<PAGE>
[GRAPHIC]
Smith Barney
Arizona
Municipals
Fund Inc.
------------------
SEMI-ANNUAL REPORT
------------------
November 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
Smith Barney
Arizona
Municipals
Fund Inc.
[PHOTO]
Heath B. McLendon
Chairman
[PHOTO]
Lawrence T. McDermott
Vice President and
Investment Officer
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, 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 November 30, 1998, the Class A shares of the Arizona
Municipals Fund posted a total return of 3.28%. In comparison, the average for
Arizona tax-exempt funds was 3.25% for the same period according to Lipper 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 period covered by this report, the Fund distributed income dividends
totaling $0.25 and capital gains of $0.13 per Class A share. Based on its net
asset value ("NAV") of $10.50 as of November 30, 1998 and the current income
dividend rate of $0.0415 per share, this equates to annualized distribution rate
of 4.74%. For an Arizona State resident in the combined federal and state tax
bracket of 39.58%, the tax-free yield of 4.74% is equivalent to a taxable yield
of 7.85%. (This figure assumes an investor is in the 36% federal income tax
bracket.)
Market and Economic Overview
With stock market volatility on the rise and anxiety about the global economy
increasing in early fall, the Federal Reserve Board ("Fed") changed its monetary
policy from one of vigilance against inflation to one of combating deflation
during the period under review. (Deflation is when prices actually fall.
Deflation should not be confused with disinflation. Disinflation is the slowing
down of the rate at which prices increase.)
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Smith Barney Arizona Municipals Fund Inc. 1
<PAGE>
The bond markets have been impacted by numerous significant events this past
year including the turmoil in many emerging markets, Russia's default and the
release of a large number of conflicting economic statistics. A key turning
point for the markets took place on October 17, 1998, when Fed Chairman
Greenspan announced that the federal funds and discount rates would both be cut
by 25 basis points. (A basis point is the equivalent of 1/100 of 1%. The
federal-funds rate is an overnight bank lending rate that is a benchmark for
other short-term interest rates.) This was the third rate cut by the Fed in
recent months and the changes in the capital markets after this rate cut were
significant.
The prices of many U.S. stocks have gone up and liquidity in many sectors of the
bond market has improved dramatically. As investors turned away from U.S.
Treasuries, which are the most liquid and least risky of all bonds, their yields
went back up sharply. For example, the yield on the 30-year Treasury Bond
increased by more than 65 basis points from October 5, 1998 through November 6,
1998. And just as other types of bonds had underperformed as U.S. Treasury rates
declined, they outperformed as Treasury rates rebounded.
For example, while 30-year Treasury Bond yields went up by about 50 basis points
from October 1, 1998 through November 5, 1998, long-term municipal bond yields
went up by only roughly 20-23 basis points. Despite these differences, we still
believe municipal bonds are attractively priced in comparison with taxable
bonds.
Heavy new issuance of municipal bonds combined with modest demand for tax-exempt
income are the main reasons why municipal bonds are so inexpensive now on a
historical basis. New investments into bond funds has been low, the demand for
municipal bonds from property and casualty companies has been moderate and many
individual investors have remained on the sidelines because of the stock
market's recent strong rebound.
Arizona Economic Highlights
Arizona's economy remains vibrant and the Grand Canyon State took the crown from
Nevada as the leading state for job creation this past year. And while Arizona's
economic growth is expected to slow down somewhat in 1999, overall employment in
the state is still anticipated to grow by 3.5%, or roughly 72,200 new jobs.
Moreover, personal income in Arizona could rise by as much as 6.8% in 1999, a
very positive development since this is one area where Arizona has traditionally
lagged. Commercial and residential housing growth remains in balance, a rare
occurrence at this late stage in the business cycle. While manufacturing job
growth has gone down in Arizona, high technology companies continue to expand
their presence in the state, which has helped to further diversify Arizona's
economy.
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2 1998 Semi-Annual Report to Shareholders
<PAGE>
Fund's 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 November 30, 1998, 90% of the Fund's holdings were rated investment grade. In
addition, roughly 53% 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 20 years. As of November 30, 1998, the Fund's
largest holdings are concentrated in general obligation bonds (21.0%),
industrial development revenue bonds (16.0%) and hospital bonds (14.7%).
Municipal Bond Market Outlook
During 1998, the performance of the U.S. economy has helped to propel state tax
collections higher and add to their strong fiscal positions. As previously
noted, the volume of new municipal issues remains heavy as attractive low
interest rates continue to provide an incentive for state and local governments
to refinance older, high interest rate debt. On the other hand, demand for
tax-exempt income remains modest. Given this strong supply and moderate demand,
it is not surprising that municipal bonds are inexpensive by historical
standards. Yet, at current yield levels, we believe municipal bonds make sense
for many investors.
Going forward, we are optimistic about the attractiveness of the tax-exempt bond
market. And while we expect no more Fed policy moves for the remainder of the
year, we believe that the Fed may lower rates again in the first half of 1999 if
the U.S. economy remains sluggish.
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
December 17, 1998
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Smith Barney Arizona Municipals Fund Inc. 3
<PAGE>
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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>
11/30/98 $10.54 $10.50 $0.25 $0.13 $0.00 3.28%+
- --------------------------------------------------------------------------------
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 $6.14 $0.64 $0.06
================================================================================
</TABLE>
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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>
11/30/98 $10.54 $10.49 $0.22 $0.13 $0.00 2.92%+
- ----------------------------------------------------------------------------------------
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 $2.91 $0.53 $0.01
========================================================================================
</TABLE>
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Historical Performance -- Class L Shares(2)
- --------------------------------------------------------------------------------
<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>
11/30/98 $10.53 $10.49 $0.22 $0.13 $0.00 2.99%+
- ----------------------------------------------------------------------------------------
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 $1.86 $0.24 $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 Semi-Annual Report to Shareholders
<PAGE>
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Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------
Class A Class B Class L(2)
================================================================================
Six Months Ended 11/30/98+ 3.28% 2.92% 2.99%
- --------------------------------------------------------------------------------
Year Ended 11/30/98 7.05 6.40 6.34
- --------------------------------------------------------------------------------
Five Years Ended 11/30/98 6.04 5.48 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 11/30/98 7.97 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 11/30/98 7.58 6.59 8.58
================================================================================
With Sales Charge(3)
----------------------------
Class A Class B Class L(2)
================================================================================
Six Months Ended 11/30/98+ (0.86)% (1.56)% 0.94%
- --------------------------------------------------------------------------------
Year Ended 11/30/98 2.80 1.90 4.24
- --------------------------------------------------------------------------------
Five Years Ended 11/30/98 5.18 5.31 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 11/30/98 7.53 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 11/30/98 7.20 6.59 8.32
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (11/30/88 through 11/30/98) 115.22%
- --------------------------------------------------------------------------------
Class B (Inception* through 11/30/98) 47.29
- --------------------------------------------------------------------------------
Class L (Inception* through 11/30/98)(2) 38.77
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gains distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 4.00% and 1.00%,
respectively. Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from 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 L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within one
year from 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 L shares are June 1, 1987, November 6,
1992 and December 8, 1994, respectively.
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Smith Barney Arizona Municipals Fund Inc. 5
<PAGE>
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of
Smith Barney Arizona Municipals Fund Inc. vs.
the Lehman Brothers Municipal Bond Index and
Lipper Arizona Municipal Fund Average+
--------------------------------------------------------
November 1988 - November 1998
[GRAPHIC]
<TABLE>
<CAPTION>
Smith Barney Arizona Municipals Fund Inc. Lehman Brothers Municipal Bond Index Lipper Arizona Peer Group Average
<S> <C> <C> <C>
11/88 9,601 10,000 10,000
05/89 10,277 10,627 10,696
05/90 10,925 11,405 11,334
05/91 11,900 12,555 12,301
05/92 13,073 13,788 13,536
05/93 14,762 15,437 15,233
05/94 14,958 15,819 15,477
05/95 16,360 17,261 16,870
05/96 16,985 18,050 17,467
05/97 18,355 19,544 18,826
05/98 20,007 21,378 20,469
11/98 20,663 22,199 21,135
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on
November 30, 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 November 30, 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 November 30, 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.
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6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) November 30, 1998
- --------------------------------------------------------------------------------
Industry Breakdown
[PIE CHART]
9.5% Housing
16.0% Industrial Development
2.6% Life Care Systems
5.6% Miscellaneous
5.0% Pollution Control
10.5% Transportation
14.7% Hospitals
21.0% General Obligation
5.5% Education
3.9% Water and Sewer
5.7% Utility
Summary of Investments by Combined Ratings
Standard & Percentage of
Moody's and/or Poor's Total Investments
- ------------------------------------------------------------------
Aaa AAA 52.6%
Aa AA 18.5
A A 12.4
Baa BBB 6.6*
B B 1.4
NR NR 8.5
-----
100.0%
=====
* 0.7% of investments were rated by Fitch Investors Services, Inc.
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Smith Barney Arizona Municipals Fund Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C> <C>
Education -- 5.5%
$1,000,000 AAA Maricopa County School District No. 40,
Glendale School Improvement, AMBAC-Insured,
6.300% due 7/1/11 $1,127,500
1,000,000 AA Maricopa County Unified High School District No. 210,
(Phoenix Project), Series B, 5.375% due 7/1/13 1,056,250
500,000 AAA Pinal County School District No. 43,
Series A, FGIC-Insured, 5.850% due 7/1/15 546,875
1,000,000 AAA Tempe Unified High School District No. 213,
Temporary School Improvement, FGIC-Insured,
(Partially Pre-Refunded to 7/1/04 Call @ 101),
6.000% due 7/1/10 1,093,750
- ------------------------------------------------------------------------------------------------
3,824,375
- ------------------------------------------------------------------------------------------------
General Obligation -- 21.0%
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 8/1/06 293,125
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 1,062,500
Maricopa County GO:
School District. No. 8, Osborne Elementary:
1,000,000 A 7.500% due 7/1/09 1,281,250
600,000 AAA FGIC-Insured, 5.875% due 7/1/14 660,000
School District. No. 11, Peoria, MBIA-Insured,
(Unrefunded Balance):
635,000 AAA 6.400% due 7/1/10 677,863
500,000 AAA 7.000% due 7/1/10 541,250
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 7/1/08 767,813
635,000 AAA School District No. 80, Chandler, FGIC-Insured, (Unrefunded
Balance), 5.800% due 7/1/12 687,387
370,000 AAA School District No. 216, FGIC-Insured, (Unrefunded Balance),
6.700% due 7/1/11 389,887
1,000,000 AAA Mesa GO, FGIC-Insured, 5.000% due 7/1/18 1,002,500
1,400,000 AA+ Phoenix GO, Refunding, Series A, 6.250% due 7/1/17 1,655,500
1,000,000 AAA Pima County GO, Unified School District No. 1, Tucson,
FGIC-Insured, 7.500% due 7/1/10 1,286,250
Puerto Rico Commonwealth GO, Capital Appreciation,
Public Improvement:
3,800,000 A Zero coupon to yield 4.950% due 7/1/17 1,491,500
5,000,000 A Zero coupon to yield 4.950% due 7/1/18(b) 1,856,250
</TABLE>
See Notes to Financial Statements.
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8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================
<S> <C> <C> <C>
General Obligation -- 21.0% (continued)
$ 500,000 A Scottsdale Mountain Communication Facilities, GO,
District No. 3, Series A, 6.200% due 7/1/17 $ 524,375
- --------------------------------------------------------------------------------------------------
14,744,900
- --------------------------------------------------------------------------------------------------
Hospitals -- 14.7%
1,500,000 AAA Maricopa County Hospital District No. 1,
AMBAC-Insured, 5.000% due 6/1/21 1,498,125
Maricopa County Hospital Revenue, Sun Health Corp.:
1,500,000 BBB 5.900% due 4/1/09 1,629,375
1,000,000 BBB 6.125% due 4/1/18 1,082,500
1,250,000 A Maricopa County IDA, Catholic Healthcare West Project,
Series A, 5.000% due 7/1/21 1,218,750
2,000,000 AA+ Maricopa County IDA, Hospital Revenue, Mayo Clinic,
5.250% due 11/15/37 2,017,500
500,000 AAA Maricopa County IDA, Hospital Revenue, Series A, Samaritan
Health Services, MBIA-Insured, 7.000% due 12/1/16 626,250
1,000,000 AAA Mohave County IDA, Hospital Systems Revenue,
Baptist Hospital, MBIA-Insured, 5.700% due 9/1/15 1,085,000
1,070,000 AAA Phoenix IDA, Hospital Revenue, John C. Lincoln Hospital,
FSA-Insured, 5.400% due 12/1/10 1,158,275
- --------------------------------------------------------------------------------------------------
10,315,775
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Housing -- 9.5%
2,125,000 NR Maricopa County IDA, Multi-Family Housing Revenue,
(Stanford Court Apartments), Series B, 6.250% due 7/1/18 2,132,969
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 1,061,250
390,000 AAA Single-Family Mortgage Revenue, GNMA/FNMA/FHLMC-
Collateralized, 6.300% due 12/1/12(c) 418,275
Pima County IDA, Multi-Family Housing Revenue:
465,000 AA Rancho Mirage Project, 7.050% due 4/1/22(c) 487,669
880,000 AAA Single-Family Mortgage Revenue, GNMA-Collateralized,
6.750% due 11/1/27(c) 941,600
640,000 AAA Single-Family Mortgage Revenue, Series A,
GNMA/FNMA/FHLMC-Collateralized, 6.250% due 11/1/30(c) 680,000
245,000 AAA Sierra Vista IDA, Multi-Family Housing,
(Steppes Apartment Project), FNMA-Collateralized,
7.125% due 12/1/10 245,801
- --------------------------------------------------------------------------------------------------
6,656,564
- --------------------------------------------------------------------------------------------------
Industrial Development -- 16.0%
1,000,000 NR Flagstaff IDA, Living Community Revenue, (Northern
Community Project), 6.200% due 9/1/28 995,000
900,000 AAA Glendale Municipal Property Corp., IDA,
MBIA-Insured, 7.000% due 7/1/09 926,073
</TABLE>
See Notes to Financial Statements.
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Smith Barney Arizona Municipals Fund Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==============================================================================================
<S> <C> <C> <C>
Industrial Development -- 16.0% (continued)
$ 1,800,000 AAA Maricopa County IDA, Series A, Multi-Family Housing Revenue,
Mortgage Loan, FHA-Insured, 5.900% due 7/1/24 $ 1,874,250
1,000,000 AA- Mohave County IDA, (Citizens Utility Project),
Series B, 7.050% due 8/1/20(b) 1,051,250
750,000 NR Navajo County IDA, IDR, 7.400% due 4/1/26(c) 839,062
Pima County IDA, Industrial Revenue Refunding:
775,000 AAA FSA-Insured, 7.250% due 7/15/10 865,094
1,000,000 B Tucson Electric Power Co. Project, Series B,
6.000% due 9/1/29(b) 1,011,250
Tempe IDA, Friendship Village Refunding, Series A:
350,000 NR 6.200% due 12/1/03 355,687
250,000 NR 6.250% due 12/1/04 253,750
1,000,000 AA Tucson COP, 6.375% due 7/1/09 1,091,250
890,000 AAA Tucson Local Development Finance Corp., Lease Revenue,
FGIC-Insured, (Unrefunded Balance), 6.250% due 7/1/12 968,988
1,000,000 AA- Yavapai County IDA, (Citizens Utilities Co. Project),
5.450% due 6/1/33(c) 1,016,250
- ----------------------------------------------------------------------------------------------
11,247,904
- ----------------------------------------------------------------------------------------------
Life Care Systems -- 2.6%
379,000 NR Peoria IDA, (Sierra Winds Life Care Project),
6.500% due 11/1/17 379,000
1,375,000 AAA Phoenix IDA, Christian Care, FHA/MBIA-Insured,
6.000% due 7/1/20 1,476,406
- ----------------------------------------------------------------------------------------------
1,855,406
- ----------------------------------------------------------------------------------------------
Miscellaneous -- 5.6%
750,000 Aa* Arizona Student Loan Revenue Acquisition Authority,
Series B, 6.600% due 5/1/10(c) 808,125
500,000 AAA Casa Grande Excise Tax Revenue, FGIC-Insured,
6.200% due 4/1/15 551,250
1,250,000 AA+ Phoenix Civic Improvement Corp., (New City Hall Project),
5.100% due 7/1/28 1,254,687
400,000 A+ Phoenix Special Assignment, Central Avenue
Improvement District, 7.000% due 1/1/06 405,044
Sierra Vista Municipal Property Corp., AMBAC-Insured:
355,000 AAA 6.000% due 1/1/11 389,169
500,000 AAA 6.150% due 1/1/15 551,250
- ----------------------------------------------------------------------------------------------
3,959,525
- ----------------------------------------------------------------------------------------------
Pollution Control -- 5.0%
Coconino County Pollution Control Corp. Revenue Refunding:
1,000,000 A- Arizona Public Service Co., Series A, 5.875% due 8/15/28 1,040,000
Nevada Power Co:
500,000 BBB++ Series E, 5.350% due 10/1/22 498,750
1,000,000 BBB- 6.375% due 10/1/36(c) 1,087,500
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==============================================================================================
<S> <C> <C> <C>
Pollution Control -- 5.0% (continued)
$ 850,000 A- Navajo County PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28 $ 884,000
- ----------------------------------------------------------------------------------------------
3,510,250
- ----------------------------------------------------------------------------------------------
Transportation -- 10.5%
3,500,000 AAA Phoenix Civic Improvement Corp., (Airport Revenue),
FSA-Insured, Series A, 5.000% due 7/1/25 3,500,000
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 3,871,250
- ----------------------------------------------------------------------------------------------
7,371,250
- ----------------------------------------------------------------------------------------------
Utility -- 5.7%
1,000,000 AAA Maricopa County IDA, Water System Revenue, Chaparral
Water Co., Series A, AMBAC-Insured, 5.400% due 12/1/2(c) 1,031,250
1,200,000 AAA Phoenix Civic Improvement Corp., Water Systems Revenue,
FGIC-Insured, 5.000% due 7/1/19 1,206,000
250,000 BBB Prescott Valley Improvement District,
Sewer Collection System, Roadway Repair,
7.900% due 1/1/12 283,438
1,500,000 AA Salt River Agricultural Project, Series A, 5.000% due 1/1/20 1,505,625
- ----------------------------------------------------------------------------------------------
4,026,313
- ----------------------------------------------------------------------------------------------
Water and Sewer -- 3.9%
1,000,000 AAA Chandler Water and Sewer Revenue Refunding,
FGIC-Insured, 6.250% due 7/1/13 1,091,250
1,000,000 NR Gilbert Wastewater Systems Revenue,
6.875% due 4/1/16 1,038,750
Sedona Wastewater Municipal Property Corp., Excise Tax
Revenue, Capital Appreciation, MBIA-Insured:
1,000,000 AAA Zero coupon to yield 5.240% due 7/1/23 292,500
1,000,000 AAA Zero coupon to yield 5.240% due 7/1/24 278,750
- ----------------------------------------------------------------------------------------------
2,701,250
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost-- $66,573,792**) $70,213,512
==============================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service with the exception of
those identified by an asterisk (*) or a double dagger (++), which are
rated by Moody's Investor Service, Inc. and Fitch Investor Services, Inc.,
respectively.
(b) Security segregated by Custodian for open purchase commitments.
(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 12 and 13 for definitions of ratings and certain security
descriptions.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("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 Investor Service, Inc. ("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 Investor Services, Inc. ("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.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited) (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 (unaudited)
- --------------------------------------------------------------------------------
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 (unaudited)
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity 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
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) November 30, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $66,573,792) $70,213,512
Cash 59,532
Receivable for Fund shares sold 49,479
Interest receivable 1,203,078
- -------------------------------------------------------------------------------
Total Assets 71,525,601
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 1,208,056
Investment advisory fees payable 12,434
Administration fees payable 18,652
Distribution fees payable 7,637
Accrued expenses 51,571
- -------------------------------------------------------------------------------
Total Liabilities 1,298,350
- -------------------------------------------------------------------------------
Total Net Assets $70,227,251
===============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 6,691
Capital paid in excess of par value 66,680,337
Overdistributed net investment income (98,325)
Accumulated net realized loss from security transactions (1,172)
Net unrealized appreciation of investments 3,639,720
- -------------------------------------------------------------------------------
Total Net Assets $70,227,251
===============================================================================
Shares Outstanding:
Class A 4,697,165
-----------------------------------------------------------------------------
Class B 1,864,542
-----------------------------------------------------------------------------
Class L 129,541
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 10.50
-----------------------------------------------------------------------------
Class B* $ 10.49
-----------------------------------------------------------------------------
Class L** $ 10.49
-----------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value
per share) $ 10.94
- -------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value
per share) $ 10.60
===============================================================================
* Redemption price is NAV of Class B shares reduced by 4.50% CDSC if shares
are redeemed within one year from purchase (See Note 4).
** Redemtion price is NAV of Class L shares reduced by 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1998
INVESTMENT INCOME:
Interest $ 1,900,097
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 4) 104,756
Investment advisory fees (Note 4) 104,138
Administration fees (Note 4) 69,425
Audit and legal 20,655
Registration fees 14,999
Shareholder and system servicing fees 14,184
Shareholder communications fees 13,364
Directors' fees 6,969
Pricing service fees 5,474
Custody 2,083
Other 2,145
- --------------------------------------------------------------------------------
Total Expenses 358,192
- --------------------------------------------------------------------------------
Net Investment Income 1,541,905
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 14,129,985
Cost of securities sold 13,702,098
- --------------------------------------------------------------------------------
Net Realized Gain 427,887
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 3,489,828
End of period 3,639,720
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 149,892
- --------------------------------------------------------------------------------
Net Gain on Investments 577,779
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,119,684
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1998 (unaudited)
and the Year Ended May 31, 1998
November 30, May 31,
===============================================================================
OPERATIONS:
Net investment income $ 1,541,905 $ 2,908,682
Net realized gain 427,887 752,174
Increase in net unrealized appreciation 149,892 1,497,511
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,119,684 5,158,367
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 3):
Net investment income (1,573,071) (3,022,096)
Net realized gains (867,043) (268,132)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,440,114) (3,290,228)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 5,415,180 13,482,281
Net asset value of shares issued for 1,459,954 1,888,919
reinvestment of dividends
Cost of shares reacquired (3,106,178) (8,472,997)
- -------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 3,768,956 6,898,203
- -------------------------------------------------------------------------------
Increase in Net Assets 3,448,526 8,766,342
NET ASSETS:
Beginning of period 66,778,725 58,012,383
- -------------------------------------------------------------------------------
End of period* $70,227,251 $66,778,725
===============================================================================
* Includes overdistributed net investment income of: $ (98,325) $ (67,159)
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<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.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
On June 12, 1998, the Portfolio's existing Class C shares were renamed Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares, also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase. There is also a CDSC of 4.50% on Class
B shares, which applies if redemption occurs within one year from purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by 1.00% per
year until no CDSC is incurred.
For the six months ended November 30, 1998, SSB received sales charges of
$50,000 and $6,000 on sales of the Fund's Class A and Class L shares,
respectively. In addition, CDSCs paid to SSB for Class B shares were
approximately $13,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to its
Class A, B and L 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 L 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, 1998, total Distribution Plan fees were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $36,344 $64,588 $3,824
================================================================================
All officers and one Director of the Fund are employees of SSB.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. Investments
During the six months ended November 30, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $15,436,560
- --------------------------------------------------------------------------------
Sales 14,129,985
================================================================================
At November 30, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $3,714,903
Gross unrealized depreciation (75,183)
- --------------------------------------------------------------------------------
Net unrealized appreciation $3,639,720
================================================================================
6. Capital Shares
At November 30, 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. Effective June
12, 1998, the Fund adopted the renaming of existing Class C shares as Class L
shares.
At November 30, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $46,008,064 $19,356,588 $1,322,376
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
November 30, 1998 May 31, 1998
-------------------- -------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 338,368 $ 3,597,006 989,126 $10,375,485
Shares issued on reinvestment 98,726 1,040,988 124,423 1,301,820
Shares redeemed (121,199) (1,283,037) (384,350) (4,020,356)
- --------------------------------------------------------------------------------
Net Increase 315,895 $ 3,354,957 729,199 $ 7,656,949
================================================================================
Class B
Shares sold 120,469 $ 1,275,071 280,136 $ 2,930,544
Shares issued on reinvestment 37,208 391,877 52,631 550,361
Shares redeemed (164,890) (1,743,385) (408,288) (4,266,089)
- --------------------------------------------------------------------------------
Net Decrease (7,213) $ (76,437) (75,521) $ (785,184)
================================================================================
Class L+
Shares sold 51,426 $ 543,103 16,759 $ 176,252
Shares issued on reinvestment 2,572 27,089 3,514 36,738
Shares redeemed (7,556) (79,756) (17,801) (186,552)
- --------------------------------------------------------------------------------
Net Increase 46,442 $ 490,436 2,472 $ 26,438
================================================================================
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1998 1997 1996 1995 1994(2)
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.54 $ 10.21 $ 9.95 $ 10.09 $ 9.82 $ 10.40
- ------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.25 0.50 0.53 0.53 0.54 0.54
Net realized and unrealized gain (loss) 0.09 0.40 0.26 (0.15) 0.33 (0.38)
- ------------------------------------------------------------------------------------------------------
Total Income From Operations 0.34 0.90 0.79 0.38 0.87 0.16
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.25) (0.52) (0.53) (0.52) (0.54) (0.53)
Net realized gains (0.13) (0.05) -- -- (0.06) (0.21)
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.38) (0.57) (0.53) (0.52) (0.60) (0.74)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.50 $ 10.54 $ 10.21 $ 9.95 $ 10.09 $ 9.82
- ------------------------------------------------------------------------------------------------------
Total Return 3.28%++ 9.00% 8.06% 3.82% 9.38% 1.33%
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $49,307 $46,183 $37,304 $40,917 $43,222 $44,552
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 0.87%+ 0.85% 0.88% 0.82% 0.82% 0.83%
Net investment income 4.60+ 4.87 5.17 5.20 5.37 5.24
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 42% 27% 22% 21% 49%
======================================================================================================
</TABLE>
(1) For the six months ended November 30, 1998 (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 waived all or part of its fees for each of 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:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
$0.02 $0.04 $0.02 0.99% 1.01% 1.05%
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1998 1997 1996 1995 1994(2)
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.54 $ 10.21 $ 9.95 $ 10.09 $ 9.82 $ 10.40
- -------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.22 0.45 0.48 0.48 0.49 0.49
Net realized and unrealized gain (loss) 0.08 0.40 0.26 (0.15) 0.33 (0.37)
- -------------------------------------------------------------------------------------------------------
Total Income From Operations 0.30 0.85 0.74 0.33 0.82 0.12
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.22) (0.47) (0.48) (0.47) (0.49) (0.49)
Net realized gains (0.13) (0.05) -- -- (0.06) (0.21)
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.52) (0.48) (0.47) (0.55) (0.70)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.49 $ 10.54 $ 10.21 $ 9.95 $ 10.09 $ 9.82
- -------------------------------------------------------------------------------------------------------
Total Return 2.92%++ 8.46% 7.53% 3.30% 8.78% 0.84%
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $19,561 $19,721 $19,886 $22,369 $22,838 $19,306
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.40%+ 1.38% 1.39% 1.33% 1.33% 1.35%
Net investment income 4.07+ 4.35 4.66 4.69 4.85 4.73
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 42% 27% 22% 21% 49%
=======================================================================================================
</TABLE>
(1) For the six months ended November 30, 1998 (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 waived all or part of its fees for each of 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:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
$0.02 $0.03 $0.02 1.50% 1.52% 1.57%
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended May 31, except where noted:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1998 1997 1996 1995(3)
=======================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.53 $10.21 $ 9.95 $10.09 $ 9.28
- ---------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.22 0.45 0.47 0.48 0.24
Net realized and unrealized gain (loss) 0.09 0.39 0.26 (0.15) 0.86
- ---------------------------------------------------------------------------------------
Total Income From Operations 0.31 0.84 0.73 0.33 1.10
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.22) (0.47) (0.47) (0.47) (0.23)
Net realized gains (0.13) (0.05) -- -- (0.06)
- ---------------------------------------------------------------------------------------
Total Distributions (0.35) (0.52) (0.47) (0.47) (0.29)
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.49 $10.53 $10.21 $ 9.95 $10.09
- ---------------------------------------------------------------------------------------
Total Return 2.99%++ 8.30% 7.49% 3.26% 12.10%++
- ---------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $1,359 $ 875 $ 822 $ 554 $ 386
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.43%+ 1.42% 1.42% 1.39% 1.38%+
Net investment income 4.04+ 4.30 4.63 4.63 4.81+
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 42% 27% 22% 21%
=======================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(2) For the six months ended November 30, 1998 (unaudited).
(3) For the period from December 8, 1994 (inception date) to May 31, 1995.
(4) The investment adviser 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:
Per Share Decreases Expense Ratios
to Net Investment Income Without Fee Waiver
------------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
$0.02 $0.01 1.56% 1.56%+
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Arizona Municipals Fund Inc. 23
<PAGE>
[This page intentionally left blank]
<PAGE>
SalomonSmithBarney
---------------------------
A member of citigroup[LOGO]
Directors
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon, Chairman
Cornelius C. Rose, Jr.
James J. Crisona, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
and Administrator
Mutual Management Corp.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Transfer Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Arizona Municipals Fund Inc. It is not authorized for distribution
to prospective investors unless accompanied or preceded by a current Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
Salomon Smith Barney is a service mark of Salomon Smith Barney, Inc.
Smith Barney Arizona
Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0820 1/99
