ANNUAL REPORT
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1997
1997
1997
1997
1997
Smith Barney
Telecommunications
Income Fund
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December 31, 1997
[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 the annual report for the year ended December 31, 1997
for the Smith Barney Telecommunications Income Fund ("Fund"). In this report, we
review the factors driving the Fund's performance during the reporting period
and discuss our outlook for the Bell operating companies that currently
represent about 95% 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.
Market and Performance Update
The primary investment objective of the Fund is to provide shareholders with a
consistent level of dividend income. Capital appreciation is a secondary
objective. The Fund's aggregate total return (income plus the change in share
price) was 45.11% during 1997, significantly outpacing the roughly 33% annual
total return generated by the Standard & Poor's 500 Index. (The S&P 500 is a
capitalization-weighted measure of 500 widely held common stocks.) During 1997,
the Fund also outperformed the 26.9% average annual return generated by the
Lipper Analytical Services, Inc. peer group average for all telecommunication
funds for 1997. (Lipper is a major fund-tracking organization.)
Several factors contributed to the Fund's strong performance this year. The pace
of deregulation in the telecommunications industry was far slower than
anticipated by many investment professionals. For example, a couple of federal
court decisions favorable to the Bell operating companies had the effect of
delaying the entry of competition into the local exchange business. These
decisions should allow the Bell companies to protect their highly lucrative
franchises even longer and to develop further their strategic defenses against
impending competition.
In addition, industry consolidation continued at a rapid pace throughout the
year. SBC Communications completed its acquisition of Pacific Telesis in April
and Bell Atlantic's merger with NYNEX was finalized in August. Consolidation
savings generated by these large-scale mergers have been widely underestimated
by many financial analysts, creating the potential for positive earnings
surprises in the future.
Finally, turmoil in the Asian financial markets during the fourth quarter 1997
spurred investor demand for high-quality, stable stocks and led to a strong
rally in many telephone utility stocks.
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Market Outlook
We remain optimistic about the prospects for the Bell operating companies and
expect them to continue delivering high-single digit earnings growth and
consistent dividend growth for the foreseeable future. We believe the Bell
operating companies' strong growth prospects over the next few years will be
fueled by:
o integration savings stemming from industry-wide consolidation
o new service offerings, including long distance and data networking
o overseas investment opportunities, particularly in emerging markets
In summary, we appreciate the opportunity to serve your investment needs and
look forward to continuing to help you pursue your financial goals in the months
ahead.
Sincerely,
/s/Heath B. McLendon /s/Valerie J. Sill
Heath B. McLendon Valerie J. Sill
Chairman Investment Officer
February 6, 1998
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Historical Performance
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Net Asset Value
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Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns+
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12/31/97 $104.62 $134.06 $ 2.83 $ 13.61 $ 0.00 45.11%
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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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Total $ 45.64 $ 84.61 $ 1.18
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It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, twice a year.
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Average Annual Total Return+
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Year Ended 12/31/97 45.11%
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Five Years Ended 12/31/97 18.40
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Ten Years Ended 12/31/97 16.65
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1/1/84* through 12/31/97 17.47
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Cumulative Total Return+
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12/31/87 through 12/31/97 366.36%
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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 1987 -- December 1997
[LINE CHART OMITTED]
+ Hypothetical illustration of $10,000 invested in the Smith Barney
Telecommunications Income Fund on December 31, 1987, assuming reinvestment
of dividends and capital gains, if any, at net asset value through
December 31, 1997. 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, 1997
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SHARES SECURITY VALUE
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COMMON STOCK -- 100.0%
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Telecommunications -- 100.0%
164,436 AirTouch Communications, Inc.+ $ 6,834,371
137,842 Ameritech Corp. 11,096,281
171,590 Bell Atlantic Corp. 15,614,690
246,944 Bellsouth Corp. 13,906,034
252,647 SBC Communications, Inc. 18,506,393
146,858 U.S. West Communications, Inc. 6,626,967
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TOTAL INVESTMENTS -- 100%
(Cost-- $11,409,253*) $72,584,736
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+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is $8,006,379.
See Notes to Financial Statements.
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Statement of Assets and Liabilities December 31, 1997
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ASSETS:
Investments, at value (Cost-- $11,409,253*) $ 72,584,736
Receivable for securities sold 1,200,895
Dividends receivable 85,645
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Total Assets 73,871,276
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LIABILITIES:
Payable to bank 504,501
Investment advisory fees payable 34,277
Administration fees payable 12,464
Accrued expenses 46,578
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Total Liabilities 597,820
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Total Net Assets $ 73,273,456
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NET ASSETS:
Par value of shares of beneficial interest $ 547
Capital paid in excess of par value 6,920,835
Overdistributed net investment income (2,181)
Accumulated net realized gain on security transactions 5,178,772
Net unrealized appreciation of investments 61,175,483
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Total Net Assets $ 73,273,456
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Shares Outstanding 546,591
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Net Asset Value, per share (and redemption price) $ 134.06
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* Aggregate cost for Federal income tax purposes is $8,006,379.
See Notes to Financial Statements.
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Statement of Operations For the Year Ended December 31, 1997
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INVESTMENT INCOME:
Dividends $ 2,178,591
Interest 17,687
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Total Investment Income 2,196,278
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EXPENSES:
Investment advisory fees (Note 2) 367,532
Administration fees (Note 2) 133,648
Audit and legal 37,726
Trustees' fees 36,000
Shareholder and system servicing fees 24,378
Shareholder communications 12,670
Custody 2,500
Other 4,412
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Total Expenses 618,866
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Net Investment Income 1,577,412
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REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 14,071,125
Cost of securities sold 2,417,922
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Net Realized Gain 11,653,203
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Change in Net Unrealized Appreciation of Investments:
Beginning of year 48,937,535
End of year 61,175,483
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Increase in Net Unrealized Appreciation 12,237,948
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Net Gain on Investments 23,891,151
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Increase in Net Assets From Operations $25,468,563
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See Notes to Financial Statements.
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Statements of Changes in Net Assets For the Year Ended December 31,
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1997 1996
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OPERATIONS:
Net investment income $ 1,577,412 $ 1,880,422
Net realized gain+ 11,653,203 5,532,858
Increase (decrease) in net
unrealized appreciation 12,237,948 (8,916,590)
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Increase (Decrease) in Net Assets
From Operations 25,468,563 (1,503,310)
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DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (1,579,593) (1,880,422)
Net realized gains (7,348,267) (5,827,066)
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Decrease in Net Assets From
Distributions to Shareholders (8,927,860) (7,707,488)
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FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued for
reinvestment of dividends 3,568,839 2,932,221
Cost of shares reacquired (9,817,656) (5,580,641)
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Decrease in Net Assets From
Fund Share Transactions (6,248,817) (2,648,420)
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Increase (Decrease) in Net Assets 10,291,886 (11,859,218)
NET ASSETS:
Beginning of year 62,981,570 74,840,788
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End of year* $ 73,273,456 $ 62,981,570
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* Includes overdistributed net
investment income of: $ (2,181) --
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+ Net realized gains for Federal income tax purposes is $11,891,418 and
$5,865,009, for the years ended December 31, 1997 and 1996, respectively.
See Notes to Financial Statements.
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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. Shares of
the Fund are not currently offered for sale to new investors.
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 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 for financial reporting
purposes and the specific identification method for tax purposes; (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.
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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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., which, in turn, is a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Trust. The Fund pays
SBSA an 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.
MMC 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 SSBH, 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, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
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Purchases --
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Sales $14,071,125
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At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
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Gross unrealized appreciation $64,578,357
Gross unrealized depreciation --
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Net unrealized appreciation $64,578,357
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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, 1997, 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, 1997 December 31, 1996
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Shares issued on reinvestment 27,784 27,670
Shares redeemed (83,210) (50,952)
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Net Decrease (55,426) (23,282)
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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>
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $104.62 $119.69 $ 95.62 $107.62 $102.67
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Income (Loss) From Operations:
Net investment income 2.83 3.12 3.58 4.02 3.94
Net realized and
unrealized gain (loss) 43.05 (5.35) 35.57 (5.91) 12.30
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Total Income (Loss) From Operations 45.88 (2.23) 39.15 (1.89) 16.24
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Less Distributions From:
Net investment income (2.83) (3.12) (3.58) (4.05) (4.42)
Net realized gains (13.61) (9.72) (11.50) (6.06) (6.87)
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Total Distributions (16.44) (12.84) (15.08) (10.11) (11.29)
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Net Asset Value, End of Year $134.06 $104.62 $119.69 $ 95.62 $107.62
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Total Return 45.11% (1.45)% 42.93% (1.83)% 16.00%
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Net Assets, End of Year (000s) $73,273 $62,982 $74,841 $61,256 $71,570
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Ratios to Average Net Assets:
Expenses 0.92% 0.90% 0.95% 0.95% 0.93%
Net investment income 2.35 2.80 3.23 3.80 3.47
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Portfolio Turnover Rate 0% 0% 0% 0% 0%
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Average commissions per share
paid on equity transactions(1) $ 0.05 $ 0.05 $ 0.06 -- --
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</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)
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For Federal tax purposes the Fund hereby designates for the fiscal year
ended December 31, 1997:
o 100% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
o The Taxpayer Relief Act of 1997 enacted differing rates of tax on
various long-term capital transactions. As a result, the Fund
designates:
o Total long-term capital gain distributions paid of $7,348,267.
$2,901,096 are considered "28 percent rate gains".
$4,447,171 are considered "20 percent rate gains".
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, 1997,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the three-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 two-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, 1997, by correspondence with the custodian. As to securities sold
but not delivered, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Telecommunications Income Fund of Smith Barney Telecommunications
Trust as of December 31, 1997, and the results of its operations for the year
then ended, the changes in its net assets for each of the years in the two-year
period then ended, and the financial highlights for each of the years in the
three-year period then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
13
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Smith Barney
Telecommunications
Income Fund
Trustees
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
Allan R. Johnson, Emeritus
John F. White, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Valerie J. Sill
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Strategy
Advisers Inc.
SMITH BARNEY
- ------------
A Member of TravelersGroup[LOGO]
Administrator
Mutual Management Corp.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, 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
www.smithbarney.com
FD0321 2/98
