ANNUAL REPORT
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1996
1996
1996
1996
1996
Smith Barney
Telecommunications
Income Fund
-------------------------------
December 31, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Smith Barney Telecommunications Income Fund
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Dear Shareholder:
We are pleased to provide you with the annual report for the year ended December
31, 1996 for the Smith Barney Telecommunications Income Fund. In this report, we
briefly cover the Fund's holdings and discuss our outlook for the Bell operating
companies, which make up a large percentage of the Fund's holdings. A more
detailed summary of the Fund's performance and current holdings can be found in
the appropriate sections that follow in the annual report.
As you know, Smith Barney Telecommunications Income Fund seeks to provide
shareholders with an attractive level of income and, secondarily, capital
growth. The Fund's aggregate total return (income plus change in share price)
was -1.45% for the year ended December 31, 1996 and significantly underperformed
the Standard & Poor's 500 Index (S&P 500) (an unmanaged capitalization-weighted
index of 500 widely held stocks) which gained 22.9% for the same period. We
believe the Fund underperformed relative to the S&P 500 because gains in that
index were driven by certain sectors while many stocks, including
telecommunications companies, did not participate in the rally. Moreover, the
Fund is positioned as a long-term investment and therefore its one-year
performance should be viewed from a longer-term historical perspective. In
contrast, Bell operating companies, which constitute 95% of the portfolio, are
generally viewed as stable but slow growth companies with earnings growth rates
about half of the S&P 500. In addition, the uncertainty of deregulation and the
potential of increased competition in the telecommunications business has
concerned investors.
We are optimistic on the prospects for the Bell operating companies and believe
that they will continue to provide the Fund with a level quarterly dividend, as
well as long-term growth potential. At the present time, Bell operating
companies provide an attractive current dividend yield and a dividend growth
rate of between 3% to 5%. Moreover, their modest but steady earnings growth rate
of 4% to 6% should help keep their stock prices fairly stable. Developing new
technologies, particularly wireless communication, are rapidly transforming the
telecommunications industry. We have committed assets to those companies we
believe show the greatest promise of success in this new environment. Although
wireless communication is not the Bell operating companies major business, we
believe it will be important to their future growth.
1
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In closing, we would like to thank you for investing in the Smith Barney
Telecommunications Income Fund. We look forward to continuing to help you
achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Guy R. Scott
Heath B. McLendon Guy R. Scott
Chairman and Investment Officer
Chief Executive Officer
January 23, 1997
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Special Shareholder Notice
Upon careful analysis, we have decided to adjust the Fund's quarterly dividend
from $1.60 per share to $0.71 per share in order to more accurately reflect the
income earned by the Fund. In addition, the Fund will attempt to make two
capital gain distributions annually. Although the nature of future dividend
distributions may change, this dividend adjustment should not reduce the total
return potential of the Fund. Instead, would realign the revenue source to the
type of earnings being distributed. Although we recognize that this dividend
adjustment may cause concern for some shareholders, maintaining the Fund's
previous dividend level in light of the current market conditions would not have
been appropriate based on the Fund's investment objectives.
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Historical Performance
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Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns+
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12/31/96 $119.69 104.62 $ 3.12 $ 9.72 $ 0.00 (1.45)%
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12/31/95 95.62 119.69 3.58 11.50 0.00 42.93
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12/31/94 107.62 95.62 4.05 6.06 0.00 (1.83)
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12/31/93 102.67 107.62 4.42 6.87 0.00 16.00
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12/31/92 110.75 102.67 4.55 15.23 0.00 10.89
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12/31/91 129.06 110.75 6.05 14.62 1.18 3.30
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12/31/90 140.93 129.06 5.79 3.20 0.00 (1.80)
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12/31/89 99.10 140.93 5.85 2.81 0.00 52.11
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12/31/88 90.28 99.10 5.40 0.99 0.00 17.12
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12/31/87 99.20 90.28 7.20 2.92 0.00 0.91
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Total $ 50.01 $ 73.92 $ 1.18
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It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
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Average Annual Total Return+
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Year Ended 12/31/96 (1.45)%
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Five Years Ended 12/31/96 12.21
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Ten Years Ended 12/31/96 12.49
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1/1/84* through 12/31/96 15.58
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Cumulative Total Return+
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12/31/86 through 12/31/96 224.39%
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+ Assumes reinvestment of all dividends and capital gain distributions, if any,
at net asset value.
* Commencement of operations.
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Historical Performance (unaudited)
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Growth of $10,000 Invested in
the Smith Barney Telecommunications Income Fund vs.
Standard & Poor's 500 Index and Lipper Equity Income Fund Index+
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December 1986 -- December 1996
[The following table was represented as a line graph in the printed material.]
Smith Barney
Telecommunications Lipper Equity
Income Fund S&P 500 Index Income Index
------------------ ------------- -------------
12/86 10000 10000 10160
12/87 10091 10525 10029
12/88 11818 12269 11769
12/89 17977 16150 12605
12/90 17654 15648 13643
12/91 18236 20406 17153
12/92 20221 21960 18845
12/93 23457 24167 21642
12/94 23029 24485 21442
12/95 32914 33675 27840
12/96 32437 41403 32909
+ Hypothetical illustration of $10,000 invested in the Smith Barney
Telecommunications Income Fund on December 31, 1986, assuming reinvestment
of dividends and capital gains, if any, at net asset value through December
31, 1996. The Standard & Poor's 500 Index is composed of widely held common
stocks listed on the New York Stock Exchange, American Stock Exchange and
the over-the-counter market. Figures for the index include reinvestment of
dividends. The Lipper Equity Income Fund Index is a net asset value
weighted index of the 30 largest funds in the Equity Income category. The
indexes are unmanaged and are not subject to the same management and
trading expenses as a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
4
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Schedule of Investments December 31, 1996
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SHARES SECURITY VALUE
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COMMON STOCKS -- 99.8%
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Telecommunications -- 99.8%
164,436 Airtouch Communications Inc.+ $ 4,152,009
159,942 Ameritech Corp. 9,696,484
169,092 Bell Atlantic Corp. 10,948,707
304,394 Bellsouth Corp. 12,289,908
45,896 NYNEX Corp. 2,208,745
184,436 Pacific Telesis Group 6,778,023
231,008 SBC Communications Inc. 11,954,664
146,858 U.S. West Communications Inc. 4,736,170
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TOTAL COMMON STOCKS
(Cost -- $13,827,175) 62,764,710
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FACE
AMOUNT SECURITY VALUE
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REPURCHASE AGREEMENT -- 0.2%
$149,000 Citibank, 6.900% due 1/2/97; Proceeds at
maturity -- $149,057; (Fully collateralized by
U.S. Treasury Notes, 5.750% due 12/31/98;
Market value -- $151,984) (Cost -- $149,000) 149,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $13,976,175*) $62,913,710
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+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is $10,335,085.
See Notes to Financial Statements.
5
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Statement of Assets and Liabilities December 31, 1996
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ASSETS:
Investments, at value (Cost-- $13,976,175) $62,913,710
Cash 129
Dividends and interest receivable 148,493
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Total Assets 63,062,332
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LIABILITIES:
Investment advisory fees payable 29,058
Administration fees payable 10,567
Accrued expenses 41,137
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Total Liabilities 80,762
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Total Net Assets $62,981,570
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NET ASSETS:
Par value of shares of beneficial interest $ 602
Capital paid in excess of par value 13,169,597
Accumulated net realized gain on security transactions 873,836
Net unrealized appreciation of investments 48,937,535
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Total Net Assets $62,981,570
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Shares Outstanding 602,017
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Net Asset Value, Per Share (and redemption price) $ 104.62
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See Notes to Financial Statements.
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Statement of Operations For the Year Ended December 31, 1996
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INVESTMENT INCOME:
Dividends $ 2,425,443
Interest 61,529
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Total Investment Income 2,486,972
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EXPENSES:
Investment advisory fees (Note 2) 369,448
Administration fees (Note 2) 134,345
Audit and legal 37,498
Shareholder and system servicing fees 23,817
Shareholder communications 20,433
Trustees' fees 11,500
Custody 3,001
Registration fees 996
Other 5,512
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Total Expenses 606,550
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Net Investment Income 1,880,422
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REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 7,346,098
Cost of securities sold 1,813,240
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Net Realized Gain 5,532,858
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Change in Net Unrealized Appreciation of Investments:
Beginning of year 57,854,125
End of year 48,937,535
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Decrease in Net Unrealized Appreciation (8,916,590)
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Net Loss on Investments (3,383,732)
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Decrease in Net Assets From Operations $ (1,503,310)
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See Notes to Financial Statements.
7
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Statements of Changes in Net Assets For the Years Ended December 31,
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1996 1995
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OPERATIONS:
Net investment income $ 1,880,422 $ 2,196,794
Net realized gain+ 5,532,858 7,813,425
Increase (decrease) in net unrealized
appreciation (8,916,590) 14,357,375
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Increase (Decrease) in Net Assets From
Operations (1,503,310) 24,367,594
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DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (1,880,422) (2,198,544)
Net realized gains (5,827,066) (7,065,562)
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Decrease in Net Assets From
Distributions to Shareholders (7,707,488) (9,264,106)
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FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 2,932,221 3,354,745
Cost of shares reacquired (5,580,641) (4,873,243)
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Decrease in Net Assets From
Fund Share Transactions (2,648,420) (1,518,498)
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Increase (Decrease) in Net Assets (11,859,218) 13,584,990
NET ASSETS:
Beginning of year 74,840,788 61,255,798
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End of year $62,981,570 $74,840,788
================================================================================
+ Net realized gains for Federal income tax purposes is $5,865,009 and
$8,233,606, respectively.
See Notes to Financial Statements.
8
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Notes to Financial Statements
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1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Telecommunications Income Fund ("Fund"), an investment
fund of the Smith Barney Telecommunications Trust ("Trust"), a Massachusetts
business trust, 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 traded
on national securities markets are valued at the closing prices on such markets;
securities for which no sales price were reported are valued at current quoted
bid prices; securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates market value;
(d) dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis; (e) dividends and distributions to shareholders
are recorded on the ex-dividend date; (f) gains or losses on the sale of
securities are calculated using the average-cost method; (g) 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; (h) income distributions and capital gain distributions are
determined in accordance with income tax regulations which differ from generally
accepted accounting principles. These differences are primarily due to differing
accounting method adopted for income tax purposes, and various timing
differences; 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.
9
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Notes to Financial Statements (continued)
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2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Strategy Advisors Inc. ("SBSA"), a wholly owned subsidiary of
Smith Barney Mutual Funds Management Inc. ("SBMFM") which, in turn, is a
subsidiary of Smith Barney Holdings Inc. ("SBH"), acts as investment adviser to
the Trust. The Fund pays SBSAan investment advisory fee calculated at an annual
rate of 0.55% of the average daily net assets. This fee is calculated daily and
paid monthly.
SBSA has entered into a sub-advisory agreement with The Boston Company
Advisors, Inc. ("Boston Advisors"). Pursuant to the sub-advisory agreement,
Boston Advisors is responsible for the day-to-day portfolio operations and
investment decisions for the Fund. As a result, SBSA will pay Boston Advisors a
monthly fee calculated at the annual rate of 0.275% of daily net assets.
SBMFM acts as the administrator of the Trust for which it receives a fee
calculated at an annual rate of 0.20% of the average daily net assets of each
fund. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Trust shares and primary broker for its portfolio agency transactions.
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the year ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases --
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Sales $7,346,098
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At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $52,578,625
Gross unrealized depreciation --
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Net unrealized appreciation $52,578,625
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10
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Notes to Financial Statements (continued)
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4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At December 31, 1996, the Trust had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share.
Transactions in shares of the Fund were as follows:
Year Ended Year Ended
December 31, 1996 December 31, 1995
================================================================================
Shares issued on reinvestment 27,670 30,235
Shares redeemed (50,952) (45,522)
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Net Decrease (23,282) (15,287)
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6. CONCENTRATION OF CREDIT RISK
Because the Fund concentrates its investments in one industry, its
portfolio may be subject to greater risk and market fluctuations than a
portfolio of securities representing a broader range of investment alternatives.
The economic and business cycle risks associated with the concentration of the
Fund in only one industry could mean that adverse conditions could substantially
impact the income earned by the Fund and the value of the Fund's holdings.
11
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Financial Highlights
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For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
==============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $119.69 $ 95.62 $107.62 $102.67 $110.75
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Income (Loss) From Operations:
Net investment income 3.12 3.58 4.02 3.94 4.91
Net realized and unrealized gain (loss) (5.35) 35.57 (5.91) 12.30 6.79
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Total Income (Loss) From Operations (2.23) 39.15 (1.89) 16.24 11.70
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Less Distributions From:
Net investment income (3.12) (3.58) (4.05) (4.42) (4.55)
Net realized gains (9.72) (11.50) (6.06) (6.87) (15.23)
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Total Distributions (12.84) (15.08) (10.11) (11.29) (19.78)
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Net Asset Value, End of Year $104.62 $119.69 $ 95.62 $107.62 $102.67
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Total Return (1.45)% 42.93% (1.83)% 16.00% 10.89%
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Net Assets, End of Year (000s) $62,982 $74,841 $61,256 $71,570 $70,637
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Ratios to Average Net Assets:
Expenses 0.90% 0.95% 0.95% 0.93% 0.92%
Net investment income 2.80 3.23 3.80 3.47 4.41
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Portfolio Turnover Rate 0% 0% 0% 0% 2%
==============================================================================================
Average commissions per share
paid on equity transactions(1) $ 0.05 $ 0.06 -- -- --
==============================================================================================
</TABLE>
(1) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
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Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Fund to its shareholders
for the fiscal year ended December 31, 1996, was $5,827,066.
The Fund designates 86.60% of the ordinary dividends paid during the fiscal
year ended December 31, 1996 as qualifying for the corporate dividends received
deduction.
12
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Independent Auditors' Report
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The Shareholders and Board of Trustees of
Smith Barney Telecommunications Trust:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney Telecommunications
Income Fund of Smith Barney Telecommunications Trust as of December 31, 1996,
the related statement of operations for the year then ended and the statement of
changes in net assets and financial highlights for each of the years in the
two-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits. The financial highlights for each of the years in the three-year
period ended December 31, 1994 were audited by other auditors whose report
thereon, dated February 3, 1995, 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
December 31, 1996, by correspondence with the custodian. 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 the
Smith Barney Telecommunications Income Fund of Smith Barney Telecommunications
Trust as of December 31, 1996, the results of its operations for the year then
ended, changes in its net assets and financial highlights for each of the years
in the two-year period then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 12, 1997
13
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Smith Barney SMITH BARNEY
Telecommunications ------------
Income Fund A Member of TravelersGroup[Logo]
Trustees
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Guy R. Scott
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Strategy
Advisers Inc.
Administrator
Smith Barney Mutual Funds Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNCBank, N.A.
Shareholder Servicing 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 Telecommunications Income Fund.
It is not authorized for distribution to
prospective investors unless accompanied or
preceded by a current Prospectus for the
Fund, which contains information
concerning the Fund's investment policies
and expenses as well as other pertinent
information.
Smith Barney
Telecommunications
Income Fund
388 Greenwich Street
New York, New York 10013
FD0321 2/97
