/1/09 938,439
1,800,000 AAA Maricopa County IDA, Series A, Multi-Family Housing
Revenue, Mortgage Loan, FHA-Insured, 5.900% due 7/1/24 1,867,500
1,000,000 AA- Mohave County IDA, (Citizens Utility Project),
Series B, 7.050% due 8/1/20(b) 1,065,000
750,000 NR Navajo County IDA, IDR, 7.400% due 4/1/26(c) 842,813
Pima County IDA, Industrial Revenue Refunding:
775,000 AAA FSA-Insured, 7.250% due 7/15/10 868,969
1,000,000 B Tucson Electric Power Co. Project, Series B,
6.000% due 9/1/29(b) 1,035,000
Tempe IDA, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 357,000
250,000 NR 6.250% due 12/1/04 254,688
1,000,000 AA Tucson COP, 6.375% due 7/1/09 1,090,000
1,275,000 AAA Tucson Local Development Finance Corp., Lease Revenue,
FGIC-Insured, (Partially Pre-Refunded -- Escrowed with
U.S. government securities to 7/1/02 Call @ 102),
6.250% due 7/1/12 1,383,375
- ------------------------------------------------------------------------------------------
9,702,784
- ------------------------------------------------------------------------------------------
Life Care Systems -- 2.7%
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/MBIA-Insured,
6.000% due 7/1/20 1,452,344
- ------------------------------------------------------------------------------------------
1,873,344
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Schedule of Investments (continued) May 31, 1998
==========================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Miscellaneous -- 11.2%
$ 750,000 Aa* Arizona Student Loan Revenue Acquisition Authority,
Series B, 6.600% due 5/1/10(c) $ 814,688
500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
6.200% due 4/1/15 543,125
1,250,000 AA+ Phoenix Civic Improvement Corp., (New City Hall Project),
5.100% due 7/1/28 1,254,688
400,000 A+ Phoenix Special Assignment, Central Avenue
Improvement District, 7.000% due 1/1/06 406,876
9,500,000 AAA Puerto Rico Commonwealth Highway & Transportation
Authority, Transportation Revenue, Series A,
AMBAC-Insured, zero coupon to yield 5.050% due
7/1/17 3,705,000
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 386,950
500,000 AAA 6.150% due 1/1/15 543,125
- ------------------------------------------------------------------------------------------
7,654,452
- ------------------------------------------------------------------------------------------
Pollution Control -- 5.1%
Coconino County Pollution Control Corp.,
Revenue Refunding:
1,000,000 A- Arizona Public Service Co., Series A,
5.875% due 8/15/28 1,033,750
Nevada Power Co:
500,000 BBB++ Series E, 5.350% due 10/1/22 497,500
1,000,000 BBB++ 6.375% due 10/1/36(c) 1,082,500
850,000 A- Navajo County PCR, Arizona Public Service Co.,
Series A, 5.875% due 8/15/28 878,688
- ------------------------------------------------------------------------------------------
3,492,438
- ------------------------------------------------------------------------------------------
Utility -- 10.6%
1,000,000 AAA Maricopa County, IDA, Water System Revenue,
Chaparral Water Co., Series A, AMBAC-Insured,
5.400% due 12/1/22(c) 1,021,250
Phoenix Civic Improvement Corp.,
Water Systems Revenue:
1,500,000 AA- 6.000% due 7/1/19 1,666,875
3,350,000 AAA FGIC-Insured, 5.000% due 7/1/19 3,308,125
250,000 BBB Prescott Valley Improvement District,
Sewer Collection System, Roadway Repair,
7.900% due 1/1/12 281,250
1,000,000 AA Salt River Agricultural Project, Series A,
5.000% due 1/1/20 996,250
- ------------------------------------------------------------------------------------------
7,273,750
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 11
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Schedule of Investments (continued) May 31, 1998
==========================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================
<S> <C> <C> <C>
Water & Sewer -- 3.1%
$1,000,000 AAA Chandler Water & Sewer Revenue Refunding,
FGIC-Insured, 6.250% due 7/1/13 $ 1,082,500
1,000,000 NR Gilbert Wastewater Systems Revenue,
6.875% due 4/1/16 1,046,250
- ------------------------------------------------------------------------------------------
2,128,750
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost-- $64,866,247**) $68,356,075
==========================================================================================
</TABLE>
(a) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(b) Security segregated by Custodian for open market purchase commitment.
(c) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
** 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 1998 Annual Report to Shareholders
<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") and those which are identified by a double dagger (++)
are rated by Fitch Investor Services, Inc. ("Fitch"). The definitions of the
applicable rating symbols are set forth below:
Standard -- 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 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 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 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 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.
Fitch -- Ratings may be modified by the addition of a plus (+) or minus (-) sign
to show relative standings within the major rating categories.
A --Bonds which are rated "A" are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and/or
dividends and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and
circumstances than securities with higher ratings.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 13
<PAGE>
================================================================================
Bond Ratings (continued)
================================================================================
BBB --Bonds which are rated "BBB" are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest
or dividends and repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however, are more
likely to have adverse impact on these securities and, therefore,
impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for securities with
higher ratings.
NR --Indicates that the bond is not rated by Standard & Poor's, Moody's or
Fitch.
================================================================================
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 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Assets and Liabilities May 31, 1998
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $64,866,247) $68,356,075
Cash 83,423
Interest receivable 1,154,325
Receivable for Fund shares sold 694,576
Receivable for securities sold 5,000
- -------------------------------------------------------------------------------
Total Assets 70,293,399
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 3,311,196
Dividends payable 112,018
Investment advisory fees payable 16,420
Administration fees payable 10,946
Distribution fees payable 4,034
Accrued expenses 60,060
- -------------------------------------------------------------------------------
Total Liabilities 3,514,674
- --------------------------------------------------------------------------------
Total Net Assets $66,778,725
===============================================================================
NET ASSETS:
Par value of capital shares $ 6,336
Capital paid in excess of par value 62,911,736
Overdistributed net investment income (67,159)
Accumulated net realized gain from security transactions 437,984
Net unrealized appreciation of investments 3,489,828
- --------------------------------------------------------------------------------
Total Net Assets $66,778,725
===============================================================================
Shares Outstanding:
Class A 4,381,270
----------------------------------------------------------------------------
Class B 1,871,755
----------------------------------------------------------------------------
Class C 83,099
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.54
----------------------------------------------------------------------------
Class B* $10.54
----------------------------------------------------------------------------
Class C** $10.53
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.17% of net asset value per share) $10.98
===============================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 15
<PAGE>
================================================================================
Statement of Operations For the Year Ended May 31, 1998
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $3,547,190
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 196,737
Investment advisory fees (Note 4) 185,780
Administration fees (Note 4) 123,853
Audit and legal 32,061
Shareholder communications 26,949
Shareholder and system servicing fees 26,837
Registration fees 16,657
Directors' fees 13,604
Pricing service fees 10,723
Custody 3,672
Other1,635
- --------------------------------------------------------------------------------
Total Expenses 638,508
- --------------------------------------------------------------------------------
Net Investment Income 2,908,682
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 26,378,516
Cost of securities sold 25,626,342
- --------------------------------------------------------------------------------
Net Realized Gain 752,174
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 1,992,317
End of year 3,489,828
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,497,511
- --------------------------------------------------------------------------------
Net Gain on Investments 2,249,685
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $5,158,367
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Statements of Changes in Net Assets For the Years Ended May 31,
================================================================================
<TABLE>
<CAPTION>
1998 1997
===============================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,908,682 $ 3,057,413
Net realized gain 752,174 410,175
Increase in net unrealized appreciation 1,497,511 1,201,096
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,158,367 4,668,684
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE 3):
Net investment income (3,022,096) (3,056,999)
Net realized gains (268,132) --
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,290,228) (3,056,999)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 13,482,281 4,666,382
Net asset value of shares issued for
reinvestment of dividends 1,888,919 1,730,984
Cost of shares reacquired (8,472,997) (13,836,654)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 6,898,203 (7,439,288)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 8,766,342 (5,827,603)
NET ASSETS:
Beginning of year 58,012,383 63,839,986
- -------------------------------------------------------------------------------
End of year* $66,778,725 $58,012,383
===============================================================================
* Includes undistributed (overdistributed)
net investment income of: $(67,159) $46,255
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 17
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Smith Barney Arizona Municipals Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, open-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on 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 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
4. Investment Advisory Agreement, Administration Agreement And Affiliated
Transactions
Mutual Management Corp. ("MMC"), 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 year ended May 31, 1998, SB received sales charges of
approximately $120,000 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 year ended May 31, 1998, CDSCs paid to
SB for Class B shares were approximately $35,000.
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
year ended May 31, 1998, total Distribution Plan fees were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $61,866 $128,784 $6,087
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
5. Investments
During the year ended May 31, 1998, 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 $35,879,380
- --------------------------------------------------------------------------------
Sales 26,378,516
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 19
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
At May 31, 1998, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $3,624,675
Gross unrealized depreciation (134,847)
- --------------------------------------------------------------------------------
Net unrealized appreciation $3,489,828
================================================================================
</TABLE>
6. Capital Shares
At May 31, 1998, the Fund had 500 million shares of capital stock authorized
with a par value of $0.001 per share. The Fund has the ability to issue multiple
classes of shares. Each share of a class represents an identical interest and
has the same rights, except that each class bears certain direct expenses,
specifically related to the distribution of its shares.
At May 31, 1998, 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 $42,653,107 $19,433,025 $831,940
================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1998 May 31, 1997
------------------------- -------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 989,126 $ 10,375,485 268,503 $ 2,733,912
Shares issued on reinvestment 124,423 1,301,820 116,288 1,179,656
Shares redeemed (384,350) (4,020,356) (843,890) (8,560,723)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) 729,199 $ 7,656,949 (459,099) $ (4,647,155)
============================================================================================
Class B
Shares sold 280,136 $ 2,930,544 167,834 $ 1,703,600
Shares issued on reinvestment 52,631 550,361 51,651 523,844
Shares redeemed (408,288) (4,266,089) (519,844) (5,271,747)
- --------------------------------------------------------------------------------------------
Net Decrease (75,521) $ (785,184) (300,359) $ (3,044,303)
============================================================================================
Class C
Shares sold 16,759 $ 176,252 22,633 $ 228,870
Shares issued on reinvestment 3,514 36,738 2,709 27,484
Shares redeemed (17,801) (186,552) (411) (4,184)
- --------------------------------------------------------------------------------------------
Net Increase 2,472 $ 26,438 24,931 $ 252,170
============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
7. Subsequent Event
The Board of Directors of the Fund approved the renaming of Class C shares to
Class L which became effective on June 12, 1998. In addition, effective June 15,
1998 Class L shares were to be sold at net asset value per share plus a maximum
initial sales charge of 1.00%. Class L shares also have a 1.00% CDSC if
redemptions occur within one year from initial purchase. Until June 25, 1999,
purchases of Class L shares by investors who were holders of Class C shares of
the Fund on June 12, 1998 will not be subject to the 1.00% front-end sales
charge.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 21
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1998 1997 1996 1995 1994(1)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.21 $9.95 $10.09 $9.82 $10.40
- ----------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.50 0.53 0.53 0.54 0.54
Net realized and unrealized gain (loss) 0.40 0.26 (0.15) 0.33 (0.38)
- ----------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.90 0.79 0.38 0.87 0.16
Less Distributions From:
Net investment income (0.52) (0.53) (0.52) (0.54) (0.53)
Net realized gains (0.05) -- -- (0.06) (0.21)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.57) (0.53) (0.52) (0.60) (0.74)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.54 $10.21 $9.95 $10.09 $9.82
- ----------------------------------------------------------------------------------------------------------------------
Total Return 9.00% 8.06% 3.82% 9.38% 1.33%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $46,183 $37,304 $40,917 $43,222 $44,552
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.85% 0.88% 0.82% 0.82% 0.83%
Net investment income 4.87 5.17 5.20 5.37 5.24
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 42% 27% 22% 21% 49%
======================================================================================================================
</TABLE>
(1) 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.
(2) The investment adviser has waived all or part of its fees for the three
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 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$0.02 $0.04 $0.02 0.99% 1.01% 1.05%
</TABLE>
- --------------------------------------------------------------------------------
22 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares 1998 1997 1996 1995 1994(1)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.21 $9.95 $10.09 $9.82 $10.40
- ----------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.45 0.48 0.48 0.49 0.49
Net realized and unrealized gain (loss) 0.40 0.26 (0.15) 0.33 (0.37)
- ----------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.85 0.74 0.33 0.82 0.12
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.47) (0.48) (0.47) (0.49) (0.49)
Net realized gains (0.05) -- -- (0.06) (0.21)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.48) (0.47) (0.55) (0.70)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.54 $10.21 $9.95 $10.09 $9.82
- ----------------------------------------------------------------------------------------------------------------------
Total Return 8.46% 7.53% 3.30% 8.78% 0.84%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $19,721 $19,886 $22,369 $22,838 $19,306
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 1.38% 1.39% 1.33% 1.33% 1.35%
Net investment income 4.35 4.66 4.69 4.85 4.73
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 42% 27% 22% 21% 49%
======================================================================================================================
</TABLE>
(1) 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.
(2) The investment adviser has waived all or part of its fees for the three
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 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$0.02 $0.03 $0.02 1.50% 1.52% 1.57%
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 23
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1998 1997 1996 1995(1)
============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.21 $9.95 $10.09 $9.28
- --------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.45 0.47 0.48 0.24
Net realized and unrealized gain (loss) 0.39 0.26 (0.15) 0.86
- --------------------------------------------------------------------------------------------
Total Income From Operations 0.84 0.73 0.33 1.10
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.47) (0.47) (0.47) (0.23)
Net realized gains (0.05) -- -- (0.06)
- --------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.47) (0.47) (0.29)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.53 $10.21 $9.95 $10.09
- --------------------------------------------------------------------------------------------
Total Return 8.30% 7.49% 3.26% 12.10%++
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $875 $822 $554 $386
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 1.42% 1.42% 1.39% 1.38%+
Net investment income 4.30 4.63 4.63 4.81+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 42% 27% 22% 21%
============================================================================================
</TABLE>
(1) For the period from December 8, 1994 (inception date) to May 31, 1995.
(2) The investment adviser has waived all or part of its fees for the year
ended May 31, 1996 and the period ended May 31, 1995. If such fees were not
waived, the per share effect on net investment income and the expense
ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <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 1998 Annual Report to Shareholders
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Board of Directors and Shareholders
Smith Barney Arizona Municipals Fund Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Arizona Municipals Fund Inc. as of
May 31, 1998, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended and financial highlights for each of the years in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended May 31, 1994 were audited by
other auditors whose report thereon, dated July 13, 1994, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1998 by correspondence with the custodian and brokers. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Arizona Municipals Fund Inc. as of May 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and financial highlights for each of
the years in the four-year period then ended, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
July 15, 1998
New York, New York
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Smith Barney Arizona Municipals Fund Inc. 25
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Tax Information (unaudited)
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For Federal tax purposes the Fund hereby designates for the fiscal year ended
May 31, 1998:
-- 100.00% of the dividends paid by the Fund from net investment income
as tax-exempt for regular Federal income tax purposes.
-- The Taxpayer Relief Act of 1997 enacted differing rates of tax on
various long-term capital gain transactions. As a result, the Fund
designates:
o Total long-term capital gain distributions paid of $268,132,
which are considered "20 percent rate gains."
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26 1998 Annual Report to Shareholders
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Additional Shareholder Information (unaudited)
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On March 9, 1998 a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
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<S> <C> <C> <C> <C>
Herbert Barg 3,137,954.340 97.645% 75,695.549 2.355%
Alfred J. Bianchetti 3,137,954.340 97.645 75,695.549 2.355
Martin Brody 3,137,954.340 97.645 75,695.549 2.355
Dwight B. Crane 3,144,212.819 97.839 69,437.070 2.161
Burt N. Dorsett 3,144,212.819 97.839 69,437.070 2.161
Elliot S. Jaffe 3,137,954.340 97.645 75,695.549 2.355
Stephen E. Kaufman 3,144,212.819 97.839 69,437.070 2.161
Joseph J. McCann 3,144,212.819 97.839 69,437.070 2.161
Heath B. McLendon 3,144,212.819 97.839 69,437.070 2.161
Cornelius C. Rose, Jr. 3,144,212.819 97.839 69,437.070 2.161
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</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Fund in order to modernize them in view of certain
regulatory, business or industry developments that have occurred since original
adoption of these policies by the Fund. The following chart demonstrates that
all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
<TABLE>
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<S> <C>
"M" Issuance of Senior Securities Approved
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"M" Lending by the Fund Approved
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"M" Real Estate Approved
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"R" Margin and the Short Sales of Securities Approved
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"M" Diversification Approved
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"M" Borrowing Approved
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</TABLE>
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Fund on all proposals.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
=========================================================================================================
<S> <C> <C> <C> <C> <C>
2,885,139.079 90.373% 85,997.245 2.694% 221,337.565 6.933%
=========================================================================================================
</TABLE>
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Smith Barney Arizona Municipals Fund Inc. 27
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Smith Barney
Arizona SMITHBARNEY
Municipals -----------
Fund Inc. A Member of TravelersGroup[LOGO]
Directors
Investment Adviser
Herbert Barg and Administrator
Alfred J. Bianchetti Mutual Management Corp.
Martin Brody
Dwight B. Crane
Burt N. Dorsett Distributor
Elliot S. Jaffe Smith Barney Inc.
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman Custodian
Cornelius C. Rose, Jr. PNC Bank, N.A.
James J. Crisona, Emeritus
Transfer Agent
First Data Investor Services Group, Inc.
Officers P.O. Box 9134
Boston, MA 02205-9134
Heath B. McLendon
President and
Chief Executive Officer
This report is submitted for the general
Lewis E. Daidone information of the shareholders of Smith
Senior Vice President Barney Arizona Municipals Fund Inc.
and Treasurer It is not authorized for distribution to
prospective investors unless accompanied
Lawrence T. McDermott or preceded by a current Prospectus for the
Vice President and Fund, which contains information
Investment Officer concerning the Fund's investment policies
and expenses as well as other pertinent
Thomas M. Reynolds information.
Controller
Christina T. Sydor
Secretary Smith Barney Arizona
Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD2223 7/98
