1994
ANNUAL
REPORT
Smith Barney Shearson
MONEY
MARKET
FUND
JULY 31, 1994
SMITH BARNEY
MONEY MARKET FUND
DEAR SHAREHOLDER:
We are pleased to provide the Annual Report for Smith Barney Shearson
Money Market Fund for the fiscal year ended July 31, 1994. During the past
twelve months, the Fund's dividend distributions resulted in a compounded
annualized yield of 2.18%.
The economy expanded faster in the second half of 1993 and the first half
of 1994 than it could potentially sustain over a long period of time. This
growth was broad based, with strong gains in capital equipment, housing,
durable goods and car production. As a result, slack in the labor and pro-
duction markets were trimmed substantially. Given this diminished slack,
any sign that growth is not slowing to the 2 1/2 to 3% range forecast by
policy makers could indicate a resurgence of inflation. And although the
labor and production markets suggest continued strength, higher interest
rates have since lead to some moderation in consumption and housing.
In keeping with its plan to pre-empt inflation, the Federal Reserve has
increased interest rates by 150 basis points since February. The most re-
cent increase of 50 basis points occurred at the August 16th Federal Open
Market Committee (FOMC) meeting, which brings the current Fed funds target
to the 4.75% level. Given how close the economy is to capacity and how un-
certain the economic outlook is, it is questionable as to whether the
Fed's increases in interest rates so far this year will be sufficient to
head off inflation or whether additional increases will be necessary. How-
ever, at this point it appears that the Fed's aggressive 50 basis point
move in August and the approach of the November election are indications
that any further action by the Fed will be put off until mid-November at
the earliest. There is also the possibility that their policy could be
left unchanged over the remainder of the year if forthcoming economic re-
leases show that the pace of expansion is moderating and if inflation in-
dicators show no further deterioration.
Looking forward, the inventory build-up in the third quarter may suggest
slower growth in the second half of 1994. We believe that scattered indi-
cations of isolated labor shortages and continued growth in employment
should sustain the momentum of consumer spending, while a vigilant Federal
Reserve which would err on the side of restraint should contain inflation-
ary fears.
After the Fed's most recent interest rate hike, the Treasury yield curve
(which is a visual depiction of interest rates across the maturity spec-
trum) flattened and the dollar strengthened versus world currencies. We
think that the market will continue to remain in a trading range until
more conclusive evidence on the economy emerges. We are maintaining a
defensive posture and keeping the weighted average maturity in the 40-50
day range.
A final word on money market funds. There have been several instances of
investment advisers supporting the dollar price of their money funds when
it threatened to "break the buck" due to the decline in value of several
forms of structured notes apparently owned by these funds. Our position on
these activities is strongly held. We were concerned to see money funds
involved in these types of securities, as we believe their use by a money
fund is inappropriate. We will not utilize in this Fund any securities not
directly linked to short-term money market rates. We are "hard liners" in
our view of permissible money fund holdings and do not believe it appro-
priate to reach for return through securities linked to the performance or
yield level of non-money market instruments.
As we have since the Fund began in 1986, we will continue to strive to
maintain our high investment standards while providing competitive invest-
ment yields. We appreciate your continued confidence and support.
Sincerely,
Heath B. McLendon Phyllis M. Zahorodny
Heath B. McLendon Phyllis M. Zahorodny
Chairman of the Board Vice President
and Investment Officer and Investment Officer
Evelyn R. Robertson
Evelyn R. Robertson
Investment Officer
September 7, 1994
PORTFOLIO OF INVESTMENTS JULY 31, 1994
<TABLE>
<CAPTION>
ANNUALIZED
YIELD AT
DATE OF
PURCHASE
MATURITY MARKET VALUE
FACE VALUE (UNAUDITED)
DATE (NOTE 1)
<S> <C> <C> <C>
<C>
COMMERCIAL PAPER -- 51.0%
$ 5,000,000 A.I. Credit Corporation 4.808%
10/6/94 $ 4,956,458
5,000,000 Banca Commerciale Italiana 4.449
8/3/94 4,998,778
10,000,000 Bankers Trust N.Y. 4.515
8/29/94 9,965,155
9,800,000 B.A.T. Capital Corporation 4.520
8/18/94 9,779,175
5,000,000 Budget Funding Corporation 4.565
9/19/94 4,969,170
10,000,000 Ciesco, L.P. 4.450
9/8/94 9,953,555
2,000,000 Ford Motor Credit Company 4.688
9/15/94 1,988,375
5,000,000 General Electric Capital Cor-
poration 4.807
10/4/94 4,957,778
5,000,000 Goldman Sachs 4.837
10/3/94 4,958,175
5,000,000 Hanson Finance, PLC 4.347
8/2/94 4,999,403
5,000,000 Hanson Finance, PLC 4.450
9/8/94 4,976,778
5,000,000 Merrill, Lynch & Company 4.517
8/12/94 4,993,125
5,000,000 Merrill, Lynch & Company 4.735
10/25/94 4,944,750
5,000,000 Morgan J.P. & Company 4.437
8/8/94 4,995,703
5,000,000 Morgan Stanley 4.296
8/1/94 5,000,000
5,000,000 National & Provincial Building
Society 4.538
8/8/94 4,995,606
7,390,000 Penny, J.C. Funding 4.445
8/4/94 7,387,272
5,000,000 PHH Corporation 4.435
8/3/94 4,998,772
5,000,000 Philip Morris Companies, Inc. 4.519
8/16/94 4,990,625
5,000,000 San Paolo US Financial Com-
pany 4.481
8/5/94 4,997,539
10,000,000 USAA Capital Corporation 4.727
10/28/94 9,885,844
5,000,000 Woolwich Building Society 4.518
8/8/94 4,995,625
TOTAL COMMERCIAL PAPER
(Cost $128,687,661)
128,687,661
CERTIFICATES OF DEPOSIT -- 13.9%
5,000,000 Banque Paribas 3.700
12/8/94 5,000,000
5,000,000 Credit Lyonnais 4.250
8/1/94 5,000,000
5,000,000 Credit Lyonnais 4.430
8/10/94 5,000,000
5,000,000 Societe Generale 4.270
8/2/94 5,000,000
5,000,000 Sumitomo Bank 4.350
8/12/94 4,999,862
10,000,000 Z-Landerbank 4.480
9/27/94 10,000,000
TOTAL CERTIFICATES OF DEPOSIT
(Cost $34,999,862)
34,999,862
EURODOLLAR TIME DEPOSITS -- 11.5%
10,000,000 Banque Franc du Comm. Ext. 4.218
8/1/94 10,000,000
7,000,000 Banque Paribas 4.250
8/1/94 7,000,000
$12,000,000 Dai Ichi Kangyo Bank 4.313%
8/1/94 $ 12,000,000
TOTAL EURODOLLAR TIME DEPOSITS
(Cost $29,000,000)
29,000,000
EURODOLLAR CERTIFICATES OF DEPOSIT -- 6.7%
5,000,000 Den Danske Bank 4.850
11/9/94 5,000,135
7,000,000 NationsBank Corporation 3.420
11/3/94 7,000,000
5,000,000 Union Bank of Switzerland Se-
curities, Inc. 4.520
8/24/94 5,000,032
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT (Cost $17,000,167)
17,000,167
DISCOUNT NOTES -- 3.6%
4,000,000 Federal Farm Credit Bank 3.285
8/4/94 3,998,932
5,000,000 Federal National Mortgage As-
sociation 4.513
10/17/94 4,952,731
TOTAL DISCOUNT NOTES
(Cost $8,951,663)
8,951,663
BANK NOTES -- 2.0% (Cost $4,999,710)
5,000,000 FCC National Bank, Wilmington 3.400
9/29/94 4,999,710
REPURCHASE AGREEMENTS -- 14.7%
3,137,000 Agreement with Citibank, N.A., 4.200% dated 7/29/94, to be
repurchased at $3,138,098 on 8/1/94, collateralized by
$3,030,000
U.S. Treasury Notes, 8.500% due 7/15/97
3,137,000
10,000,000 Agreement with First Boston Corporation, 4.430% dated
7/28/94,
to be repurchased at $10,041,839 on 8/31/94, collateralized
by
$8,170,000 U.S. Treasury Bonds, 10.375% due 11/15/12
10,000,000
12,000,000 Agreement with Kidder Peabody, 4.250% dated 7/29/94, to be
repurchased at $12,004,250 on 8/1/94, collateralized by
$12,350,000 FHLB, 6.050% due 3/10/99
12,000,000
12,000,000 Agreement with Prudential Securities Inc., 4.270% dated
7/29/94,
to be repurchased at $12,004,270 on 8/1/94, collateralized
by
$11,010,000 U.S. Treasury Note, 8.500% due 2/15/2000
12,000,000
TOTAL REPURCHASE AGREEMENTS
(Cost $37,137,000)
37,137,000
TOTAL INVESTMENTS (Cost $260,776,063*)
103.4% 260,776,063
OTHER ASSETS AND LIABILITIES (Net)
(3.4) (8,530,023)
NET ASSETS
100.0 % $252,246,040
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1994
<TABLE>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $260,776,063) (Note 1)
See accompanying schedule:
Investment securities $223,639,063
Repurchase agreements 37,137,000
$260,776,063
Cash
594
Interest receivable
698,149
Receivable for Fund shares sold
216,699
TOTAL ASSETS
261,691,505
LIABILITIES:
Payable for Fund shares redeemed 8,642,665
Dividends payable 447,584
Distribution fee payable (Note 3) 109,947
Investment advisory fee payable (Note 2) 65,968
Administration fee payable (Note 2) 43,979
Custodian fees payable (Note 2) 30,000
Transfer agent fees payable (Note 2) 19,000
Accrued expenses and other payables 86,322
TOTAL LIABILITIES
9,445,465
NET ASSETS
$252,246,040
NET ASSETS CONSIST OF:
Accumulated net realized loss on investments sold $
(107,676)
Par value
252,354
Paid-in capital in excess of par value
252,101,362
TOTAL NET ASSETS
$252,246,040
NET ASSET VALUE and offering price per share+
($252,246,040 / 252,353,716 shares of beneficial
interest outstanding) $
1.00
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest
$7,254,141
EXPENSES:
Distribution fee (Note 3) $ 1,036,758
Investment advisory fee (Note 2) 622,203
Administration fee (Note 2) 414,802
Transfer agent fees (Note 2) 251,425
Custodian fees (Note 2) 102,690
Legal and audit fees 38,667
Trustees' fees and expenses (Note 2) 13,995
Other 124,537
TOTAL EXPENSES
2,605,077
NET INVESTMENT INCOME
4,649,064
NET REALIZED GAIN ON INVESTMENTS (NOTE 1)
49,072
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$4,698,136
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C> <C>
Net investment income $ 4,649,064 $
4,413,978
Net realized gain on investments sold 49,072
42,425
Net increase in net assets resulting from op-
erations 4,698,136
4,456,403
Distributions to shareholders from net invest-
ment income (4,649,064)
(4,413,978)
Net increase/(decrease) in net assets from
Fund share
transactions (Note 4) 85,935,185
(59,256,639)
Net increase/(decrease) in net assets 85,984,257
(59,214,214)
NET ASSETS:
Beginning of year 166,261,783
225,475,997
End of year $252,246,040
$166,261,783
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C> <C>
Net asset value, beginning of year $ 1.00 $
1.00
Income from investment operations:
Net investment income 0.0216
0.0212
Less distributions:
Distributions from net investment income (0.0216)
(0.0212)
Net realized gain on investments 0.0002
0.0000
Net asset value, end of year $ 1.00 $
1.00
Total return+ 2.18%
2.15%
Ratios to average net assets/Supplemental data:
Net assets, end of year (in 000's) $252,246
$166,262
Ratio of operating expenses to average net assets 1.26%
1.25%
Ratio of net investment income to average net assets 2.24%
2.16%
<FN>
* The Fund commenced operations on July 8, 1986.
** Annualized.
+ Total return represents aggregate total return for the period indicated
and does not reflect any
applicable sales charge.
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/92 7/31/91 7/31/90 7/31/89 7/31/88 7/31/87
7/31/86*
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $
1.00
0.0400 0.0618 0.0740 0.0802 0.0566 0.0460
0.0032
(0.0400) (0.0618) (0.0740) (0.0802) (0.0566) (0.0460)
(0.0032)
0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
0.0001
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $
1.00
4.06% 6.36% 7.62% 8.32% 5.85% 4.69%
0.32%
$225,476 $426,862 $686,756 $829,743 $215,731 $ 83,366 $
2,778
1.22% 1.17% 1.15% 1.22% 1.46% 1.61%
1.50%**
4.13% 6.27% 7.42% 8.36% 5.69% 4.96%
4.78%**
</TABLE>
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a "Mas-
sachusetts business trust" under the laws of the Commonwealth of Massachu-
setts on March 12, 1985. The Trust is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. As of the
date of this report, the Trust offered eight managed investment funds:
Smith Barney Shearson Premium Total Return Fund, Smith Barney Shearson
Convertible Fund, Smith Barney Shearson Global Bond Fund, Smith Barney
Shearson High Income Fund, Smith Barney Shearson Tax-Exempt Income Fund,
Smith Barney Shearson Money Market Fund (the "Fund"), Smith Barney Shear-
son Diversified Strategic Income Fund and Smith Barney Shearson Utilities
Fund. Shares of the Fund may be acquired by the general public only
through the exchange of Class B shares of other funds in the Smith Barney
Shearson Group of Funds. Shares of the Fund acquired through exchange are
subject to the contingent deferred sales charge ("CDSC"), of the shares
with which the exchange is made. Shares of the Fund are also offered to
plans participating in the Smith Barney 401(k) Program and certain other
non-qualified retirement plans for direct investment at net asset value
subject to a CDSC of 3%. The following is a summary of significant ac-
counting policies consistently followed by the Fund in the preparation of
its financial statements.
Portfolio valuation: Securities are valued at amortized cost. Amortized
cost involves valuing an instrument at its cost initially and, thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value
of the instrument.
Repurchase agreements: The Fund engages in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of
the seller to repurchase, and the Fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return
that is not subject to market fluctuations during the Fund's holding pe-
riod. The value of the collateral is at least equal at all times to the
total amount of the repurchase obligations, including interest. In the
event of counterparty default, the Fund has the right to use the collat-
eral to offset losses incurred. There is potential loss to the Fund in the
event the Fund is delayed or prevented from exercising its rights to dis-
pose of the collateral securities including the risk of a possible decline
in the value of the underlying securities during the period while the Fund
seeks to assert its rights. The Fund's investment adviser, administrator
and/or sub-administrator, acting under the supervision of the Board of
Trustees, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agree-
ments to evaluate potential risks.
Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Realized gains and losses from securi-
ties sold are recorded on the identified cost basis. Interest income is
recorded on the accrual basis.
Dividends and distributions to shareholders: Dividends from net invest-
ment income, if any, of the Fund are declared on each day that the Fund is
open for business and are paid on the second Friday of the Smith Barney
Inc. ("Smith Barney") statement month. Distributions, if any, of any net
realized capital gains earned by the Fund will be made annually after the
close of the fiscal year in which they are earned. Additional distribu-
tions of net investment income and capital gains from the Fund may be made
at the discretion of the Trust's Board of Trustees in order to avoid the
application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting princi-
ples. These differences are primarily due to differing treatments of in-
come and gains on various investment securities held by the Fund, timing
differences and differing characterization of distributions made by the
Fund.
Federal income taxes: The Trust intends that the Fund qualify as a regu-
lated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Reve-
nue Code of 1986, as amended, applicable to regulated investment companies
and by distributing substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Manage-
ment Corp., which is controlled by Smith Barney Holdings Inc. ("Hold-
ings"). Holdings is a wholly owned subsidiary of The Travelers Inc. Under
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of
0.30% of the value of its average daily net assets.
Prior to May 4, 1994, the Fund was party to an administration agreement
(the "Administration Agreement") with The Boston Company Advisors, Inc.
("Boston Advisors"), an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). Under the Administration Agreement, the Fund paid
a monthly fee at the annual rate of 0.20% of the value of its average
daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substan-
tially the same terms and conditions, including the level of fees, as the
predecessor agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with Boston Advisors. Under the Sub-Administration Agreement, SBA pays
Boston Advisors a portion of its fee at a rate agreed upon from time to
time between SBA and Boston Advisors.
The CDSC is generally payable by the shareholder in connection with the
redemption of shares within five years (eight years in the case of pur-
chase by certain 401(k) plans) after the date purchase. In circumstances
in which the CDSC is imposed, the amount of the CDSC ranges between 5% and
1% of net asset value depending on the number of years since the date of
purchase (except in the case of purchases by certain 401(k) plans in which
case a 3% CDSC is imposed for the eight year period after the date of pur-
chase). For the year ended July 31, 1994, Smith Barney received from
shareholders $1,188,817 in CDSCs.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as a Trustee or of-
ficer of the Trust. The Fund pays each Trustee who is not an officer, di-
rector or employee of Smith Barney or any of its affiliates $10,000 per
annum plus $1,500 per meeting attended and reimburses each such Trustee
for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Trust's custodian. The Shareholder Services
Group, Inc., a subsidiary of First Data Corporation, serves as the Trust's
transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as the distributor of the Trust's shares pursuant to a
distribution agreement with the Trust and sells shares of the Fund through
Smith Barney or its affiliates.
The Fund has adopted a plan of distribution (the "Plan") under Rule 12b-1
of the 1940 Act. Under the Plan, the Fund pays an annual fee of 0.50% of
the value of its average daily net assets to Smith Barney for activities
primarily intended to result in the sale of its shares.
4. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest
with a $.001 par value. Because the Fund has sold shares, issued shares as
reinvestments of dividends and redeemed shares only at a constant net
asset value of $1.00 per share, the number of shares represented by such
sales, reinvestments and redemptions is the same as the amounts shown
below for such transactions.
Changes in the Fund's shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR
ENDED
7/31/94
7/31/93
<S> <C> <C>
Sold $ 631,604,784 $
388,033,399
Issued as reinvestment of
dividends 4,011,153
4,103,434
Redeemed (549,680,752)
(451,393,472)
Net increase/(decrease) $ 85,935,185 $
(59,256,639)
</TABLE>
5. CAPITAL LOSS CARRY FORWARD
As of July 31, 1994, the Fund had available for Federal tax purposes an
unused capital loss carryforward of $107,676 expiring in 1998.
6. SUBSEQUENT EVENT
Eight years after the date of their original purchase, shares of the Fund
will be automatically redeemed at net asset value and the redemption pro-
ceeds will be reinvested, at net asset value, in Class A shares of Smith
Barney Shearson Daily Dividend Fund Inc. ("SDDI"). The first of these con-
versions occurred on September 8, 1994; and, 86,057,543 shares of the Fund
were converted into Class A shares of SDDI.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY SHEARSON MONEY MARKET FUND OF
SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
the Smith Barney Shearson Money Market Fund of Smith Barney Shearson In-
come Funds, including the schedule of portfolio investments, as of July
31, 1994, and the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the eight
years in the period then ended and for the period July 8, 1986 (commence-
ment of operations) to July 31, 1986. These financial statements and fi-
nancial 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.
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 fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1994 by correspondence with the custodian
and brokers. 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 Shearson Money Market Fund of Smith Barney Shearson
Income Funds as of July 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the
eight years in the period then ended and for the period July 8, 1986 (com-
mencement of operations) to July 31, 1986, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 9, 1994
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit
and Trust Company
One Boston Place
Boston, Massachusetts 02108
INVESTOR BENEFITS
MONTHLY DISTRIBUTIONS
It's your fund's policy to distribute dividend income monthly.
AUTOMATIC REINVESTMENT
You may reinvest your dividends and/or capital gains automatically in ad-
ditional shares of your fund at the current net asset value.
UNLIMITED EXCHANGES
If your investment goals change, you may exchange into another Smith Bar-
ney Shearson mutual fund with the same sales charge structure without in-
curring a sales charge.*
AUTOMATIC CASH WITHDRAWAL PLAN
With this plan, you may withdraw money on a regular basis while maintain-
ing your investment.
MUTUAL FUND EVALUATION SERVICE
Through your Financial Consultant, you may obtain a free personalized
analysis of how your fund has performed for you, taking into account the
effect of every transaction. The analysis is based upon month- end data
from CDA Investment Technologies, Inc., a widely recognized mutual fund
information service. An evaluation also gives you other important facts
and figures about your investment.
For more information about these benefits, or if you have any other ques-
tions, please call your Financial Consultant or write:
MUTUAL FUND POLICY GROUP
SMITH BARNEY
388 GREENWICH STREET 37TH FLOOR
NEW YORK, NY 10013
* After written notification, exchange privilege may be modified or termi-
nated at any time.
MONEY MARKET
FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Phyllis M. Zahorodny
Vice President and
Investment Officer
Evelyn R. Robertson
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
Recycled
Recyclable
This report is submitted for
the general information of the
shareholders of Smith Barney
Shearson Money Market Fund.
It is not authorized for distribution
to prospective investors unless
accompanied or preceded by an
effective Prospectus for the Fund,
which contains information
concerning the Fund's investment
policies, fees and expenses, as well
as other pertinent information.
SMITH BARNEY
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 26
FD0428 I4
1994
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing a black and white picture of walkway
with two steps up to the left and walkway surrounded by white pillars with
monument in background behind pillars.
Smith Barney Shearson
TAX-EXEMPT
INCOME
FUND
JULY 31, 1994
SMITH BARNEY
TAX-EXEMPT INCOME FUND
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report, which includes the
portfolio of investments for Smith Barney Shearson Tax-Exempt Income Fund
for the fiscal year ended July 31, 1994. The Fund's net asset value for
both classes was $18.24 per share on July 31, 1993, the beginning of the
Fund's fiscal year; in response to declining prices for municipal bonds
during most of the past twelve months, the Fund's net asset value declined
to $17.26 per share on July 31, 1994. Investors owning Class A shares re-
ceived tax-exempt distributions of $1.06 per share and a capital gains
distribution of $0.13; investors owning Class B shares received tax-exempt
distributions of $0.96 per share and a capital gains distribution of
$0.13. The total return for this fiscal period was a modest 1.14% for
Class A shares and 0.60% for Class B shares. Further information about the
performance of your investment during this and previous fiscal periods is
available on the "performance" pages of this report.
ECONOMIC ENVIROMENT AND MUNICIPAL MARKET OVERVIEW
After a very strong market and rising valuations during the first four
months of the Fund's fiscal year, municipal securities experienced in-
creased volatility and declining prices. A catalyst for this reversal was
the Federal Reserve's aggressive attempt to control inflation by increas-
ing the Federal funds rate and the discount rate, two very sensitive indi-
cators of the direction of interest rates. The textbook result of an in-
crease in short- term rates is slower economic growth and lower long-term
interest rates. However, at the time there were many leveraged investments
in the marketplace based on short-term interest rates staying low. As
short-term rates rose, investors met liquidity demands by selling long-
term U.S. Treasuries which caused an unintended and unwarranted rise in
long-term interest rates. Interest rates on municipal securities also rose
as dealers sold their municipal inventory in order to meet the selling de-
mands of Treasury investors. This uncertain investment environment caused
many investors to purchase shorter maturities which are generally less
volatile than longer- term issues.
It's clear to us from the Federal Reserve's actions of the last few months
that they will continue to raise interest rates as long as they see infla-
tion building into the economy. But we believe that it will be later in
the year before we see any further movement in rates by the Federal Re-
serve. We think that the slowdown in mortgage refinancings, new construc-
tion, and sales of single family homes will translate into a slowdown in
economic growth. In addition, job growth and wage growth have not been
contributing much strength to the economy. The real issue is whether or
not the economy reaches the equilibrium state of growth with low inflation
that the Federal Reserve is striving for.
INVESTMENT STRATEGY
As investment adviser, our goal is to provide you with tax-free income and
stability of principal through investments in securities, which are exempt
from Federal personal income taxes. We tend to take a longer-term invest-
ment perspective to tax-exempt investing and, although we are not market
timers, when the market requires it we are ready, willing and able to ad-
just the portfolio accordingly. Such a situation occurred during this fis-
cal year. When the very attractive tax-exempt market environment of the
last few years gave way in November to an environment of tumbling bond
prices, we shortened the average maturity of the Fund. We were concerned
by the market's volatility and lack of liquidity caused by various dislo-
cations. We consequently raised the Fund's cash holdings. Yields in the
municipal market have now risen approximately 100 basis points (one per-
centage point) and we believe that the worst of the market's volatility is
behind us.
Recently, we have been allocating the portfolio's cash holdings to the
longer-term market to try and capture a little bit more yield. This higher
yield will be important to maintaining the Fund's income stream which has
been reduced by the bond calls and refinancings of the past year and will
continue to be challenged by bond calls during the rest of 1994.
Although the economy is strong, we have been emphasizing high quality se-
curities because the spread (the difference in yield between high quality
and lower quality securities) in the tax-exempt market is still quite nar-
row. We used the market decline as an opportunity to invest in AAA-rated
securities at very attractive prices, and until we feel that we are addi-
tionally compensated for buying lower rated securities, we will confine
the majority of our holdings to the investment grade category. At the end
of this reporting period, 40% of the Fund was invested in AAA-rated secu-
rities. Because of the uncertainties surrounding national health care re-
form and its reimbursement policies, we have reduced the portfolio's hold-
ings in hospital and health care issues.
DIVIDEND POLICY
Although not explicitly stated in the prospectus, the Fund's policy is to
pay a level monthly dividend based on our projections for the municipal
market and the general direction of interest rates. This policy has no
appreciable affect on the Fund's investment strategies or net asset value
per share since it is guided by market conditions. We continually monitor
both the market and the Fund's income stream to see that our dividend pro-
jections are on target. This means that we do not sacrifice the quality of
the portfolio by investing in higher yielding but lower quality bonds that
may undermine the Fund's net asset value per share in order to maintain an
unrealistically high dividend policy.
In closing, we welcome new investors to the Fund and thank more tenured
investors for their continued trust. As we have since the Fund's commence-
ment of operations in 1985, we will strive to provide you with investment
performance that best serves the interests of the Fund's shareholders.
Sincerely,
Heath B. McLendon Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman of the Board Vice President and
Investment Officer
September 2, 1994
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Capital Gains Dividends
Total
July 31 Beginning Ending Paid Paid
Return*
<S> <C> <C> <C> <C>
<C>
11/6/92-7/31/93 $ 17.45 $ 18.24 $0.16 $0.83
10.24%
1994 18.24 17.26 0.13 1.06
1.14
Total $0.29 $1.89
Cumulative Total Return -- (11/6/92 through 7/31/94)
11.49%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the front-end
sales charge (maximum 4.5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without Sales Charge With Sales
Charge***
<S> <C> <C>
Year Ended 7/31/94 1.14%
(3.42)%
Inception 11/6/92 through 7/31/94 6.48 3.69
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the maxi-
mum 4.5% sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992.
Class A shares are subject to a maximum 4.5% front-end sales charge
and a service fee of 0.15% of the value of the average daily net
assets attributable to that class.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND+
VS. LEHMAN MUNICIPAL BOND INDEX
November 6, 1992 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (TAX-EXEMPT INCOME FUND)
CLASS A
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Series
Fund -- Tax-Exempt Income Fund Class A shares on November 6, 1992 through
July 31, 1994 as compared with the growth of a $10,000 investment in the
Lehman Municipal Bond Index. The plot points used to draw the line graph
were as follows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
GROWTH OF $10,000 INVESTMENT IN
THE
MONTH INVESTED IN CLASS A LEHMAN
BROTHERS
ENDED SHARES OF THE PORTFOLIO MUNICIPAL BOND
INDEX
<S> <C> <C>
10/30/92 -- $10,000
11/06/92 $ 9,550 --
11/92 $ 9,671 $10,179
12/92 $ 9,785 $10,282
3/93 $10,171 $10,664
6/93 $10,506 $11,013
9/93 $10,856 $11,385
12/93 $10,994 $11,545
3/94 $10,387 $10,911
6/94 $10,465 $11,032
7/94 $10,648 $11,234
<FN>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 4.5% sales charge at the time of in-
vestment and reinvestment of dividends and capital gains at net asset
value through July 31, 1994.
LEHMAN MUNICIPAL BOND INDEX -- The Lehman Municipal Bond Index is an un-
managed, broad-based index which includes about 8,000 tax-free bonds and
reflects approximately $300 billion of market capitalization.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class A shares and do not guarantee future results.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Return of Capital Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
9/16/85-
7/31/86 $15.00 $16.30 -- -- $1.04
15.89%
1987 16.30 16.48 -- -- 1.10
7.90
1988 16.48 16.44 -- $0.06 1.13
7.32
1989 16.44 17.31 -- 0.01 1.13
12.68
1990 17.31 16.98 -- 0.03 1.12
4.95
1991 16.98 16.97 -- 0.11 1.10
7.40
1992 16.97 18.00 $0.01 0.13 1.04
13.50
1993 18.00 18.24 -- 0.17 1.02
8.28
1994 18.24 17.26 -- 0.13 0.96
0.60
Total $0.01 $0.64 $9.64
Cumulative Total Return -- (9/16/85 through 7/31/94)
110.66%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the contin-
gent deferred sales charge ("CDSC").
</TABLE>
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without CDSC With
CDSC***
<S> <C> <C>
Year Ended 7/31/94 0.60%
(3.66)%
Five Years Ended 7/31/94 6.86
6.71
Inception 9/16/85 through 7/31/94 8.76
8.76
<FN>
** All average annual total return figures shown reflect reinvestment
of dividends and capital gains at net asset value. The Fund com-
menced operations September 16, 1985.
*** Average annual total return figures assume the deduction of the max-
imum applicable CDSC which is described in the prospectus.
NOTE: The Fund began offering Class B shares on September 16, 1985.
Class B shares are subject to a maximum 4.5% CDSC and service and
distribution fees of 0.15% and 0.50%, respectively, of the value of
the average daily net assets attributable to that class.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND+
VS. LEHMAN MUNICIPAL BOND INDEX
September 16, 1985 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (TAX-EXEMPT INCOME FUND)
CLASS B
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Series
Fund -- Tax-Exempt Income Fund Class B shares on September 16, 1985
through July 31, 1994 as compared with the growth of a $10,000 investment
in the Lehman Municipal Bond Index. The plot points used to draw the line
graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
GROWTH OF $10,000 INVESTMENT IN
THE
MONTH INVESTED IN CLASS B LEHMAN
BROTHERS
ENDED SHARES OF THE PORTFOLIO MUNICIPAL BOND
INDEX
<S> <C> <C>
9/16/85 $10,000 --
9/85 $ 9,933 --
10/31/85 -- $10,000
12/85 $10,754 $10,808
3/86 $11,788 $11,903
6/86 $11,789 $11,829
9/86 $12,007 $12,465
12/86 $12,569 $12,895
3/87 $12,889 $13,207
6/87 $12,342 $12,848
9/87 $12,013 $12,529
12/87 $12,607 $13,089
3/88 $13,039 $13,539
6/88 $13,322 $13,801
9/88 $13,732 $14,153
12/88 $14,097 $14,417
3/89 $14,211 $14,512
6/89 $14,997 $15,372
9/89 $14,971 $15,382
12/89 $15,372 $15,973
3/90 $14,387 $16,045
6/90 $15,646 $16,420
9/90 $15,624 $16,429
12/90 $16,153 $17,138
3/91 $16,482 $17,524
6/91 $16,837 $17,899
9/91 $17,416 $18,595
12/91 $17,958 $19,219
3/92 $18,100 $19,277
6/92 $18,739 $20,009
9/92 $19,194 $20,542
12/92 $19,526 $20,916
3/93 $20,269 $21,692
6/93 $20,910 $22,402
9/93 $21,578 $23,159
12/93 $21,826 $23,484
3/94 $20,592 $22,194
6/94 $20,718 $22,440
7/94 $21,072 $22,851
<FN>
+ Illustration of $10,000 invested in Class B shares on September 16,
1985 assuming reinvestment of dividends and capital gains at net asset
value through July 31, 1994.
LEHMAN MUNICIPAL BOND INDEX -- The Lehman Municipal Bond Index is an
unmanaged, broad-based index which includes about 8,000 tax-free bonds
and reflects approximately $300 billion of market capitalization.
Index information is available at month-end only; therefore, the clos-
est month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
</TABLE>
PORTFOLIO HIGHLIGHTS (UNAUDITED) JULY 31, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Income Funds -- Tax-Exempt In-
come Fund's investment securities held at July 31, 1994 by industry clas-
sification. The pie is broken in pieces representing industries in the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY
PERCENTAGE
<S>
<C>
HOSPITALS
13.7%
HOUSING
8.3%
POLLUTION CONTROL
18.4%
EDUCATION
5.6%
OTHER MUNICIPAL BONDS
12.7%
SHORT-TERM TAX-EXEMPT INVESTMENTS AND NET OTHER ASSETS AND LIABILITIES
0.4%
GENERAL OBLIGATION
12.8%
UTILITY REVENUE
13.7%
INDUSTRIAL CONTROL
5.4%
TRANSPORTATION
9.0%
</TABLE>
TOP FIVE STATES REPRESENTED
<TABLE>
<CAPTION>
Percentage of
State Net Asset
Value
<S> <C>
PENNSYLVANIA 9.5%
TEXAS 9.3
GEORGIA 5.8
NEW JERSEY 5.7
NEW YORK 5.4
</TABLE>
SUMMARY OF MUNICIPAL BONDS AND SHORT-TERM
TAX-EXEMPT INVESTMENTS BY COMBINED RATINGS
<TABLE>
<CAPTION>
Standard &
Percentage of
Moody's Poor's Market
Value
<S> <C> <C> <C>
AAA OR AAA
40%
AA AA 10
A A 18
BAA BBB 19
BA BB 4
B B 1
VMIG1 A-1+ 1
NR NR 7
100%
</TABLE>
PORTFOLIO OF INVESTMENTS JULY 31, 1994
KEY TO INSURANCE ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
BIGI -- Bond Investors Guaranty Insurance
CO LEE -- College Construction Loan Association
CAPGTY -- Capital Guaranty
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Federal Security Assurance
MBIA -- Municipal Bond Investors Assurance
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED)
MARKET VALUE
FACE VALUE MOODY'S S&P
(NOTE 1)
<S> <C> <C> <C>
<C>
MUNICIPAL BONDS AND NOTES -- 99.6%
ALABAMA -- 1.2%
Alabama Special Care Facilities Finance Au-
thority, (Daughters of Charity Health Sys-
tems), Hospital Revenue:
$ 500,000 Mobile, Alabama, (Providence Hospital),
10.125% due 6/15/15 Aa NR
$ 531,250
500,000 Montgomery, Alabama, (St. Margaret's Hospi-
tal),
10.125% due 11/1/15 Aa NR
541,875
3,000,000 Birmingham, Alabama, Water Revenue & Sewer,
5.500% due 1/1/20 Aa AA
2,741,250
4,000,000 Courtland, Alabama, Industrial Waste Dis-
posal, (Champion International Corporation,
Inc. Project), Series A,
6.375% due 3/1/29 Baa1 BBB
3,770,000
3,000,000 Huntsville, Alabama, Health Care Facilities
Authority, Series A, (MBIA Insured),
6.375% due 6/1/12 Aaa AAA
3,056,250
2,500,000 Morgan County-Decatur, Alabama, Healthcare
Facilities, Decatur General Hospital,
(Co Lee Insured),
6.250% due 3/1/13 NR AAA
2,528,125
ALASKA -- 0.8%
Alaska State Housing Finance Corporation:
2,250,000 Series A,
6.000% due 12/1/22 Aa A+
2,407,500
1,000,000 Series B, Veteran's Mortgage Purchase,
5.875% due 12/1/35 Aaa AAA
880,000
6,000,000 Valdez, Alaska, Marine Terminal Revenue,
(Pipelines, Inc. Project), Series A,
5.800% due 8/1/25 A1 AA-
5,422,500
ARIZONA -- 2.2%
1,000,000 Arizona Educational Loan Marketing Corpora-
tion,
6.375% due 9/1/05 Aa NR
1,015,000
850,000 Arizona Health Facilities Authority, Hospital
Revenue, (St. Luke's Hospital), Series A,
10.125% due 11/1/15 Ba NR
894,625
1,170,000 Arizona State, Certificates of Participation,
(FSA Insured),
6.625% due 9/1/08 Aaa AAA
1,228,500
Arizona State, Certificates of Participation,
Refunding Revenue Bonds:
1,730,000 Series B, (AMBAC Insured),
6.250% due 9/1/10 Aaa AAA
1,751,625
1,000,000 (FSA Insured),
6.500% due 3/1/08 Aaa AAA
1,038,750
70,000 Arizona State Municipal Financing, Certifi-
cates of Participation, Series 10, (BIGI In-
sured),
7.900% due 8/1/17 (prerefunded 8/1/97) Aaa AAA
77,087
1,000,000 Gila County, Arizona, Industrial Development
Authority, Pollution Control Revenue,
Series 1987, (ASARCO Inc. Project),
8.900% due 7/1/06 Baa2 BBB
1,116,250
1,860,000 Manicopa County, Arizona, Industrial Develop-
ment, Mortgage Loan, Multi-Family Housing
Revenue, Series A, (FHA Insured),
5.900% due 7/1/24 NR AAA
1,739,100
5,000,000 Maricopa County, Arizona, Pollution Control,
Public Service Company, Palo Verde, Series A,
6.375% due 8/15/23 Ba2 BB
4,618,750
1,300,000 Maricopa County, Arizona, School District,
Fountain Hills, No. 98, (FGIC Insured),
6.625% due 7/1/10 Aaa AAA
1,358,500
1,085,000 Mohave County, Arizona, Hospital Systems Rev-
enue, (Medical Environments Inc. Project),
8.800% due 1/1/06 Baa NR
1,204,350
6,500,000 Navajo County, Arizona, Pollution Contol, Ar-
izona Public Service Company, Series A,
5.875% due 8/15/28 Baa2 BBB
5,825,625
369,000 Peoria, Arizona, Industrial Development Reve-
nue, (Sierra Winds Life Care),
5.000% due 11/1/17 (in default) NR NR
369,000
665,000 Pinal County, Arizona, Industrial
Development Revenue, (Casa Grande
Regional Medical Center),
9.000% due 12/1/13 NR NR
697,418
1,225,000 Tucson, Arizona, Local Business Development,
Lease Revenue Refunding Bonds, (FGIC In-
sured),
6.250% due 7/1/12 Aaa AAA
1,244,905
ARKANSAS -- 0.2%
2,000,000 Arkansas State Development Finance Authority,
Single Family Mortgage Revenue,
6.100% due 1/1/17 NR AAA
1,975,000
CALIFORNIA -- 4.6%
4,000,000 Burbank, California, Redevelopment
Agency, Series A, (Golden State
Redevelopment Project),
6.250% due 12/1/24 Baa1 A-
3,785,000
5,000,000 California Health Facilities Finance Author-
ity, Kaiser Permanente,
5.550% due 8/15/25 Aa2 AA
4,443,750
1,500,000 California Housing Finance Agency Revenue,
Multi-Unit Rental Housing, Series B-II,
6.700% due 8/1/15 A1 A+
1,533,750
2,250,000 California Public Works Board, Lease Revenue
(University of California Project), Series A,
5.500% due 6/1/21 A1 A-
1,946,250
5,000,000 California State, (FGIC Insured),
6.000% due 5/1/20 Aaa AAA
4,825,000
2,500,000 California Statewide Community Development
Authority Revenue, Certificates of Participa-
tion, Sutter Health, (AMBAC Insured),
6.125% due 8/15/22 Aaa AAA
2,437,500
2,000,000 Central Coast Water Project, (California
State Water Project), (AMBAC Insured),
6.600% due 10/1/22 Aaa AAA
2,065,000
2,600,000 Central Valley Finance Authority, California,
(Cogeneration/Carson Ice Project),
6.200% due 7/1/20 NR
BBB- 2,401,750
3,000,000 Duarte, California, Hope Medical Center,
6.250% due 4/1/23 Baa1 NR
2,850,000
4,000,000 Los Angeles, California, Corporate Lease Rev-
enue, (Los Angeles International Airport),
6.800% due 1/1/27 NR A-
4,070,000
700,000 Mojave, California, Water Agency Improvement
District, Morongo Basin, Series M,
6.600% due 9/1/22 Baa
BBB+ 702,625
1,000,000 Norwalk, California, Redevelopment Agency,
Tax Allocation, Area 1,
9.100% due 12/1/15 NR NR
1,071,250
5,000,000 San Diego County, California, Water Author-
ity, Water Revenue, Series B, (MBIA Insured),
6.300% due 4/8/21 Aaa AAA
5,000,000
9,150,000 San Joaquin Hills, California, Transportation
Authority, (Transcorridor Agency Project),
Toll Road, Sr. Lien,
6.750% due 1/1/32 NR NR
8,681,062
4,000,000 University California, Multiple Purpose
Projects, (MBIA Insured),
6.375% due 9/1/24 Aaa AAA
4,060,000
COLORADO -- 1.7%
1,560,000 Arapahoe Colorado, Water and Sanitation Dis-
trict Revenue, Series B,
9.250% due 12/1/13 NR NR
1,579,500
Arvada, Colorado, Urban Renewal Authority,
(Arvada City Center Urban):
855,000 Series B1, (prerefunded 2/1/95),
12.500% due 2/1/05 Aaa NR
918,013
1,500,000 Series R,
8.750% due 3/1/06 B NR
1,125,000
4,750,000 Colorado Springs, Colorado, Airport
Revenue, Series A,
7.000% due 1/1/22 NR BBB
4,868,750
1,000,000 Cottonwood, Colorado, Water and Sanitation
District Revenue, (prerefunded 12/1/94),
10.250% due 12/1/05 NR NR
1,022,760
1,000,000 Dove Valley, Arapahoe County, Colorado, Met-
ropolitan District, Improvement Authority,
9.500% due 12/1/08 NR NR
1,026,250
2,250,000 Jefferson County, Colorado, Certificates of
Participation, (MBIA Insured),
6.650% due 12/1/08 Aaa AAA
2,415,937
440,000 Jefferson County, Colorado, Single Family
Mortgage, Series A, (MBIA Insured),
8.875% due 10/1/13 Aaa AAA
472,450
1,500,000 Larimer County, Colorado, School District
No. R-1 (Poudre-Ft. Collins), Colorado School
Board Lease, Certificates of Participation,
6.700% due 12/1/13 A NR
1,563,750
500,000 Meridian, Colorado, Metropolitian District,
7.000% due 12/1/98 A3 NR
533,750
250,000 Poudre Valley, Colorado, Hospital District,
(AMBAC Insured),
6.625% due 12/1/11 Aaa AAA
274,062
2,340,000 Pueblo County, Colorado, Single Family Hous-
ing Authority, Series A,
(FNMA/GNMA Mortgage Backed),
6.850% due 12/1/25 NR AAA
2,424,825
CONNECTICUT -- 1.6%
2,000,000 Connecticut State, Airport Revenue,
(Bradley International Airport), (FGIC In-
sured),
7.650% due 10/1/12 Aaa AAA
2,285,000
495,000 Connecticut Development Authority, Industrial
Development, (Nutmeg Partnership Project),
Series B,
12.750% due 5/15/15 NR NR
501,805
1,930,000 Connecticut Development Authority,
Resource Recovery Authority,
(Bridgeport Project), Series B,
8.500% due 1/1/00 A A
2,026,500
Connecticut Development Authority,
Solid Waste and Electric Revenue,
(Ogden Martin System, Bristol, Inc.):
1,670,000 9.900% due 7/1/99 NR
BBB+ 1,786,900
3,000,000 10.000% due 7/1/14 NR
BBB+ 3,213,750
Connecticut State Health and
Educational Facilities:
1,200,000 Quinipiac College, Series D,
6.000% due 7/1/23 NR
BBB- 1,125,000
Series D, (University of Hartford):
1,655,000 6.750% due 7/1/12 Baa BBB
1,659,138
1,450,000 6.800% due 7/1/22 Baa BBB
1,444,563
3,000,000 Connecticut State, Housing Finance
Authority, Series A,
6.200% due 5/15/14 Aa AA
2,977,500
DELAWARE -- 0.2%
2,500,000 Delaware State Economic Development Author-
ity, Pollution Control Revenue,
Series B, (AMBAC Insured),
6.750% due 5/1/19 Aaa AAA
2,650,000
DISTRICT OF COLUMBIA -- 0.8%
3,500,000 District of Columbia, Certificates of Partic-
ipation,
7.300% due 1/1/13 NR BBB
3,618,125
1,000,000 District of Columbia, Revenue,
(Georgetown University),
5.375% due 4/1/23 A1 A+
877,500
4,350,000 District of Columbia, Series A, General Obli-
gation,
6.000% due 6/1/07 Baa A-
4,235,813
FLORIDA -- 5.3%
Alachua County, Florida, Health Facilities
Authority, Health Facilities Revenue,
(Santa Fe Healthcare Facilities Project):
465,000 6.875% due 11/15/02 Baa1
BBB+ 472,556
500,000 7.600% due 11/15/13 Baa1
BBB+ 533,750
1,100,000 Brevard County, Florida, School Board, Cer-
tificates of Participation, Series A,
(AMBAC Insured),
6.500% due 7/1/12 Aaa AAA
1,142,625
Broward County, Florida, Resource Recovery:
605,000 Waste Energy, (North),
7.950% due 12/1/08 A A
660,206
2,785,000 Waste Energy, (South),
7.950% due 12/1/08 A A
3,039,131
825,000 Dade County, Florida, Aviation Revenue,
Series B, (MBIA Insured),
6.600% due 10/1/22 Aaa AAA
849,750
2,500,000 Dade County, Florida, Health Facilities Au-
thority, (North Shore Medical Center), (AMBAC
Insured),
6.500% due 8/15/15 Aaa AAA
2,584,375
1,000,000 Dade County, Florida, School District, Series
A, (MBIA Insured),
6.125% due 6/1/14 Aaa AAA
996,250
500,000 Escambia, Florida, Pollution Control Revenue,
(Champion International Corporation Project),
6.950% due 11/1/07 Baa1 BBB
510,000
500,000 Escambia, Florida, Utilities Authority, Gen-
eral Mortgage, Series B, (FGIC Insured),
6.250% due 1/1/15 Aaa AAA
518,125
500,000 Florida State Housing Finance Agency,
General Mortgage, Series A, (FHA Insured),
6.400% due 6/1/24 NR AAA
503,125
2,840,000 Florida State Turnpike Authority,
Turnpike Revenue,
6.350% due 7/1/22 Aaa AAA
2,886,150
420,000 Fort Lauderdale, Florida, Central Beach Com-
munity Redevelopment Agency,
(AMBAC Insured),
6.100% due 9/1/07 Aaa AAA
430,500
1,455,000 Hialeah, Florida, Hospital Revenue Refunding,
(Hialeah Hospital),
8.000% due 2/1/14 (in default) NR D
851,175
800,000 Hillsborough County, Florida, Aviation Au-
thority, Revenue, (U.S. Airlines Project),
8.600% due 1/15/22 Ba2 B+
788,000
1,500,000 Hillsborough County, Florida,
School Board, (MBIA Insured),
6.000% due 7/1/14 Aaa AAA
1,498,125
Hillsborough County, Florida,
Utility Revenue, Series A:
2,800,000 7.000% due 8/1/14 (refunded) Baa1
BBB+ 2,894,500
580,000 7.000% due 8/1/14 (prerefunded 8/1/01) Baa1
BBB+ 650,325
3,250,000 Jacksonville, Florida, Excise Tax Revenue,
Series A, (AMBAC Insured),
6.500% due 10/1/13 Aaa AAA
3,388,125
Jacksonville, Florida, Health Facilities Rev-
enue:
2,000,000 (Children's Hospital -- Baptist Medical Cen-
ter), (MBIA Insured),
7.000% due 6/1/11 Aaa AAA
2,182,500
3,440,000 (University Medical Center), (Co Lee In-
sured),
6.600% due 2/1/21 NR AAA
3,543,200
500,000 Melbourne, Florida, Water and Sewer Revenue,
Series C, (FGIC Insured),
6.375% due 10/1/12 Aaa AAA
516,875
500,000 North Port Florida Utility Revenue,
(FGIC Insured),
6.250% due 10/1/22 Aaa AAA
503,750
1,525,000 Orange County, Florida, Solid Waste
Facilities Authority, (FGIC Insured),
6.375% due 10/1/17 Aaa AAA
1,565,031
Orange County, Florida, Tourist Development
Tax Revenue, Series B:
1,000,000 (AMBAC Insured),
6.500% due 10/1/19 Aaa AAA
1,040,000
1,500,000 (MBIA Insured),
6.000% due 10/1/24 Aaa AAA
1,481,250
3,750,000 Orange County, Florida, Waste and Water Reve-
nue Refunding, (AMBAC Insured),
6.250% due 10/1/17 Aaa AAA
3,810,938
300,000 Pace Property Finance Authority,
Florida Utility Revenue,
6.250% due 9/1/13 NR BBB
295,125
Palm Beach County, Florida, Health Facilities
Authority Revenue, (J.F.K. Medical Center):
1,320,000 8.875% due 12/1/18 (prerefunded 12/1/98) NR NR
1,544,400
1,150,000 8.875% due 12/1/18 (unrefunded) NR BBB
1,275,063
400,000 Palm Beach County, Florida, Solid Waste Au-
thority Revenue, (MBIA Insured),
6.250% due 12/1/08 Aaa AAA
418,000
3,000,000 Putnam County, Florida, Development Author-
ity, Pollution Control Revenue,
(Georgia Pacific),
7.000% due 12/1/05 A3
BBB- 3,097,500
3,400,000 Tampa, Florida, Water and Sewer Revenue, Se-
ries A, (FGIC Insured),
6.250% due 10/1/12 Aaa AAA
3,472,250
1,900,000 Tampa, Florida, Utility Tax and Special Reve-
nue, (AMBAC Insured),
6.900% due 10/1/09 Aaa AAA
2,040,125
1,850,000 Tampa, Florida, Water System Revenue, (Aquar-
ium Project),
7.750% due 5/1/27 NR NR
1,986,438
Volusia County, Florida, Educational Facili-
ties Authority Revenue, (Embery-Riddle Aero-
nautical University), (Co Lee Insured):
500,000 6.500% due 10/15/15 NR AAA
519,375
1,500,000 6.500% due 10/15/22 NR AAA
1,533,750
2,000,000 Volusia County, Florida, School Board,
(Master Lease Program), Certificates of Par-
ticipation, (FSA Insured),
6.625% due 8/1/06 Aaa AAA
2,137,500
GEORGIA -- 5.8%
2,425,000 Appling County, Georgia, Development Author-
ity, Pollution Control Revenue,
(Georgia Power Company), (Hatch Project),
10.600% due 10/1/15 A3 A-
2,625,063
4,000,000 Atlanta, Georgia, Airport Facilities Revenue,
7.250% due 1/1/17 A A
4,330,000
3,495,000 Burke County, Georgia, Development
Authority, Pollution Control Revenue,
(Georgia Power Company), (Vogtle Project):
10.600% due 10/1/15 A3 A-
3,805,181
1st Series:
1,475,000 10.125% due 6/1/15 A3 A-
1,570,875
8,000,000 6.350% due 5/1/19 A2 NR
7,870,000
6,310,000 3rd Series,
10.500% due 11/1/15 A3 A-
6,885,788
3,000,000 Fulton County, Georgia, Development
Authority, Special Facilities Revenue,
(Delta Airlines Inc. Project),
6.950% due 11/1/12 Ba1 BB
2,887,500
4,750,000 George L. Smith, Georgia World
Congress Center Authority Revenue,
(Domed Stadium Project),
7.875% due 7/1/20 Aa3 A+
5,189,375
7,000,000 Georgia Municipal Electric Authority Power
Revenue, Series EE, (AMBAC Insured),
6.400% due 1/1/23 Aaa AAA
7,131,250
5,000,000 Medical Center Hospital Authority, Georgia,
Columbus Healthcare, Series C,
(MBIA Insured),
6.400% due 8/1/06 Aaa AAA
5,356,250
5,000,000 Metropolitan Atlanta, Georgia, Rapid Transit
Authority, Sales Tax Revenue, Series O,
6.550% due 7/1/20 A AA-
5,175,000
7,000,000 Monroe County, Georgia, Development Author-
ity, Pollution Control Revenue,
(Georgia Power Company, Scherer Project),
10.500% due 9/1/15 A3 A-
7,560,000
3,000,000 Municipal Electric Authority,Georgia,
Fifth Crossover Series, Project One,
6.400% due 1/1/13 Aaa AAA
3,138,750
GUAM -- 0.1%
1,500,000 Government of Guam, Limited Obligation Reve-
nue, Series A,
7.000% due 11/15/04 A1 A+
1,605,000
HAWAII -- 0.2%
2,000,000 Hawaii, State, Department of Budget and Fi-
nance, Special Purpose Mortgage Revenue, (Ka-
piolani Health Care Systems),
6.400% due 7/1/13 A A
2,017,500
IDAHO -- 0.3%
2,780,000 Idaho Housing Agency, Single Family Mortgage,
Series C,
7.875% due 1/1/21 Aa AA
2,932,900
ILLINOIS -- 3.8%
1,925,000 Chicago, Illinois, Metropolitan Housing De-
velopment Corporation, (Section 8),
Series A, (FHA Insured),
6.700% due 7/1/12 NR AA
1,973,125
Chicago, Illinois, O'Hare International Air-
port, Special Facilities Revenue:
1,800,000 (Delta Airlines),
6.450% due 5/1/18 Ba3 BB
1,651,500
1,800,000 (Lufthansa Airlines),
7.125% due 5/1/18 Aaa AAA
1,887,750
3,000,000 (United Airlines),
8.250% due 5/1/99 Baa2 BB
3,206,250
3,343,000 (United Airlines), Series B,
8.950% due 5/1/18 Baa2 BB
3,702,373
3,970,000 (United Airlines), Series C,
8.200% due 5/1/18 Baa2 BB
4,213,163
4,000,000 Cook County, Illinois, Series A,
(MBIA Insured),
6.600% due 11/15/22 Aaa AAA
4,070,000
East Chicago, Illinois, Industrial Pollution
Control, Revenue, (Inland Steel Company):
250,000 Series B,
10.750% due 12/1/12 NR BB-
267,813
3,000,000 (Project 10),
6.800% due 6/1/13 Ba3 BB-
2,936,250
1,500,000 Illinois Education Facilities Authority Reve-
nue, (Chicago Osteopathic College),
9.625% due 7/1/05 NR
BBB+ 1,563,750
1,500,000 Illinois Health Facilities Authority Revenue,
(OSF Healthcare),
6.000% due 11/15/23 A1 A+
1,393,125
Illinois Health Facilities Authority Reve-
nue:
1,955,000 (Grant Children's Hospital), Series A,
10.300% due 6/1/13 NR BB+
2,074,744
1,300,000 (Northern Illinois Medical Center),
6.000% due 9/1/19 NR A-
1,186,250
2,715,000 (St. Elizabeth's Hospital),
10.125% due 7/1/16 NR NR
2,796,450
1,500,000 Illinois, Housing and Development Authority,
Multi-Family Housing, Series A,
6.125% due 7/1/25 A1 A+
1,361,250
2,750,000 Illinois State Toll Highway Authority,
Series A, (FGIC Insured),
6.200% due 1/1/16 Aaa AAA
2,715,625
3,600,000 Metropolitan Pier and Exposition Authority,
(McCormick Place Expansion Project),
Series A, (AMBAC Insured),
6.500% due 6/15/27 A A+
3,550,500
1,000,000 Sauget, Illinois, Special Service Area No. 1,
10.250% due 1/1/00 NR NR
1,043,750
INDIANA -- 1.3%
Hamilton County, Indiana, Hospital Building
Revenue, (Hospital Association):
275,000 7.500% due 2/1/08 Aa NR
290,813
285,000 7.500% due 8/1/08 Aa NR
301,388
110,000 7.600% due 8/1/09 Aa NR
116,188
320,000 7.600% due 2/1/10 Aa NR
338,000
1,500,000 Indiana Health Financing Authority, (Bartho-
lomew County Hospital Project),
(FGIC Insured),
7.750% due 8/15/20 (prerefunded 8/15/00) Aaa AAA
1,730,625
4,000,000 Indianapolis, Indiana, Airport Facilities
Revenue,
6.850% due 7/1/17+++ Baa3 BBB
3,970,000
250,000 Indianapolis, Indiana, Local Public Improve-
ment, Series A,
6.000% due 1/10/18 Aaa AA+
243,438
Indianapolis, Indiana, Resource Recovery Rev-
enue, (Ogden Martin Systems, Incorporated):
500,000 Series A,
7.900% due 12/1/08 A A
531,250
1,240,000 Series B,
7.900% due 12/1/08 A A
1,317,500
1,500,000 Kokomo, Indiana, Hospital Authority Revenue,
(St. Joseph's Hospital), Series A,
8.750% due 2/15/13 Baa BBB
1,734,375
2,500,000 Lawrenceburg, Indiana, Pollution Control Rev-
enue, (Indiana Power Company), Series E,
5.900% due 11/1/19 Baa2 BBB
2,243,750
500,000 Marion County, Indiana, Daughters of
Charity, Hospital Facility Revenue,
(St. Vincent's Hospital),
10.125% due 11/1/15 Aa NR
541,875
745,000 North Warrick County, Indiana, School Build-
ing Authority, 1st Mortgage,
10.000% due 1/1/04 (prerefunded 11/1/96) NR AAA
817,638
IOWA -- 0.1%
1,000,000 Dubuque County, Iowa, Hospital Revenue, (Sis-
ters of Mercy Hospital), Series L,
(FSA Insured),
7.000% due 8/15/21 Aaa AAA
1,092,500
Iowa City, Iowa, Parking Facilities Revenue:
150,000 10.000% due 7/1/02 A NR
154,875
415,000 10.000% due 7/1/03 A NR
428,488
KANSAS -- 0.2%
2,500,000 Shawnee County, Kansas, (Sisters of
Charity, Leavenworth),
5.000% due 12/1/23 Aa NR
2,056,250
KENTUCKY -- 1.5%
2,000,000 Ashland, Kentucky, Solid Waste Revenue, (Ash-
land Oil Inc. Project),
7.200% due 10/1/20 A3 BBB
2,147,500
5,000,000 Jefferson County, Kentucky, Hospital Revenue,
(MBIA Insured),
6.520% due 10/23/14 Aaa AAA
5,081,250
Kenton County, Kentucky, Airport Board Reve-
nue, Series A:
270,000 8.250% due 3/1/15 (prerefunded) A A
303,075
1,230,000 8.250% due 3/1/15 (unrefunded) A A
1,372,988
590,000 Kentucky Multi-County Residential Mortgage,
10.500% due 10/1/00 NR NR
620,975
4,000,000 Pendleton County, Kentucky, Multi-County
Lease Revenue, Series A,
6.500% 3/1/19 NR A
4,015,000
Trimble County, Kentucky, Pollution
Control Revenue:
2,605,000 Series B,
6.550% due 11/1/20 (unrefunded) Aa2 AA
2,670,125
395,000 Series B,
6.550% due 11/1/20 (prerefunded 9/16/02) Aaa NR
429,563
LOUISIANA -- 2.8%
4,000,000 Calcasoeu Parish, Louisiana, Industrial De-
velopment Authority Environmental Revenue,
(Citgo Petroleum Corporation),
6.000% due 7/1/23 Baa2 BB
3,590,000
5,000,000 Hodge, Louisiana, Utility Revenue,
9.000% due 3/1/10 NR NR
5,237,500
5,000,000 Jefferson Parish, Drain Sales Tax Revenue,
(AMBAC Insured),
6.500% due 11/1/06 Aaa AAA
5,262,500
2,800,000 Lake Charles, Louisiana, (Harbor and
Terminal Project), (Trunkline Liqiud Natural
Gas Company Project),
7.750% due 8/15/22 Ba1 NR
2,982,000
2,500,000 Louisiana Public Facilities, Association of
Independent Colleges and Universities,
7.000% due 12/1/17 Baa NR
2,509,375
2,000,000 Port of New Orleans, Louisiana,
Industrial Development Revenue,
(Continental Grain Company Project),
7.500% due 7/1/13 NR BB-
2,010,000
St. Charles Parish, Louisiana, Solid Waste
Distribution Revenue, (Louisiana Power and
Light Company Project):
3,250,000 7.050% due 4/1/22 Baa2 BBB
3,327,188
1,750,000 Series A,
7.000% due 12/1/22 Baa2 BBB
1,791,563
1,210,000 St. Tammany Parish, Louisiana, Hospital Reve-
nue, District 2, (Co Lee Insured),
6.250% due 10/1/14 NR AAA
1,200,925
2,000,000 West Feliciana Parish, Pollution Control Rev-
enue, (Gulf State Utilities),
7.000% due 11/1/15 Baa3
BBB- 2,052,500
MAINE -- 0.2%
2,500,000 Bucksport, Maine, Solid Waste
Disposal Revenue, (Champ International Corpo-
ration Project),
6.250% due 5/1/10 Baa1 BBB
2,396,875
MARYLAND -- 2.3%
3,000,000 Baltimore, Maryland, Mortgage Revenue, (Dun-
field Townhouses), Series A,
(FHA Insured),
6.900% due 8/1/28 NR AAA
3,123,750
2,000,000 Baltimore County, Maryland, Mortgage Revenue,
(Liberty Crossing Project), Series A,
6.000% due 8/20/20 NR AAA
1,890,000
2,500,000 Howard County, Maryland, Mortgage Revenue,
(Howard Hills Townhouses), Series A,
(MBIA Insured),
6.400% due 7/1/24 Aaa AAA
2,550,000
Maryland State, Community Development:
1,000,000 6.450% due 4/1/14 Aa NR
1,003,750
1,110,000 Series D,
6.050% due 5/15/24 Aa NR
1,051,725
2,000,000 (Single Family Project), Third Series,
5.300% due 4/1/12 Aa NR
1,770,000
4,000,000 Maryland State, Health & Higher Education Fa-
cilities, (Fredrick Memorial Hospital),
(FGIC Insured),
5.000% due 7/1/23 Aaa AAA
3,355,000
Northeast Maryland Waste Disposal Authority,
Recovery Revenue, (MBIA Insured):
(Southwest Resource Recovery):
3,000,000 7.200% due 1/1/06 Aaa AAA
3,307,500
3,000,000 7.200% due 1/1/07 Aaa AAA
3,262,500
1,000,000 (Harford County Resource Recovery),
8.600% due 1/1/08 NR A
1,040,000
1,600,000 Prince Georges County, Maryland,
(Greater Southeast Healthcare System),
6.375% due 1/1/23 Baa NR
1,512,000
1,000,000 Prince Georges County, Maryland, Housing Au-
thority, (Stevenson Apartments Project), Se-
ries A,
6.350% due 7/20/20 NR AAA
996,250
MASSACHUSETTS -- 4.3%
Boston, Massachusetts, Hospital Revenue,
(Boston City Hospital), Series B, (FHA In-
sured):
2,000,000 5.750% due 2/15/13 Aa AA-
1,900,000
5,850,000 5.750% due 2/15/23 Aa AA-
5,396,625
530,000 Haverhill, Massachusetts, Revenue Bonds, Se-
ries A, (AMBAC Insured),
6.700% due 9/1/10 Aaa AAA
563,788
2,575,000 Lowell, Massachusetts, Series B,
(FSA Insured),
5.600% due 11/1/12 Aaa AAA
2,423,719
Massachusetts Bay Transportation Authority,
General Transportation System:
750,000 Series A,
7.000% due 3/1/22 (prerefunded 3/1/01) Aaa A+
839,063
1,250,000 Series B,
6.200% due 3/1/16 A A+
1,259,375
2,000,000 Series C,
6.100% due 3/1/23 A A+
1,937,500
Massachusetts Health and Educational Finance
Authority, (Suffolk University), Series B,
(Co Lee Insured):
2,700,000 6.250% due 7/1/12 Baa AAA
2,716,875
775,000 6.350% due 7/1/22 Baa AAA
776,938
2,650,000 (University of Massachusetts Medical
Project), (Co Lee Insured),
6.000% due 7/1/23 NR AAA
2,580,438
1,300,000 Massachusetts Municipal Wholesale Company,
Power Supply System, Series D,
6.125% due 7/1/19 A
BBB+ 1,254,500
Massachusetts State Construction Loan:
700,000 Series C,
7.000% due 8/1/12 A A+
764,750
2,000,000 Series D, General Obligation Bonds,
7.000% due 7/1/07 A A+
2,182,500
Massachusetts State Health and Educational
Facilities Authority:
3,500,000 (New England Medical Center),
Series F, (FGIC Insured),
6.625% due 7/1/25 Aaa AAA
3,578,750
735,000 (Community College), Series A, (Co Lee In-
sured),
6.600% due 10/1/22 NR AAA
747,863
1,000,000 Quincy, Massachusetts, (Quincy Hospital),
5.500% due 1/15/13 Aaa AAA
921,250
1,500,000 (St. Memorial Medical Center), Series A,
6.000% due 10/1/23 B NR
975,000
Massachusetts State Housing Finance Agency,
Residential Development Authority:
2,000,000 Series C, (FNMA),
6.875% due 11/15/11 Aaa AAA
2,097,500
3,000,000 Series D, (FNMA),
6.800% due 11/15/12 Aaa AAA
3,116,250
2,500,000 Massachusetts State Housing Finance Agency-
Housing Projects, Series A,
6.375% due 4/1/21 A1 A+
2,471,875
Massachusetts State Industrial Financial
Agency, Resource Recovery,
(S.E. Mass Project):
2,700,000 Series A,
9.000% due 7/1/15 NR NR
3,017,250
4,335,000 Series B,
9.250% due 7/1/15 NR NR
4,866,038
MICHIGAN -- 4.3%
Detroit, Michigan, Economic Development, Re-
source Recovery:
Series A, (FSA Insured):
3,680,000 6.450% due 5/1/01 Aaa AAA
3,965,200
7,500,000 6.875% due 5/1/09 Aaa AAA
7,959,375
Detroit, Michigan, Water Supply
System, (FGIC Insured):
3,500,000 6.500% due 7/1/15 Aaa AAA
3,675,000
3,000,000 6.375% due 7/1/22 Aaa AAA
3,033,750
Greater Detroit, Michigan,
(Resource Recovery Project):
6,350,000 Series B,
9.250% due 12/13/08 NR
BBB- 6,770,688
1,000,000 Series G,
9.250% due 12/13/08 NR
BBB- 1,066,250
1,815,000 Series H,
9.250% due 12/13/08 NR
BBB- 1,935,244
Michigan State Hospital Finance
Authority Revenue:
5,000,000 (FSA Insured),
6.300% due 2/15/22 Aaa AAA
5,012,500
495,000 (St. Mary's Hospital), Daughters of Charity
-- St. Mary's Hospital,
10.000% due 11/1/15 Aa NR
535,838
1,500,000 (Sparrow Obligated Group), (MBIA Insured),
6.500% due 11/15/11 Aaa AAA
1,539,375
Monroe County, Michigan, Pollution Control
Revenue, (Detroit Edison Company):
4,500,000 Series 1, (MBIA Insured),
6.875% due 9/1/22 Aaa AAA
4,696,875
2,360,000 Series A,
10.500% due 12/1/16 Baa1 BBB
2,593,050
3,750,000 Western Townships, Michigan, Utilities Au-
thority, Sewer Disposal Systems,
(FGIC Insured),
6.750% due 1/1/15 Aaa AAA
3,923,438
MINNESOTA -- 0.5%
1,200,000 Minneapolis, Minnesota, Commercial Develop-
ment Revenue, (Holiday Inn
Metrodome Project),
10.500% due 6/1/03 NR NR
1,227,000
4,000,000 St. Paul, Minnesota, Housing and Redevelop-
ment Authority, (Health East Project), Series
A,
6.625% due 11/1/17 Baa BBB
3,850,000
MISSISSIPPI -- 0.4%
Mississippi, Hospital Equipment and Facili-
ties:
1,500,000 (Methodist Health Systems), (MBIA Insured),
5.500% due 8/15/13 Aaa AAA
1,393,125
3,000,000 (North Mississippi Health Service),
(AMBAC Insured),
5.750% due 5/15/16 Aaa AAA
2,808,750
MISSOURI -- 0.4%
3,500,000 Missouri State, Health & Educational Facili-
ties, (St. Lukes Health System), (MBIA In-
sured),
6.250% due 2/15/22 Aaa AAA
3,539,375
St. Louis County, Missouri, Industrial Devel-
opment Authority, Multi-Family
Housing Revenue:
395,000 Series 1989 B, (Pine Tree Apartment Project),
10.000% due 6/15/09 (in default) NR NR
195,525
(Westbrook Village Apartments):
135,000 Series E,
10.000% due 12/15/03 (in default) NR NR
67,500
50,000 Series H,
10.000% due 12/15/15 (in default) NR NR
24,688
NEBRASKA -- 0.6%
2,600,000 Nebraska Municipal Energy, Municipal Energy
Agency of Nebraska, Power Supply Systems Rev-
enue, Series A, (AMBAC Insured),
6.000% due 4/1/17 Aaa AAA
2,580,500
4,000,000 Nebraska Public Power, Power Supply
System Revenue,
6.125% due 1/1/15 A1 A+
3,960,000
NEVADA -- 0.8%
6,000,000 Clark County, Nevada, Industrial Development
Project, (Nevada Power Company), Series C,
7.200% due 10/1/22 Baa2 BBB
6,210,000
2,000,000 Humboldt County, Nevada, Pollution
Control Revenue, (Sierra Pacific Project),
(AMBAC Insured),
6.500% due 10/1/13 Aaa AAA
2,102,500
NEW HAMPSHIRE -- 0.7%
New Hampshire Higher Education and Health Fa-
cilities Authority Revenue:
1,500,000 (Concord Hospital), (FGIC Insured),
7.000% due 10/1/12 Aaa AAA
1,616,250
1,000,000 (University of New Hampshire),
(MBIA Insured),
6.000% due 7/1/12 Aaa AAA
982,500
2,500,000 State of New Hampshire, Business Financing
Authority, Pollution Control Revenue,
(United Illuminating Company), Series A,
(MBIA Insured),
5.875% due 10/1/33 Baa3 BBB-
2,190,625
1,000,000 State of New Hampshire, Industrial Develop-
ment Authority, Resource Recovery Revenue Se-
ries, (Concord Project),
8.500% due 1/1/09 NR AA-
1,086,250
2,000,000 State of New Hampshire, Turnpike
System Revenue,
6.000% due 4/1/13 A A
1,962,500
NEW JERSEY -- 5.7%
775,000 Atlantic County, New Jersey, Utilities Au-
thority Solid Waste Revenue,
7.125% due 3/1/16 Baa NR
764,344
2,575,000 Essex County, New Jersey, General Obligation
Bonds, (FSA Insured),
6.500% due 12/1/11 Aaa AAA
2,684,438
2,500,000 Hoboken, Union City, Weehawken, New Jersey,
Sewer Authority Revenue, (MBIA Insured),
6.200% due 8/1/19 Aaa AAA
2,562,500
2,500,000 Hudson County, New Jersey, Improvement Au-
thority, Solid Waste Revenue,
7.100% due 1/1/20 NR
BBB- 2,421,875
1,710,000 Keansburg, New Jersey, Board of Education,
Certificates of Participation,
8.000% due 11/1/14 NR
BBB- 1,932,300
6,300,000 Mercer County, New Jersey, Improvement Au-
thority, (Solid Waste Site Project),
Series A, (FGIC Insured),
6.700% due 4/1/12 Aaa AAA
6,717,375
1,000,000 New Jersey Building Authority, State Building
Revenue,
5.000% due 6/15/17 Aa AA-
857,500
1,000,000 New Jersey Economic Development Authority,
Pollution Control Revenue, (MBIA Insured),
6.400% due 5/1/32 Aaa AAA
1,003,750
New Jersey Economic Development
Authority, First Mortgage Gross Revenue:
495,000 (Dayton Manor Residential Health Care),
13.000% due 9/1/15 (in default) NR NR
396,000
845,000 Series A,
6.250% due 12/1/01 Aaa NR
857,675
New Jersey Health Care Facilities
Finance Authority:
2,500,000 (Irvington General Hospital), (FHA Insured),
6.375% due 8/1/04+++ NR AAA
2,512,500
2,000,000 (Newark Beth Israel Medical Center),
(FSA Insured),
6.000% due 7/1/24 Aaa AAA
1,957,500
1,000,000 (Raritan Bay Medical Center),
7.250% due 7/1/27 NR NR
972,500
1,465,000 Series B, (Passaic General Hospital),
10.375% due 7/1/14 Baa1 BBB
1,563,888
2,400,000 Series C, (Zurbrugg Memorial Hospital),
8.500% due 7/1/12 Baa1
BBB+ 2,523,000
2,950,000 Series D, (Kennedy Memorial University
Medical Center),
7.875% due 7/1/09 A A-
3,167,563
1,895,000 New Jersey State Educational Facilities Au-
thority, (Farleigh Dickinson), Series C,
7.750% due 7/1/01 NR NR
2,179,250
6,500,000 New Jersey State Educational Facilities Au-
thority, (New Jersey Institute of Technol-
ogy), (MBIA Insured),
6.000% due 7/1/24 Aaa AAA
6,402,500
3,700,000 New Jersey State Housing and Mortgage Finance
Authority, Multifamily Housing Authority,
(Presidential Plaza Apartments), (FHA In-
sured),
7.000% due 5/1/30 NR AAA
3,848,000
2,150,000 New Jersey State, Transportation Corporation,
Certificates of Participation, (FSA Insured),
6.500% due 10/1/16 Aaa AAA
2,268,250
2,500,000 Perth Amboy, New Jersey, Board of Education
Certificates of Participation, (FSA Insured),
6.125% due 12/15/17 Aaa AAA
2,525,000
3,300,000 Port Authority of New York & New Jersey Sev-
enty Seventh Series,
6.250% due 1/15/27 A1 AA-
3,304,125
2,000,000 Salem County, New Jersey, Pollution Control,
Fingauth Waste Revenue,
6.500% due 11/15/21 Aa2 AA
2,010,000
Union County, New Jersey, Utility Authority,
Solid Waste Revenue:
4,600,000 Series A,
7.200% due 6/15/14 NR A-
4,692,000
2,000,000 Series D,
6.850% due 6/15/14 Aaa AA+
2,072,500
NEW MEXICO -- 0.5%
5,000,000 Lordsburg, New Mexico, Pollution Control Rev-
enue, (Phelps Dodge Corporation Project),
6.500% due 4/1/13 A3 A
5,106,250
147,588 Santa Fe, New Mexico, Single Family Mortgage
Revenue,
8.450% due 12/1/11 Aa NR
160,317
NEW YORK -- 5.4%
930,000 Babylon, New York, Industrial Development Au-
thority, Recycling Facility Revenue, Babylon
Recycling Center, Series A,
8.875% due 3/1/11 NR NR
465,000
City of New York, General Obligation Bonds:
3,000,000 Series A,
6.250% due 8/1/10+++ Baa1 A-
2,962,500
4,175,000 Series B,
7.000% due 10/1/12 Baa1 A-
4,420,281
3,190,000 Series C,
7.750% due 9/1/05 Baa1 A-
3,425,263
1,000,000 Series C, (AMBAC Insured),
7.750% due 9/1/05 Aaa AAA
1,065,000
55,000 Series C, Subseries C-1, (MBIA Insured),
6.000% due 8/1/01 (unrefunded) Aaa AAA
57,819
20,000 (AMBAC Insured),
6.625% due 8/1/15 (unrefunded) Aaa AAA
20,925
Series D:
45,000 8.500% due 8/1/13 (unrefunded) Baa1 A-
48,769
10,000 8.500% due 8/1/13 (prerefunded 8/1/96) Aaa A-
10,988
1,000,000 Series D, (FSA Insured),
8.500% due 8/1/13 Aaa AAA
1,082,500
4,000,000 Series H, Subseries H-1,
6.125% due 8/1/10 Baa1 A-
3,885,000
5,000,000 New York City General Obligation,
6.666% due 8/1/09 Baa1 A-
5,093,750
2,650,000 Metropolitan Transportation Authority, New
York, Commuter Facilities Revenue, Series A,
6.500% due 7/1/24 Baa1
BBB+ 2,663,250
1,000,000 Metropolitan Transportation Authority, New
York Transit Facilities Revenue, Series J,
(FGIC Insured),
6.500% due 7/1/18 Aaa AAA
1,023,750
3,085,000 New York State, Certificates of Participa-
tion, (Hanson Redevelopment Project),
8.375% due 5/1/08 NR BBB
3,435,919
New York State, Dormitory Authority Revenue:
7,000,000 City University System,
6.000% due 7/1/14 Baa1 BBB
6,798,750
500,000 (Upstate Community Colleges), Series A,
(Co Lee Insured),
5.750% due 7/1/22 NR AAA
472,500
New York State, Energy, Research and Develop-
ment Authority, (Long Island Lighting Com-
pany):
1,250,000 7.150% due 6/1/20 Ba1 BB+
1,264,063
1,150,000 7.150% due 12/1/20 Ba1 BB+
1,162,938
3,100,000 New York State, Medical Care Facilities, Fi-
nance Agency Revenue,
6.400% due 11/1/14 Aaa AAA
3,177,500
New York State, Medical Care Facilities Fi-
nancing Authority:
4,500,000 6.500% due 2/15/19 (unrefunded) Baa1 BBB+
4,561,875
1,540,000 Mental Health Services,
7.750% due 2/15/20 Baa1 BBB+
1,643,950
5,500,000 New York State Power Authority
Revenue, Series Z,
6.500% due 1/1/19 Aa AA-
5,637,500
1,850,000 New York State Refunding Bonds,
7.000% due 11/15/02 A A-
2,053,500
State of New York, Municipal Bond Banking
Agency, Special Program, Series A:
575,000 6.500% due 3/15/00 NR
BBB+ 596,563
1,610,000 6.600% due 3/15/01 NR
BBB+ 1,680,438
NORTH CAROLINA -- 2.0%
3,000,000 Charlotte, North Carolina, Special Facilities
Revenue, (Piedmont Aviation Inc. Project),
9.000% due 7/1/17 B2 B+
3,033,750
North Carolina Eastern Municipal Power
Agency, Power System Revenue,
Series B:
8,700,000 7.000% due 1/1/08 A A-
9,406,875
280,000 8.000% due 1/1/21 (prerefunded 1/1/98) Aaa A-
313,250
North Carolina Municipal Power
Agency Systems:
2,300,000 (Catawba Electric),
6.250% due 1/1/17 A A
2,279,875
6,000,000 (MBIA Insured),
5.460% due 1/1/20 Aaa AAA
6,000,000
1,000,000 Pitt County, North Carolina, Certificates of
Participation, (FGIC Insured),
6.900% due 4/1/08 Aaa AAA
1,078,750
NORTH DAKOTA -- 0.7%
Mercer County, North Dakota, Pollution Con-
trol Revenue, (Basin Electric Power):
4,900,000 Series E,
7.000% due 1/1/19 A2 A
5,145,000
2,820,000 Series 1984D,
8.125% due 1/1/19 A2 A
2,982,150
OHIO -- 2.6%
4,000,000 Cleveland, Ohio, Airport Special Revenue,
(Continental Airlines Incorporated),
9.000% due 12/1/19 NR NR
4,185,000
915,000 Cleveland, Ohio, City School District,
9.000% due 12/1/08 (refunded 12/1/98) Aaa BBB
1,077,413
1,250,000 Cuyahoga County, Ohio, Hospital Revenue,
(Brentwood Hospital Project),
9.625% due 11/1/14 Baa1 NR
1,340,625
1,000,000 Lorain, Ohio, Sewer System,
Mortgage Revenue,
8.750% due 4/1/11 NR
BBB- 1,110,000
Maumee, Ohio, Hospital Revenue:
100,000 (St. Lukes Hospital), (AMBAC Insured),
5.800% due 12/1/14 Aaa AAA
97,375
5,000,000 (Pollution Control Revenue-Cleveland),
6.850% due 7/1/23 Ba2 BB
4,837,500
4,000,000 (Columbus and South), Series A,
(FGIC Insured),
6.375% due 12/1/20 Aaa AAA
4,095,000
5,000,000 (Pollution Control Revenue-Ohio Edison),
Series B, (AMBAC Insured),
5.625% due 11/15/29 Aaa AAA
4,581,250
5,000,000 (Pollution Control-Toledo Edison),
6.875% due 7/1/23 Ba2 BB
4,937,500
200,000 Ohio State Higher Educational Facilities,
(University of Dayton), (FGIC Insured),
5.800% due 12/1/19 Aaa AAA
194,250
Ohio State Housing Finance Agency,
Single Family Mortgage:
85,000 11.375% due 8/1/10 Aa A
88,189
150,000 6.100% due 9/1/14 NR AAA
148,688
165,000 6.000% due 2/1/19 NR AAA
167,681
150,000 6.125% due 9/1/24 NR AAA
148,313
Ohio State Water Development Authority, Pol-
lution Control Revenue:
870,000 (Ohio Edison Project),
10.625% due 7/1/15 Baa2 BBB
937,425
210,000 Series B, (Pennsylvania Power Project),
8.100% due 9/1/18 Baa3 BB+
224,438
OKLAHOMA -- 1.7%
Cleveland County, Oklahoma, Home Loan Author-
ity, Single Family Mortgage Revenue:
180,000 6.250% due 2/1/98 A NR
183,600
220,000 6.250% due 8/1/98 A NR
224,675
4,795,000 Oklahoma Housing Finance Agency,
Single Family Mortgage, Series B,
7.997% due 8/1/18 NR AAA
5,184,594
3,150,000 Oklahoma State Turnpike Authority Revenue,
Series C, (MBIA Insured),
6.250% due 1/1/22 Aaa AAA
3,213,000
Tulsa, Oklahoma, Municipal Airport Revenue,
(American Airlines):
2,895,000 9.375% due 6/1/04 Baa2 BB+
3,079,556
2,400,000 7.350% due 12/1/11 Baa2 BB+
2,406,000
3,480,000 9.500% due 6/1/20 Baa2 BB+
3,701,850
PENNSYLVANIA -- 9.5%
4,000,000 Allegheny County, Pennsylvania, Airport Reve-
nue, (Greater Pittsburg International Air-
port), Series B, (FSA Insured),
6.625% due 1/1/22 Aaa AAA
4,090,000
3,200,000 Allegheny County, Pennsylvania, Capital Ap-
preciation, Series C-40,
(AMBAC Insured),
6.000% due 05/01/10 Aaa AAA
3,224,000
2,500,000 Allegheny County, Pennsylvania, Series A,
6.700% due 12/1/20 Baa3 BB+
2,487,500
4,500,000 Allentown, Pennsylvania, Hospital Authority
Revenue, (Sacred Heart Hospital of Allen-
town), Series B,
6.750% due 11/15/15 NR BBB
4,325,625
1,250,000 Beaver County, Pennsylvania, Hospital Author-
ity, (Beaver Medical Center),
Series A, (AMBAC Insured),
6.250% due 7/1/22 Aaa AAA
1,254,688
Beaver County, Pennsylvania, Industrial De-
velopment Authority, Pollution Control Reve-
nue:
1,500,000 (Cleveland Electric),
10.500% due 9/1/15 NR BB
1,597,500
4,500,000 Series A, (Ohio Edison Company),
10.500% due 10/1/15 NR
BBB- 4,854,375
Series B, (Toledo Edison Company),
(Beaver Valley):
250,000 10.750% due 9/15/95 Ba3 NR
264,375
340,000 12.250% due 9/15/15 Ba3 NR
371,025
2,955,000 Series C, (Toledo Edison Company),
(Beaver Valley),
10.750% due 11/15/15 NR NR
3,180,318
3,000,000 Berks County, Pennsylvania, Solid Waste Au-
thority, (FGIC Insured),
6.000% due 4/1/11 Aaa AAA
3,018,750
Bethlehem, Pennsylvania, Water Authority Rev-
enue, (MBIA Insured):
2,000,000 5.300% due 11/15/17 Aaa AAA
1,802,500
2,000,000 5.200% due 11/15/21 Aaa AAA
1,762,500
2,000,000 Delaware County, Pennsylvania, Hospital Au-
thority, (Crozer -- Chester Medical Center),
(MBIA Insured),
5.300% due 12/15/20 Aaa AAA
1,790,000
2,000,000 Delaware County, Pennsylvania, Industrial De-
velopment Authority, Resource Recovery, Se-
ries A,
8.100% due 12/1/13 Aa3 A+
2,142,500
157,000 Falls Township, Pennsylvania, Hospital Au-
thority Revenue, (Delaware Valley Medical
Center), (FHA Insured),
6.000% due 8/1/01 NR AAA
154,840
3,675,000 Fayette County, Pennsylvania, Hospital Au-
thority Revenue, (Uniontown Hospital
Project),
9.750% due 7/1/15 Baa BBB
3,886,312
3,000,000 Franklin, Pennsylvania, Industrial Develop-
ment Authority, (Chamberburgs Hospital
Project), (FGIC Insured),
6.250% due 7/1/12 Aaa AAA
3,045,000
1,465,000 Grove City, Pennsylvania, Area Hospital Au-
thority Revenue, (United Community Hospital),
8.125% due 7/1/12 NR
BBB- 1,534,588
5,000,000 Harrisburg, Pennsylvania, Authority Lease
Revenue, (FGIC Insured),
6.625% due 6/1/13 Aaa AAA
5,362,500
Lehigh County, Pennsylvania, Industrial De-
velopment Authority, Pollution Control Reve-
nue:
400,000 (Pennsylvania Power and Light Company
Project), Series B,
10.625% due 9/1/14 A2 A-
410,000
5,500,000 Series A, (MBIA Insured),
6.400% due 11/1/21 Aaa AAA
5,555,000
Luzerne County, Pennsylvania, Industrial De-
velopment Authority, Pennsylvannia Gas
and Water Company, Series A:
2,500,000 7.200% due 10/1/17 Baa3
BBB- 2,543,750
2,250,000 6.050% due 1/1/19 Baa3
BBB- 2,058,750
Montgomery County, Pennsylvania, Industrial
Development Authority, Pollution Control Rev-
enue, Series A, (Philadelphia Electric Com-
pany):
3,670,000 10.500% due 5/15/15 Baa1 BBB
3,931,487
1,350,000 8.875% due 6/1/16 Baa1 BBB
1,461,375
2,380,000 Montgomery County, Pennsylvania, Industrial
Development Authority Revenue, Series B,
(MBIA Insured),
6.700% due 12/1/21 Aaa AAA
2,463,300
2,500,000 Montgomery County, Pennsylvania, Redevelop-
ment Authority, Series A,
6.500% due 7/1/25 NR NR
2,334,375
Northampton County, Pennsylvania, Industrial
Development Authority, Pollution Control Rev-
enue:
500,000 Commercial Development, (Strawbridge
Project),
7.200% due 12/15/01 NR BBB
528,750
500,000 Series A, (Metro Edison Company),
10.500% due 9/1/95 Baa1
BBB+ 532,500
350,000 North Huntington Township, Pennsylvania, Mu-
nicipal Guaranteed Sewer Revenue,
(MBIA Insured),
6.875% due 4/1/14 Aaa AAA
374,500
5,000,000 Pennsylvania State, Higher Education, Student
Loan Revenue, Series D, (AMBAC Insured),
6.050% due 1/1/19 Aaa AAA
4,875,000
2,750,000 Pennsylvania State, Industrial Development
Authority Revenue, (AMBAC Insured),
6.000% due 1/1/12 Aaa AAA
2,743,125
2,500,000 Pennsylvania State Turnpike Commission Reve-
nue, Series P, (AMBAC Insured),
6.000% due 12/1/17 Aaa AAA
2,471,875
Philadelphia, Pennsylvania, Municipal Author-
ity, Gas Works Lease Revenue:
2,500,000 7.625% due 5/1/14 Baa BBB-
2,678,125
2,750,000 14th Series,
6.375% due 7/1/26 Baa1 BBB
2,684,687
Philadelphia, Pennsylvania, Municipal
Authority Revenue:
1,500,000 Series A, (Justice Lease), (FGIC Insured),
7.125% due 11/15/18 Aaa AAA
1,702,500
1,000,000 Series B,
6.400% due 11/15/16 Ba BB
940,000
3,480,000 Philadelphia, Pennsylvania, Water and Sewer
Revenue, (MBIA Insured),
5.250% due 6/15/23 Aaa AAA
3,058,050
2,500,000 Scranton-Lackawanna, Pennsylvania, Health
and Welfare Authority Revenue, Series B,
(Moses Taylor Hospital),
8.500% due 7/1/20 NR BB+
2,675,000
2,000,000 Schuykill County, Pennsylvania,
Industrial Development Revenue,
(Schuykill Energy Resources, Inc.),
6.500% due 1/1/10 NR NR
1,887,500
5,000,000 University of Pittsburgh, (Higher Education
University Capital Project), Series A,
(MBIA Insured),
6.125% due 6/1/21 Aaa AAA
5,006,250
PUERTO RICO -- 0.8%
170,000 Commonwealth of Puerto Rico,
Electric Power Authority, Series L,
8.375% due 7/1/07 Baa1 AAA
191,037
330,000 Commonwealth of Puerto Rico,
General Obligation Bonds,
7.750% due 7/1/13 Baa1 AAA
372,075
1,100,000 Commonwealth of Puerto Rico, Municipal Fi-
nance Agency, Series A,
8.250% due 7/1/08 Baa1 A-
1,222,375
455,000 Commonwealth of Puerto Rico, General Obliga-
tion Bonds,
8.000% due 7/1/08 Baa1 A
509,030
5,760,000 Commonwealth of Puerto Rico,
Urban Renewal and Housing Corporation,
7.875% due 10/1/04 Baa BBB
6,436,800
RHODE ISLAND -- 1.1%
2,650,000 Rhode Island Depositors Economic Protection
Corporation, Series B, (MBIA Insured),
6.000% due 8/1/17 Aaa AAA
2,547,312
9,500,000 Rhode Island Housing and Mortgage
Finance Authority,
7.100% due 4/1/24 Aa AA
9,500,000
SOUTH CAROLINA -- 1.3%
2,400,000 Fairfield County, South Carolina, Industrial
Development Revenue, (Rite Aid Corporation),
7.900% due 12/1/16 A3 NR
2,538,000
1,500,000 Greenville County, South Carolina,
Industrial Development Revenue,
(Lockheed Aeromod Center Project),
7.200% due 11/1/21 NR A-
1,601,250
500,000 Lexington County, South Carolina, Health Ser-
vices District, Hospital Revenue,
(FSA Insured),
6.750% due 10/1/18 Aaa AAA
526,250
1,000,000 Myrtle Beach, South Carolina,
Water and Sewer Revenue,
5.500% due 3/1/13 Aaa AAA
943,750
4,000,000 Richland County, South Carolina,
Pollution Control Revenue, (Union Camp
Corporation Project),
6.625% due 5/1/22 A1 A-
4,140,000
4,500,000 South Carolina State, Public Service Author-
ity Revenue, Series A, (AMBAC Insured),
6.375% due 7/1/21 Aaa AAA
4,522,500
125,000 Sumter County, South Carolina,
Hospital Facilities Revenue,
10.000% due 10/1/04 (prerefunded 10/1/95) NR AAA
133,437
SOUTH DAKOTA -- 0.4%
Oglala Sioux, South Dakota, Tribal
Revenue Bond:
320,000 7.000% due 7/1/99 Aaa NR
320,000
1,865,000 7.500% due 7/1/13 Aaa NR
1,865,000
1,835,000 10.000% due 7/1/13 (prerefunded 7/1/95) Aaa NR
1,988,442
TENNESSEE -- 2.3%
7,000,000 Humphreys County, Tennessee,
Industrial Development Board,
6.700% due 5/1/24 Aa2 AA
7,157,500
1,700,000 Knox-Chapman, Tenessee, Utilities District,
Water and Sewer Revenue, (MBIA Insured),
6.100% due 1/1/19 Aaa AAA
1,687,250
1,400,000 Knoxville, Tennessee, Community Development
Corporation, (GNMA Morningside Gardens),
6.100% due 7/20/20 NR AAA
1,352,750
3,400,000 Memphis-Shelby County, Tennessee, Airport Au-
thority, (Federal Express Corporation),
6.750% due 9/1/12 Baa3 BBB
3,434,000
1,000,000 Metropolitan Nashville & Davidson County,
Tennessee, Industrial Development Board Reve-
nue, (Volunteer Health Care), Series A,
10.750% due 6/1/18 (in default) NR NR
300,000
Metropolitan Nashville Airport Authority,
Tennessee Airport Revenue, Special Facili-
ties:
2,500,000 (American Airlines Project),
9.875% due 10/1/05 Baa2 BB+
2,662,500
5,000,000 Series C, (FGIC Insured),
6.600% due 7/1/15 Aaa AAA
5,168,750
3,260,000 Tennessee, Housing Development
Agency, Series A,
5.850% due 7/1/13 A1 A+
3,121,450
TEXAS -- 9.3%
2,325,000 Austin, Texas, Utility System Revenue,
(AMBAC Insured),
7.000% due 5/15/16 Aaa AAA
2,499,375
1,000,000 Bell County, Texas, Health Care Facilities,
Series A, (Living Tech Inc. Project),
10.500% due 6/15/18 NR NR
920,000
1,000,000 Bexar County, Texas, Healthcare Facilities,
Hospital Revenue, (Southwest Texas
Methodist Hospital), (AMBAC Insured),
6.750% due 11/1/21 Aaa AAA
1,052,500
Brazos River Authority, Texas,
Pollution Control Revenue,
(Houston Lighting and Power Company):
Series A:
750,000 7.875% due 11/1/18 A2 A
803,437
2,000,000 (AMBAC Insured),
6.700% due 3/1/17 Aaa AAA
2,075,000
1,900,000 Series B, (FGIC Insured),
7.200% due 12/1/18 Aaa AAA
2,052,000
(Texas Utilities Electric Company Project):
3,000,000 8.250% due 12/1/16 Baa2 BBB
3,221,250
3,000,000 7.875% due 3/1/17 Baa2 BBB
3,206,250
Dallas-Fort Worth, Texas,
International Airport Facilities:
4,250,000 (Delta Airlines),
7.125% due 11/1/26 Ba1 BB
4,143,750
4,000,000 (UPS Services, Inc.),
6.600% due 5/1/32 Aaa AAA
4,170,000
2,000,000 Denton County, Texas, Reclamation
and Road District,
8.500% due 6/1/16 NR NR
2,000,000
Gulf Coast Waste Disposal Authority, Texas,
Waste Disposal and Sewer System Control, Rev-
enue Refunding, (Bay Port Area System), Se-
ries A, (FSA Insured):
1,395,000 6.700% due 10/1/10 Aaa AAA
1,461,262
990,000 6.700% due 10/1/11 Aaa AAA
1,037,025
970,000 Harris County, Texas, Refunding Toll Road Au-
thority, Series A, (AMBAC Insured),
6.500% due 8/15/17 Aaa AAA
990,612
190,000 Heart Of Texas, Housing Finance Authority,
Single Family Mortgage Revenue, Series 1984,
11.000% due 1/1/11 NR
BBB- 197,600
5,125,000 Houston, Texas, Water and Sewer Systems, Se-
ries A, Jr. Lien, (MBIA Insured),
6.375% due 12/1/22 Aaa AAA
5,214,688
Matagorda County, Texas, Pollution
Control Revenue, Navajo District No. 1:
(Central Power and Light Company Project):
1,500,000 10.125% due 10/15/14 NR A-
1,638,750
1,475,000 9.750% due 7/1/15 A2 A
1,581,938
3,250,000 7.875% due 12/1/16 A3 A-
3,485,625
1,300,000 (Houston Light and Power Company Project):
7.875% due 11/1/26 A2 A
1,391,000
5,000,000 (AMBAC Insured),
6.700% due 3/1/27 Aaa AAA
5,237,500
1,695,000 Series A,
10.000% due 10/15/15 A3 A-
1,832,718
500,000 Series B,
7.700% due 2/1/19 A2 A
541,250
2,100,000 Series E, (FGIC Insured),
7.200% due 12/1/18 Aaa AAA
2,270,625
3,000,000 North Texas, Higher Education Authority Inc.,
6.300% due 4/1/09 A NR
2,928,750
Port Corpus Christi, Texas, Industrial Devel-
opment Revenue:
4,000,000 (Hoechst Celanese Corporation Project),
6.875% due 4/1/17 A2 AA-
4,200,000
2,000,000 (Valero Refining and Manufacturing),
Series A,
10.250% due 6/1/17 Baa3
BBB- 2,257,500
4,000,000 Red River Authority, Texas,
Pollution Control Revenue,
(Hoechst Celanese Corporation Project),
6.875% due 4/1/17 A2 AA-
4,200,000
Sabine River Authority, Texas,
Pollution Control Revenue:
4,750,000 (Southwestern Electric Power
Company Project),
8.200% due 7/1/14 Aa3 NR
5,124,062
3,500,000 (Texas Electric Project), (FSA Insured),
5.550% due 5/1/22 Aaa AAA
3,171,875
Sam Rayburn, Texas, Municipal Power Agency,
Power Supply System Revenue:
2,200,000 Series A,
6.750% due 10/1/14 Baa BB
2,139,500
2,500,000 Series B,
6.125% due 10/1/13 Baa BB
2,271,875
San Antonio, Texas, Airport System Revenue,
(AMBAC Insured):
3,000,000 7.125% due 7/1/06 Aaa AAA
3,315,000
1,000,000 7.125% due 7/1/08 Aaa AAA
1,105,000
2,000,000 7.375% due 7/1/13 Aaa AAA
2,227,500
2,000,000 Terrel Hills, Texas, Higher Education, (In-
carnate World College Project), (Co Lee In-
sured),
5.750% due 3/15/13 Aaa AAA
1,905,000
3,010,000 Texas Municipal Power Agency, Revenue Bonds,
Series A, (AMBAC Insured),
6.750% due 9/1/12 Aaa AAA
3,231,987
2,150,000 Texas State Department, Housing and Community
Affairs, Home Mortgage Revenue, Series A,
6.950% due 7/1/23 NR AAA
2,244,061
2,000,000 Texas State Public Property Finance Corpora-
tion Revenue, (Mental Health and Retarda-
tion), (FGIC Insured),
5.500% due 9/1/13 Aaa AAA
1,830,000
2,900,000 Texas State Veterans Housing Assistance, Sin-
gle Family Mortgage Revenue,
6.800% due 12/1/23 Aa AA
2,947,125
500,000 Travis County, Texas, Hospital Revenue,
(Daughters of Charity Health System),
(Seton Medical Center),
10.125% due 11/1/15 Aa NR
540,625
975,000 Tyler, Texas, Health Facilities Revenue,
(Park Place Limited Project),
12.500% due 12/1/18 NR NR
1,026,187
1,250,000 Westside Calhoun County, Tax District,
Solid Waste Disposal Revenue,
(Union Carbide Chemicals Corporation),
6.400% due 5/1/23 Baa2 BBB
1,187,500
UTAH -- 0.5%
Utah State Housing Finance Agency,
Single Family Mortgage:
855,000 Series D,
8.625% due 1/1/19 NR AA
883,855
510,000 Series D1,
6.200% due 7/1/16 Aa NR
502,986
4,000,000 Utah Municipal Power System Revenue, (Sordan
Project), (MBIA Insured),
6.375% due 6/1/22 Aaa AAA
4,015,000
VIRGIN ISLANDS -- 0.1%
1,215,000 Virgin Islands Port Authority, Marine Divi-
sion Revenue, Series A,
10.125% due 11/1/05 NR
BBB- 1,283,342
Virgin Islands Public Finance Authority, Se-
ries A:
15,000 7.300% due 10/1/18 (escrowed to maturity) Aaa AAA
17,250
110,000 7.300% due 10/1/18 (prerefunded 10/1/00) Aaa AAA
124,712
VIRGINIA -- 2.5%
500,000 Chesapeake Bay, Bridge and Tunnel General
Resolution, (MBIA Insured),
6.375% due 7/1/22 Aaa AAA
505,625
2,435,000 Fairfax County, Virginia, Redevelopment and
Housing Authority Revenue, Multifamily Hous-
ing, Series A, (Kingsley), (FHA Insured),
7.000% due 5/1/26 NR AAA
2,547,618
1,880,000 Henrico County, Virginia, Industrial Develop-
ment Authority, (Maryview Hospital), Series
B,
7.500% due 9/1/11 A1 A+
2,140,850
1,500,000 Hopewell, Virginia, Industrial Development
Authority, Resource Recovery,
(Stone Container Corporation Project),
8.250% due 6/1/16 NR NR
1,531,875
8,000,000 Isle Wight County, Virginia,
Industrial Development Authority,
Solid Waste Diposal Revenue,
6.550% due 4/1/24 A1 A-
8,030,000
3,500,000 Prince William County, Virginia, Service Rev-
enue, Water and Sewer Revenue,
(FGIC Insured),
6.000% due 7/1/29 Aaa AAA
3,360,000
4,750,000 Richmond, Virginia, Metropolitan Expressway
Authority, Series B, (FGIC Insured),
6.250% due 7/15/22 Aaa AAA
4,773,750
1,400,000 Southern Public Service Authority,
Solid Waste System Revenue,
6.000% due 7/1/17 A A-
1,310,750
4,000,000 Virginia State Housing Authority, Series H,
5.250% due 7/1/23 Aa A+
3,285,000
WASHINGTON -- 1.8%
1,500,000 King County, Washington, Public Hospital Dis-
trict 1, (Valley Medical Center),
(AMBAC Insured),
7.250% due 9/15/15 Aaa AAA
1,648,125
500,000 Pierce County, Washington,
Economic Development Corporation,
Industrial Revenue Authority,
(Pioneer Business Forms Inc. Project),
10.125% due 10/1/00 NR AA-
510,000
2,000,000 Port of Moses Lake, Washington,
Pollution Control Revenue,
(Union Carbide),
7.875% due 8/1/06 Baa2 BBB
2,112,500
2,000,000 Port of Seattle, Washington, Sub. Lien,
(MBIA Insured),
6.625% due 8/1/17 Aaa AAA
2,095,000
3,000,000 Snohomish County, Washington,
Electric Revenue Generation System,
(Public Utility District No. 1),
(FGIC Insured),
6.000% due 1/1/18 Aaa AAA
2,928,750
3,500,000 Tacoma, Washington, Electric Systems Revenue,
(AMBAC Insured), Series B,
6.150% due 1/1/08 Aaa AAA
3,583,125
2,750,000 Washington State Health Care Facilities Au-
thority Revenue, (Franciscan Health,
St. Joseph), (MBIA Insured),
6.700% due 7/1/21 Aaa AAA
2,870,312
Washington State Public Power Supply System:
3,000,000 (Nuclear Project No. 1),
7.500% due 7/1/07 Aa AA
3,288,750
500,000 Series A, (MBIA Insured),
6.250% due 7/1/17 Aaa AAA
499,375
WEST VIRGINIA -- 1.8%
2,000,000 Beckley, West Virginia, Industrial Develop-
ment Revenue, (Water Commission Project),
7.000% due 10/1/17 NR A
2,087,500
3,500,000 Harrison County, West Virginia,
Solid Waste Disposal Revenue,
(West Virginia Power Company), Series B,
6.300% due 5/1/23 A1 A
3,416,875
Marion County, West Virginia,
Solid Waste Disposal Revenue,
(American Power, Paper Recycling):
2,500,000 7.750% due 12/1/11 NR NR
2,468,750
5,000,000 9.000% due 12/1/11+++ NR NR
5,043,750
4,000,000 Mason County, West Virginia, Pollution Con-
trol Revenue, (Ohio Power Company), Series B,
(AMBAC Insured),
5.450% due 12/1/16 Aaa AAA
3,695,000
2,300,000 West Virginia School Building Authority Reve-
nue, Series A, (MBIA Insured),
7.000% due 7/1/11 Aaa AAA
2,475,375
500,000 West Virginia State Water Development Author-
ity, Series A,
7.000% due 11/1/25 Aaa AAA
541,250
WISCONSIN -- 0.4%
2,000,000 Racine County, Wisconsin,
Health Center Revenue,
8.125% due 8/1/21 Baa1 BBB
2,110,000
1,665,000 Wisconsin State Health Care Facilities Au-
thority Revenue, (Medical Services Inc.
Project),
9.250% due 10/1/16 NR NR
1,729,517
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $1,063,116,608)
1,083,207,909
SHORT-TERM TAX-EXEMPT INVESTMENTS -- 0.5%
FLORIDA -- 0.1%
600,000 Hillsborough County, Florida, Industrial De-
velopment Authority, Pollution Control Reve-
nue,
2.850% due 6/1/21+ VMIG1 A-
1+ 600,000
IDAHO -- 0.0%
200,000 Power County, Idaho, Pollution
Control Revenue,
2.750% due 12/1/10+ VMIG1 NR
200,000
IOWA -- 0.0%
100,000 Iowa Finance Authority,
Solid-Waste Disposition,
2.900% due 7/1/23+ NR A-
1+ 100,000
NEW YORK -- 0.0%
100,000 New York, New York, General Obligation,
2.900% due 8/1/15+ VMIG1 A-1
100,000
200,000 New York, New York, City Housing Development,
2.750% due 1/1/23+ NR A-1
200,000
OHIO -- 0.1%
200,000 Cuyahoga County, Ohio, Hospital Revenue,
(University Hospital-Cleveland),
2.850% due 1/1/16+ VMIG1 NR
200,000
200,000 Hamilton County, Ohio, Health System Revenue,
(Franciscon Sisters),
2.850% due 3/1/17+ VMIG1 NR
200,000
100,000 Oakwood, Ohio, Industrial
Development Revenue,
3.000% due 12/1/16+ NR NR
100,000
100,000 Ohio State Air Quality Development Authority,
2.900% due 4/1/28++ VMIG1 A-
1+ 100,000
100,000 Ohio State Water Development Authority,
3.100% due 11/1/97++ NR NR
100,000
Socioto County, Ohio Hospital:
100,000 Series C,
3.000% due 12/1/25++ NR A-1
100,000
200,000 Series D,
3.000% due 12/1/25++ NR A-1
200,000
100,000 Toledo Lucas County, Ohio, Industrial Devel-
opment Revenue,
3.000% due 3/1/04++ NR NR
100,000
OREGON -- 0.2%
1,700,000 Port Morrow, Oregon, Portland General Elec-
tric,
2.700% due 10/1/13+ NR A-1
1,700,000
PUERTO RICO -- 0.1%
1,100,000 Commonwealth of Puerto Rico, Government De-
velopment Bank,
2.550% due 12/1/15++ VMIG1 A-1
1,100,000
TEXAS -- 0.0%
100,000 Gulf Coast Industrial Development Authority,
Solid Waste Disposable Revenue,
2.900% due 4/1/26+ VMIG1 A-
1+ 100,000
TOTAL SHORT-TERM TAX-EXEMPT INVESTMENTS
(Cost $5,200,000)
5,200,000
TOTAL INVESTMENTS (Cost $1,068,316,608*)
100.1% 1,088,407,909
OTHER ASSETS AND LIABILITIES (NET)
(0.1) (1,149,048)
NET ASSETS
100.0% $1,087,258,861
<FN>
* Aggregate cost for Federal tax purposes.
+ Variable rate daily demand notes are payable upon not more than one
business day's notice.
++ Variable rate demand notes are payable upon not more than seven calen-
dar days' notice.
+++ When-issued security (see Note 1).
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1994
<TABLE>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $1,068,316,608) (Note 1)
See accompanying schedule
$ 1,088,407,909
Cash
160,608
Interest receivable
16,572,824
Receivable for Fund shares sold
1,112,816
TOTAL ASSETS
1,106,254,157
LIABILITIES:
Payable for investment securities purchased $ 14,650,503
Dividends payable 2,433,141
Payable for Fund shares redeemed 568,402
Distribution fee payable (Note 3) 451,064
Investment advisory fee payable (Note 2) 366,995
Administration fee payable (Note 2) 183,498
Service fee payable (Note 3) 137,623
Custodian fees payable (Note 2) 43,000
Transfer agent fees payable (Note 2) 40,600
Accrued expenses and other payables 120,470
TOTAL LIABILITIES
18,995,296
NET ASSETS
$ 1,087,258,861
NET ASSETS CONSIST OF:
Distributions in excess of net investment income
$ (2,372,244)
Accumulated net realized gain on investments sold
1,179,561
Net unrealized appreciation of investments
20,091,301
Par value
62,992
Paid-in capital in excess of par value
1,068,297,251
TOTAL NET ASSETS
$ 1,087,258,861
NET ASSETS:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($17,792,490 / 1,031,069 shares of beneficial inter-
est outstanding)
$17.26
Maximum offering price per share ($17.26 / 0.955)
(based on sales charge of 4.5% of the offering price
on July 31, 1994)
$18.07
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($1,069,466,371 / 61,960,951 shares of beneficial
interest outstanding)
$17.26
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1994
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Interest
$76,076,446
EXPENSES:
Distribution fee (Note 3) $ 5,613,101
Investment advisory fee (Note 2) 4,561,779
Administration fee (Note 2) 2,280,890
Service fee (Note 3) 1,710,667
Transfer agent fees (Notes 2 and 4) 405,248
Custodian fees (Note 2) 167,090
Legal and audit fees 110,836
Trustees' fees and expenses (Note 2) 14,002
Other 258,853
TOTAL EXPENSES
15,122,466
NET INVESTMENT INCOME
60,953,980
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on investments sold during the
year
1,179,561
Net unrealized depreciation of investments during
the year
(56,414,234)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(55,234,673)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$5,719,307
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C>
<C>
Net investment income $ 60,953,980 $
54,744,965
Net realized gain on investments sold during the
year 1,179,561
10,471,895
Net unrealized appreciation/(depreciation) of
investment during the year (56,414,234)
17,261,814
Net increase in net assets resulting from opera-
tions 5,719,307
82,478,674
Distributions to shareholders from net invest-
ment income:
Class A (998,289)
(222,387)
Class B (57,766,814)
(53,903,795)
Distributions to shareholders in excess of net
investment income:
Class A (40,212)
(8,993)
Class B (2,332,032)
(2,179,884)
Distribution to shareholders from net realized
gain on investments:
Class A (149,909)
(15,935)
Class B (8,232,090)
(9,037,717)
Net increase in net assets from Fund share
transactions (Note 6):
Class A 5,328,509
13,372,323
Class B 24,129,260
219,779,670
Net increase/(decrease) in net assets (34,342,270)
250,261,956
NET ASSETS:
Beginning of year 1,121,601,131
871,339,175
End of year (including distributions in excess
of net investment income of $2,372,244 and
$2,188,877, respectively) $ 1,087,258,861 $
1,121,601,131
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*++
<S> <C> <C>
Net Asset Value, beginning of period $ 18.24 $
17.45
Income from investment operations:
Net investment income 1.06
0.78
Net realized and unrealized gain/(loss) on in-
vestments (0.85)
1.00
Total from investment operations 0.21
1.78
Less distributions:
Distributions from net investment income (1.02)
(0.80)
Distributions in excess of net investment in-
come (0.04)
(0.03)
Distributions from net realized gains (0.13)
(0.16)
Total distributions (1.19)
(0.99)
Net Asset Value, end of period $ 17.26 $
18.24
Total return+ 1.14%
10.24%
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $17,792
$13,508
Ratio of operating expenses to average net as-
sets 0.84%
0.86%**
Ratio of net investment income to average net
assets 5.83%
6.03%**
Portfolio turnover rate 39%
34%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period since the use of the undistributed method does not accord with
results of operations.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR
ENDED ENDED ENDED
ENDED
7/31/94 7/31/93++ 7/31/92
7/31/91
<S> <C> <C> <C>
<C>
Net Asset Value, beginning of
year $18.24 $18.00 $16.97
$16.98
Income from investment opera-
tions:
Net investment income 0.96 0.98 1.04
1.10
Net realized and unrealized
gain/(loss)
on investments (0.85) 0.45 1.17
0.10
Total from investment operations 0.11 1.43 2.21
1.20
Less distributions:
Distributions from net invest-
ment income (0.92) (0.98) (1.04)
(1.10)
Distributions in excess of net
investment income (0.04) (0.04) --
- --
Distributions from net realized
gains (0.13) (0.17) (0.14)
(0.11)
Total distributions (1.09) (1.19) (1.18)
(1.21)
Net Asset Value, end of year $17.26 $18.24 $18.00
$16.97
Total return+ 0.60% 8.28% 13.50%
7.40%
Ratios to average net as-
sets/supplemental data:
Net assets, end of year (in
000's) $1,069,466 $1,108,093 $871,339
$639,340
Ratio of operating expenses to
average
net assets 1.33% 1.38% 1.45%#
1.45%
Ratio of net investment income
to average net assets 5.34% 5.52% 5.96%
6.48%
Portfolio turnover rate 39% 34% 61%
44%
<FN>
+ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period since the use of the undistributed method does not accord with
results of operations.
# Annualized operating expense ratio excludes interest expense. The annu-
alized ratio including interest expense for the year ended July 31,
1992 was 1.46%.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (continued)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED
ENDED
7/31/90 7/31/89 7/31/88 7/31/87
7/31/86*
<S> <C> <C> <C> <C>
<C>
Net Asset Value, beginning
of year $17.31 $16.44 $16.48 $16.30
$15.00
Income from investment op-
erations:
Net investment income 1.12 1.13 1.13 1.10
1.04
Net realized and unrealized
gain/(loss) on invest-
ments (0.30) 0.88 0.02 0.18
1.30
Total from investment oper-
ations 0.82 2.01 1.15 1.28
2.34
Less distributions:
Distributions from net in-
vestment income (1.12) (1.13) (1.13)
(1.10) (1.04)
Distributions in excess of
net
investment income -- -- -- --
- --
Distributions from net re-
alized gains (0.03) (0.01) (0.06) --
- --
Total distributions (1.15) (1.14) (1.19)
(1.10) (1.04)
Net Asset Value, end of
year $16.98 $17.31 $16.44 $16.48
$16.30
Total return+ 4.95% 12.68% 7.32%
7.90% 15.89%
Ratios to average net as-
sets/
supplemental data:
Net assets, end of year (in
000's) $573,930 $557,518 $451,262 $453,158
$349,527
Ratio of operating expenses
to average net assets 1.47% 1.44% 1.43%
1.57% 1.53%**+++
Ratio of net investment in-
come to average net as-
sets 6.57% 6.70% 6.99%
6.43% 6.88%**
Portfolio turnover rate 29% 21% 12%
16% 6%
<FN>
* The Fund commenced operations on September 16, 1985. Those shares in
existence prior to November 6, 1992 were designated Class B shares.
** Annualized.
+ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+++ Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator and distributor for the pe-
riod ended July 31, 1986 was 1.58%.
</TABLE>
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a "Mas-
sachusetts business trust" under the laws of the Commonwealth of Massachu-
setts on March 12, 1985. The Trust is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. As of the
date of this report, the Trust offered eight managed investment funds:
Smith Barney Shearson Premium Total Return, Smith Barney Shearson Convert-
ible Fund, Smith Barney Shearson Global Bond Fund, Smith Barney Shearson
High Income Fund, Smith Barney Shearson Tax-Exempt Income Fund (the
"Fund"), Smith Barney Shearson Money Market Fund, Smith Barney Shearson
Diversified Strategic Income Fund and Smith Barney Shearson Utilities
Fund. The Fund offers two classes of shares to the general public: Class A
shares and Class B shares. Class A shares are sold with a front-end sales
charge. Class B shares may be subject to a contingent deferred sales
charge ("CDSC"). Class B shares will convert automatically to Class A
shares eight years after the date of original purchase. Both classes of
shares have identical rights and privileges except with respect to the ef-
fect of the respective sales charges, the distribution and/or service fees
borne by each class, expenses allocable exclusively to each class, voting
rights on matters affecting a single class, the exchange privilege of each
class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements.
Portfolio valuation: Securities are valued by The Boston Company
Advisors, Inc. ("Boston Advisors") after consultation with an independent
pricing service (the "Pricing Service") approved by the Board of Trustees.
When, in the judgment of the Pricing Service, quoted bid prices for in-
vestments are readily available and are representative of the bid side of
the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment of the
Pricing Service, there are no readily obtainable market quotations are
carried at fair value as determined by the Pricing Service, based on meth-
ods which include consideration of yields or prices of municipal securi-
ties of comparable quality, coupon, maturity and type; indications as to
value from dealers; and general market conditions. The procedures of the
Pricing Service are reviewed periodically by the officers of the Trust
under the general supervision and responsibility of the Trustees. Short-
term investments that mature in 60 days or less are valued at amortized
cost.
Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Realized gains and losses from securi-
ties sold are recorded on the identified cost basis. Interest income is
recorded on the accrual basis. Investment income and realized and unreal-
ized gains and losses are allocated based upon the relative net assets of
each class of shares.
Securities purchased or sold on a when-issued or delayed-delivery basis
may be settled a month or more after the trade date; interest income is
not accrued until settlement date. The Fund instructs the custodian to
segregate assets in a separate account with a current value at least equal
to the amount of its when-issued purchase commitments.
Dividends and distributions to shareholders: Dividends from net invest-
ment income are determined on a class level and are declared on each day
that the Fund is open for business and are paid on the last day of the
Smith Barney Inc. ("Smith Barney") statement month. Distributions, if any,
of any net short- and long-term capital gains earned will be paid annually
after the close of the fiscal year in which they are earned. Additional
distributions of net investment income and capital gains from the Fund may
be made at the discretion of the Board of Trustees in order to avoid the
application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and
capital gain distributions on a Fund level are determined in accordance
with income tax regulations which may differ from generally accepted ac-
counting principles. These differences are primarily due to timing differ-
ences and differing characterization of distributions made by the Fund as
a whole.
Federal income taxes: The Trust intends that the Fund qualify as a regu-
lated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Reve-
nue Code of 1986, as amended, applicable to regulated investment companies
and by distributing substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Manage-
ment Corp., which is controlled by Smith Barney Holdings Inc. ("Hold-
ings"). Holdings is a wholly owned subsidiary of The Travelers Inc. Under
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of
0.40% of the value of its average daily net assets.
Prior to May 4, 1994, the Fund was a party to an administration agreement
with Boston Advisors, an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). Under this agreement, the Fund paid a monthly fee
at the annual rate of 0.20% of the value of its average daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substan-
tially the same terms and conditions, including the level of fees, as the
predecessor agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with Boston Advisors. Under the Sub-Administration Agreement, SBA pays
Boston Advisors a portion of its fee at a rate agreed upon from time to
time between SBA and Boston Advisors.
For the year ended July 31, 1994, Smith Barney received from investors
$176,786 representing commissions (sales charges) on sales of Class A
Shares.
A CDSC is generally payable by a shareholder in connection with the
redemption of Class B shares within five years after the date of purchase.
In circumstances in which the CDSC is imposed, the amount ranges between
4.5% and 1% of net asset value depending on the number of years since the
date of purchase. For the year ended July 31, 1994, Smith Barney received
from shareholders $1,570,424 in CDSCs on the redemption of Class B shares.
No officer, director or employee of Smith Barney or of any of its affili-
ates receives any compensation from the Trust for serving as a Trustee or
officer of the Trust. The Trust pays each Trustee who is not an officer,
director or employee of Smith Barney, or any of its affiliates $10,000 per
annum plus $1,500 per meeting attended and reimburses each such Trustee
for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Trust's custodian. The Shareholder Services
Group, Inc., a subsidiary of First Data Corporation, serves as the Trust's
transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Trust's shares pursuant to a dis-
tribution agreement with the Trust and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services
and distribution plan (the "Plan"). Under this Plan, the Fund compensates
Smith Barney for servicing shareholder accounts for Class A and Class B
shareholders, and covers expenses incurred in distributing Class B shares.
Smith Barney is paid an annual service fee with respect to Class A and
Class B shares of the Fund at the annual rate of 0.15% of the average
daily net assets of each respective class of shares. Smith Barney is also
paid an annual distribution fee with respect to Class B shares at the an-
nual rate of 0.50% of the value of the average daily net assets of Class B
shares. For the year ended July 31, 1994, the service fee for Class A and
Class B shares was $26,737 and $1,683,930, respectively. For the year
ended July 31, 1994, the distribution fee for Class B shares was
$5,613,101.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class
of shares are charged to that class' operations. In addition to the above
service and distribution fees, class specific operating expenses include
transfer agent fees. For the year ended July 31, 1994, transfer agent fees
for Class A and Class B shares were $8,045 and $397,203, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments and U.S. government securities, aggregated $463,122,658
and $436,128,700, respectively, for the year ended July 31, 1994.
At July 31, 1994, aggregate gross unrealized appreciation for all securi-
ties in which there was an excess of value over tax cost was $36,744,290
and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $16,652,989.
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest
of each class in each separate series with a $.001 par value. Changes in
shares of beneficial interest of the Fund which are divided into two
classes (Class A and Class B) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
ENDED
7/31/94 7/31/93*
CLASS A SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
Sold 2,396,372 $ 42,651,712 783,584
$14,149,777
Issued as reinvestment of
dividends 46,307 833,218 10,849
196,417
Redeemed (2,152,168) (38,156,421) (53,875)
(973,871)
Net increase 290,511 $ 5,328,509 740,558
$13,372,323
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR
ENDED
7/31/94
7/31/93
CLASS B SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
Sold 8,179,538 $ 148,163,875 17,824,927 $
318,132,111
Issued as reinvestment of
dividends 2,238,768 40,284,476 2,175,647
38,812,324
Redeemed (9,208,861) (164,319,091) (7,669,161)
(137,164,765)
Net increase 1,209,445 $ 24,129,260 12,331,413 $
219,779,670
<FN>
* The Fund commenced selling Class A shares on November 6, 1992. Any
shares outstanding prior to November 6, 1992 were designated Class B
shares.
</TABLE>
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated
Line of Credit Agreement (the "Agreement") dated April 30, 1992, and re-
newed effective May 31, 1994, primarily for temporary or emergency pur-
poses, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. The Fund may borrow up to
the lesser of $25 million or 10% of its net assets. Interest is payable
either at the bank's Money Market Rate or the London Interbank Offered
Rate (LIBOR) plus .375% on an annualized basis. Under the terms of the
Agreement, the Fund and the other affiliated entities are charged an ag-
gregate commitment fee of $100,000 which is allocated equally among each
of the participants. The Agreement requires, among other provisions, each
participating fund to maintain a ratio of net assets (not including funds
borrowed pursuant to the Agreement) to aggregate amount of indebtedness
pursuant to the agreement of no less than 5 to 1. During the year ended
July 31, 1994, the Fund had an average outstanding daily balance of
$40,548 with interest rates ranging from 3.38% to 3.69%. Interest expense
totalled $1,549 for the year ended July 31, 1994 and is offset against in-
terest income on the Fund's Statement of Operations for the year ended
July 31, 1994. At July 31, 1994, the Fund had no outstanding borrowings
under the Agreement.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND
OF SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
Smith Barney Shearson Tax-Exempt Income Fund of Smith Barney Shearson In-
come Funds, including the schedule of portfolio investments, as of July
31, 1994, and the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the eight
years in the period then ended and for the period September 16, 1985 (com-
mencement of operations) to July 31, 1986. 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.
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 fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1994 by correspondence with the custodian
and brokers. 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 Fund as of July 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the
eight years in the period then ended and for the period September 16, 1985
(commencement of operations) to July 31, 1986, in conformity with gener-
ally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Boston, Massachusetts
September 16, 1994
TAX INFORMATION (UNAUDITED) FISCAL YEAR ENDED JULY 31, 1994
The following tax information represents fiscal year end disclosures of
various tax benefits passed through to shareholders at calendar year end.
Of the dividend paid by the Fund from net investment income for the year
ended July 31, 1994, 100% is tax-exempt for regular Federal tax income
purposes.
The capital gains dividend distribution paid to shareholders for fiscal
year ended July 31, 1994, whether taken in shares or in cash, is as fol-
lows:
Long Term Capital Gains $7,470,007
The above figure may differ from those cited elsewhere in this report due
to differences in the calculations of income and capital gains for Securi-
ties and Exchange Commission (book) purposes and Internal Revenue Service
(tax) purposes.
TAX-EXEMPT
INCOME
FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Lawrence T. McDermott
Vice President and
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
Recycled
Recyclable
This report is submitted for the
general information of the
shareholders of Smith Barney
Shearson Tax-Exempt Income
Fund. It is not authorized
for distribution to prospective
investors unless accompanied
or preceded by an effective
Prospectus for the Fund which
contains information concerning
the Fund's investment policies, fees
and expenses as well as other
pertinent information.
SMITH BARNEY
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 18, 187
FD0427 I4
1994
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above Fund name showing the Continents of the United States with
ripples of water, clouds overlooking the Continents. In the upper left
corner there is a hand fan spread out as well as in the lower right cor-
ner. At the lower left side approximately one quarter of the way to the
right is the sun.
Smith Barney Shearson
GLOBAL
BOND FUND
JULY 31, 1994
SMITH BARNEY
GLOBAL BOND FUND
DEAR SHAREHOLDER:
Uncertainty as to the timing and extent of further monetary policy tight-
ening in the United States, in response to continuing indications of
higher than normal economic activity, combined with a sharp rise in cer-
tain commodity prices, notably crude oil, provided an unsettled environ-
ment for the performance of global bond markets in the first six months of
1994. The ongoing liquidation of highly leveraged speculative positions
undoubtedly contributed to increased volatility, particularly in the pe-
ripheral bond markets.
During the period immediately following the transfer of management of the
Global Bond Fund to Smith Barney Capital Management, strategic activity on
the portfolio centered around two core defensive measures. Firstly, the
interest rate sensitivity of the portfolio was progressively reduced,
mostly through the sale of all securities denominated in European curren-
cies with maturity dates beyond the turn of the century. These positions
were replaced with European government bonds with maturities averaging 2
1/2 years, where it was felt that yields had adjusted to abnormally high
levels. Secondly, the portfolio's exposure to the more volatile peripheral
European currencies such as the Swedish Kroner, the Spanish Peseta and the
Italian Lira was reduced in favor of the core European currencies, partic-
ularly the Deutschemark.
At the time of writing, the Fund's duration (a measure of a portfolio's
sensitivity to changes in interest rates) had been reduced from approxi-
mately 4 3/4 years to 2 years. Similarly, the portfolio's foreign currency
exposure has been restructured in an effort to reduce volatility without
impairing the diversification benefits of investment in a broad range of
bond markets, and without negatively impacting the yield level on the
portfolio.
PERFORMANCE
During the second calendar quarter of 1994, the portfolio fell in value by
2.2%. Since the beginning of the year the portfolio has fallen in value by
6%, comparing favorably with similar World Income Funds tracked in the
Lipper Survey where the average decline was 6.9%. This placed the Global
Bond Fund 49th out of 106 funds measured.
OUTLOOK
Having recently seen the Federal Reserve act decisively by raising offi-
cial interest rates, a certain amount of anxiety has been dispelled, and
the Federal Reserve may remain on hold until possibly as late as November
before reviewing its activities. It therefore seems reasonable to expect a
period of relative stability in financial markets after the turbulence of
the first half of calendar 1994. We anticipate that the U.S. bond market
will remain range bound in the coming months, buoyed by indications of a
slowdown in the rate of economic activity and by a favorable issuance cal-
endar. A note of caution is warranted. Strong employment gains, rising
commodity prices and continuing above-trend growth rates could undermine
the market. The U.S. long bond is expected to trade in a range with ral-
lies limited to 7.25% and 8% yields on the downside. In Europe, a return
to economic growth is now clearly apparent in the core economies, although
unemployment rates are expected to stay high, acting as a brake on infla-
tionary pressures and possibly allowing some room for further monetary
easing. The most significant threat to bond market performance in Europe
remains the high level of debt servicing necessary to fund government def-
icits. Consequently, we would expect the high yielding markets such as
Sweden, Italy and Belgium to provide trading opportunities, although not
deserving a high weighting in the portfolio.
In Japan, a strong currency and a relatively high unemployment rate of 3%
suggest a continuing accommodative monetary policy, although we expect the
yield curve to steepen in anticipation of eventual economic recovery. How-
ever, we remain considerably underweighted in Japanese assets as the yield
on Japanese bonds is too low for our income objectives.
The outlook for the major currencies will be highly dependent on relative
economic performance, and hence, on interest rate differentials in the
case of Deutschemarks. This will also have profound implications for Euro-
pean cross-rates where a strong German recovery will likely put pressure
on the non-core currencies, and possibly even on the French Franc. Also, a
weak Dollar and abnormal European bond market volatility will put addi-
tional pressure on high-yielding currencies in Europe. Hence, we are
mainly positioned in Deutschemarks and Pounds Sterling within Europe with
minimal exposure elsewhere. We anticipate that the performance of the Yen
versus the Dollar will be influenced both by developments in the trade ne-
gotiations and by domestic political factors, although we are not optimis-
tic that the trade talks will have any lasting effect on dollar strength.
DIVIDEND POLICY
Although not explicitly stated in the prospectus, the Fund's policy is to
pay a level monthly dividend based on our projections for the markets in
which the Fund invests and the general direction of interest rates. This
policy has no appreciable affect on the Fund's investment strategies or
net asset value per share since it is guided by market conditions. We con-
tinually monitor both the market and the Fund's income stream to see that
our dividend projections are on target. This means that we do not sacri-
fice the quality of the portfolio by investing in higher yielding but
lower quality bonds that may undermine the Fund's net asset value per
share in order to maintain an unrealistically high dividend policy.
Against this background, we would expect global bond markets to provide
steady returns during the rest of the year, and we will particularly fa-
vour those countries where political uncertainty and government indebted-
ness are less likely to become future causes of concern.
Sincerely,
Heath B. McLendon Victor S. Filatov
Heath B. McLendon Victor S. Filatov
Chairman of the Board Vice President and
Investment Officer
September 12, 1994
HISTORICAL PERFORMANCE -- CLASS A SHARES
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Return of Capital Gains
Dividends Total
July 31 Beginning Ending Capital Paid
Paid Return*
<S> <C> <C> <C> <C>
<C> <C>
11/6/92-7/31/93 $16.32 $16.53 -- --
$1.00 7.70%
1994 $16.53 $15.16 $0.03 $0.30
$0.98 (0.67)%
Total $0.03 $0.30
$1.98
Cumulative Total Return -- (11/6/92 through 7/31/94)
6.98%
<FN>
* Figures assume reinvestment of all dividends and capital gains distribu-
tions at net asset value and do not assume deduction of the front-end
sales charge (maximum 4.5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES
<TABLE>
<CAPTION>
Without Sales Charge With Sales
Charge***
Without
Without
Actual Fee Waiver Actual Fee
Waiver
<S> <C> <C> <C> <C>
Year Ended 7/31/94 (0.67)% (2.18)% (5.14)%
(6.58)%
Inception 11/6/92
through 7/31/94 3.97% 0.45% 1.25%
(0.14)%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the maxi-
mum 4.5% sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992.
Class A shares are subject to a maximum 4.5% front-end sales charge
and a service fee of 0.25% of the value of the average daily net
assets attributable to that class.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY SHEARSON GLOBAL BOND FUND+
VS. SALOMON BROTHERS CURRENCY-HEDGED WORLD GOVERNMENT BOND INDEX
November 6, 1992 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN
SHEARSON COVERS (GLOBAL BOND FUND) CLASS A
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Series
Fund -- Global Bond Fund Class A shares on November 6, 1992 through July
31, 1994 as compared with the growth of a $10,000 investment in the Sa-
lomon Brothers Currency -- Hedged World Government Bond Index. The plot
points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
GROWTH OF $10,000 SALOMON
BROTHERS
MONTH INVESTED IN CLASS A CURRENCY -- HEDGED
WORLD
ENDED SHARES OF THE PORTFOLIO GOVERNMENT BOND
INDEX
<S> <C> <C>
10/30/92 -- $10,000
11/6/92 $ 9,500 --
11/92 $ 9,474 $ 9,994
12/92 $ 9,545 $10,121
3/93 $ 9,924 $10,467
6/93 $10,236 $10,736
9/93 $10,615 $11,122
12/93 $10,737 $11,376
3/94 $10,330 $11,014
6/94 $10,156 $10,804
7/94 $10,217 $10,920
<FN>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 4.5% sales charge at the time of in-
vestment and reinvestment of dividends and capital gains at net asset
value through July 31, 1994.
SALOMON BROTHERS CURRENCY-HEDGED WORLD GOVERNMENT BOND INDEX -- The Sa-
lomon Brothers Currency-Hedged World Government Bond Index consists of
worldwide fixed-rate government bonds with one-to-three years to matu-
rity.
The Fund had been compared to the Salomon Brothers World Government Bond
Index, a weighted index of the world's major bond markets. The Fund's
investment officers, however, believe that because the Fund is denomi-
nated in United States Dollars that the currency hedged Salomon Brothers
World Government Bond Index is more appropriate for comparison purposes.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Class has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class A shares and do not guarantee future results.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS B SHARES
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Return of Capital Gains
Dividends Total
July 31 Beginning Ending Capital Paid
Paid Return*
<S> <C> <C> <C> <C>
<C> <C>
10/27/86-7/31/87 $15.00 $16.35 -- --
$0.24 10.57%
1988 $16.35 $16.70 -- $0.47
$0.85 10.53%
1989 $16.70 $16.60 -- $0.23
$0.94 6.66%
1990 $16.60 $16.79 -- --
$1.14 8.43%
1991 $16.79 $15.24 $1.11 --
$1.39 6.02%
1992 $15.24 $16.32 $0.09 $0.26
$0.94 16.11%
1993 $16.32 $16.53 -- --
$1.15 8.67%
1994 $16.53 $15.16 $0.02 $0.30
$0.89 (1.19)%
Total $1.22 $1.26
$7.54
Cumulative Total Return -- (10/27/86 through 7/31/94)
86.85%
<FN>
* Figures assume reinvestment of all dividends and capital gains distribu-
tions at net asset value and do not assume deduction of the contingent
deferred sales charge ("CDSC").
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES
<TABLE>
<CAPTION>
Without CDSC With CDSC***
Without
Without
Actual Fee Waiver Actual Fee
Waiver
<S> <C> <C> <C> <C>
Year Ended 7/31/94 (1.19)% (2.58)% (5.32)%
(6.65)%
Five Years Ended
7/31/94 7.47% 7.16% 7.33%
7.03%
Inception 10/27/86
through 7/31/94 8.39% 8.18% 8.39%
8.18%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the maxi-
mum applicable CDSC which is described in the prospectus.
NOTE: On November 6, 1992, existing shares of the Fund were desig-
nated Class B shares. Class B shares are subject to a 4.5% CDSC fee
and service and distribution fees of 0.25% and 0.50%, respectively, of
the value of the average daily net assets attributable to that Class.
The Fund's annual rates of return would have been lower had service
fees been in effect prior to November 6, 1992.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY SHEARSON GLOBAL BOND FUND+
VS. SALOMON BROTHERS CURRENCY HEDGED WORLD GOVERNMENT BOND INDEX
October 27, 1986 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN
SHEARSON COVERS (GLOBAL BOND FUND) CLASS B
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Series
Fund -- Global Bond Fund Class B shares on October 27, 1986 through July
31, 1994 as compared with the growth of a $10,000 investment in the Sa-
lomon Brothers Currency -- Hedged World Government Bond Index. The plot
points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
GROWTH OF $10,000 SALOMON
BROTHERS
MONTH INVESTED IN CLASS B CURRENCY -- HEDGED
WORLD
ENDED SHARES OF THE PORTFOLIO GOVERNMENT BOND
INDEX
<S> <C> <C>
10/27/86 $10,000 --
11/86 $10,067 $10,089
12/86 $10,347 $10,149
3/87 $11,307 $10,462
6/87 $11,118 $10,446
9/87 $10,916 $10,122
12/87 $12,438 $10,724
3/88 $12,446 $11,109
6/88 $12,221 $11,168
9/88 $12,377 $11,369
12/88 $12,624 $11,602
3/89 $12,462 $11,688
6/89 $12,666 $12,246
9/89 $12,931 $12,404
12/89 $13,462 $12,629
3/90 $13,152 $12,323
6/90 $13,680 $12,714
9/90 $14,119 $12,671
12/90 $14,685 $13,371
3/91 $14,830 $13,740
6/91 $14,908 $13,876
9/91 $15,732 $14,546
12/91 $17,013 $15,138
3/92 $16,187 $15,053
6/92 $17,101 $15,484
9/92 $17,940 $16,072
12/92 $17,600 $16,330
3/93 $18,277 $16,888
6/93 $18,827 $17,322
9/93 $19,500 $17,945
12/93 $19,699 $18,355
3/94 $18,926 $17,770
6/94 $18,583 $17,433
7/94 $18,685 $17,619
<FN>
+ Illustration of $10,000 invested in Class B shares on October 27, 1986,
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
SALOMON BROTHERS WORLD CURRENCY-HEDGED GOVERNMENT BOND INDEX -- The Sa-
lomon Brothers Currency-Hedged World Government Bond Index consists of
worldwide fixed-rate government bonds with one-to-three years to matu-
rity.
The Fund had been compared to the Salomon Brothers World Government Bond
Index, a weighted index of the world's major bond markets. The Fund's
investment officers, however, believe that
because the Fund is denominated in United States Dollars that the cur-
rency hedged Salomon Brothers World Government Bond Index is more appro-
priate for comparison purposes.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Class has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS D SHARES
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Return of Capital Gains
Dividends Total
<S> <C> <C> <C> <C>
<C> <C>
July 31 Beginning Ending Capital Paid
Paid Return*
2/4/93-7/31/93 $15.98 $16.53 -- --
$0.44 6.19%
1994 $16.53 $15.16 $0.02 $0.30
$0.89 (1.19)%
Total $0.02 $0.30
$1.33
Cumulative Total Return -- (2/4/93 through 7/31/94)
4.93%
<FN>
* Figures assume reinvestment of all dividends and capital gains distribu-
tions at net asset value.
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN** -- CLASS D SHARES
<TABLE>
<CAPTION>
With
Without
Fee Waiver Fee
Waiver
<S> <C> <C>
Year Ended 7/31/94 (1.19)%
(2.77)%
Inception 2/4/93
through 7/31/94 3.29%
0.60%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
NOTE: The Fund began selling Class D shares on February 4, 1993.
Class D shares are subject to service and distribution fees of 0.25%
and 0.50%, respectively, of the value of the average daily net assets
attributable to that Class.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS D SHARES OF
SMITH BARNEY SHEARSON GLOBAL BOND FUND+
VS. SALOMON BROTHERS CURRENCY-HEDGED WORLD GOVERNMENT BOND INDEX
February 4, 1993 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN
SHEARSON COVERS (GLOBAL BOND FUND) CLASS D
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Series
Fund -- Global Bond Fund Class D shares on February 4, 1993 through July
31, 1994 as compared with the growth of a $10,000 investment in the Sa-
lomon Brothers Currency -- Hedged World Government Bond Index. The plot
points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
GROWTH OF $10,000 SALOMON
BROTHERS
MONTH INVESTED IN CLASS D CURRENCY -- HEDGED
WORLD
ENDED SHARES OF THE PORTFOLIO GOVERNMENT BOND
INDEX
<S> <C> <C>
1/93 -- $10,000
2/4/93 $10,000 --
2/93 $10,200 $10,188
3/93 $10,269 $10,183
6/93 $10,573 $10,445
9/93 $10,950 $10,820
12/93 $11,063 $11,067
3/94 $10,629 $10,715
6/94 $10,436 $10,511
7/94 $10,493 $10,624
<FN>
+ Illustration of $10,000 invested in Class D shares on February 4, 1993
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
SALOMON BROTHERS CURRENCY-HEDGED WORLD GOVERNMENT BOND INDEX -- The Sa-
lomon Brothers Currency-Hedged World Government Bond Index consists of
worldwide fixed-rate government bonds with one-to-three years to matu-
rity.
The Fund had been compared to the Salomon Brothers World Government Bond
Index, a weighted index of the world's major bond markets. The Fund's
investment officers, however, believe that because the Fund is denomi-
nated in United States Dollars that the currency hedged Salomon Brothers
World Government Bond Index is more appropriate for comparison purposes.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Class has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class D shares and do not guarantee future results.
</TABLE>
PORTFOLIO HIGHLIGHTS (UNAUDITED) JULY 31, 1994
COUNTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Income Funds -- Global Bond
Fund's investment securities held at January 31, 1994 by country classifi-
cation. The pie is broken in pieces representing countries in the follow-
ing percentages:
<TABLE>
<CAPTION>
COUNTRY
PERCENTAGE
<S> <C>
DANISH KRONER BOND
9.4%
GREAT BRITAIN POUND STERLING BONDS
9.3%
COMMERCIAL PAPER, TIME DEPOSITS, PUT OPTIONS PURCHASED AND
NET OTHER ASSETS AND LIABILITIES
25.4%
OTHER BONDS
12.6%
UNITED STATES DOLLAR BONDS
12.3%
SPANISH PRESETA BONDS
4.6%
CANADIAN DOLLAR BOND
4.6%
NEW ZEALAND DOLLAR BONDS
5.1%
SWEDISH KRONA BONDS
4.0%
IRISH PUNT BOND
5.7%
ITALIAN LIRA BOND
7.0%
</TABLE>
TOP TEN BOND HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Bond Net
Assets
<S> <C>
KINGDOM OF DENMARK 9.4%
UNITED KINGDOM TREASURY 9.3
GOVERNMENT OF IRELAND 5.7
GOVERNMENT OF NEW ZEALAND 5.1
GOVERNMENT OF CANADA 4.6
GOVERNMENT OF SPAIN 4.6
REPUBLIC OF ITALY 4.4
UNITED STATES TREASURY NOTES 4.0
KINGDOM OF BELGIUM 3.7
REPUBLIC OF FINLAND 3.3
</TABLE>
PORTFOLIO OF INVESTMENTS JULY 31, 1994
KEY TO CURRENCY ABBREVIATIONS
BEF -- Belgium Franc
CAD -- Canadian Dollar
DEM -- German Mark
DKK -- Danish Kroner
ESP -- Spanish Peseta
FIM -- Finnish Marrka
FRF -- French Franc
GBP -- Great Britain Pound Sterling
IEP -- Irish Punt
ITL -- Italian Lira
JPY -- Japanese Yen
NZD -- New Zealand Dollar
SEK -- Swedish Krona
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE
(NOTE 1)
<S> <C>
<C>
UNITED STATES DOLLAR BONDS -- 12.3%
$ 3,000,000 Abbey National,
4.750% due 4/25/96
$ 2,925,937
2,500,000 Gas Argentino,
7.250% due 12/7/98
2,309,500
3,000,000 International Bank for Reconstruction &
Development,
8.625% due 10/1/95
3,170,076
2,000,000 Republic of Portugal,
5.750% due 10/8/03
1,748,600
5,000,000 United States Treasury Notes,
6.500% due 4/30/99
4,959,844
TOTAL UNITED STATES DOLLAR BONDS
(Cost $15,384,411)
15,113,957
DANISH KRONER BOND -- 9.4% (Cost $11,492,300)
DKK 69,000,000 Kingdom of Denmark,
9.000% due 11/15/98
11,581,975
GREAT BRITAIN POUND STERLING BONDS -- 9.3% (Cost $11,592,488)
GBP 7,500,000 United Kingdom Treasury,
7.000% due 8/6/97
11,384,142
ITALIAN LIRA BONDS -- 7.0%
ITL 5,500,000,000 Credit Local de France,
7.500% due 1/26/99
3,255,668
9,000,000,000 Republic of Italy,
9.000% due 10/1/98+
5,385,265
TOTAL ITALIAN LIRA BONDS (Cost $8,894,282)
8,640,933
IRISH PUNT BOND -- 5.7% (Cost $6,953,326)
IEP 4,500,000 Government of Ireland,
8.750% due 7/27/97
$ 6,970,343
NEW ZEALAND DOLLAR BOND -- 5.1% (Cost $6,198,454)
NZD 10,000,000 Government of New Zealand,
9.000% due 11/15/96
6,229,047
CANADIAN DOLLAR BOND -- 4.6% (Cost $5,678,092)
CAD 8,000,000 Government of Canada,
7.500% due 7/1/97
5,647,977
SPANISH PESETA BOND -- 4.6% (Cost $5,542,094)
ESP 700,000,000 Government of Spain,
11.600% due 1/15/97
5,581,215
SWEDISH KRONA BONDS -- 4.0%
Government of Sweden:
SEK 25,000,000 10.750% due 1/23/97
3,281,462
12,000,000 11.000% due 1/21/99
1,583,456
TOTAL SWEDISH KRONA BONDS (Cost $4,979,179)
4,864,918
BELGIUM FRANC BOND -- 3.7% (Cost $4,507,862)
BEF 140,000,000 Kingdom of Belgium,
9.000% due 7/30/98
4,560,184
FINNISH MARRKA BOND -- 3.3% (Cost $4,034,993)
FIM 20,000,000 Republic of Finland,
11.000% due 6/15/97
4,053,319
FRENCH FRANC BOND -- 2.9% (Cost $3,421,487)
FRF 20,000,000 Government of France, BTAN
5.750% due 12/11/98
3,560,216
JAPANESE YEN BONDS -- 2.7%
JPY 125,000,000 International Bank for Reconstruction &
Development,
5.250% due 3/20/02
1,303,045
175,000,000 Japan Development Bank,
6.500% due 9/20/01
1,950,949
TOTAL JAPANESE YEN BONDS (Cost $3,158,383)
3,253,994
TIME DEPOSITS -- 9.5%
NZD 2,900,000 Bank of New Zealand,
5.875% due 8/3/94
$ 1,745,075
DEM 15,600,000 Deutsche Bank,
4.750% due 8/2/94
9,832,966
TOTAL TIME DEPOSITS (Cost $11,565,656)
11,578,041
COMMERCIAL PAPER -- 2.8% (Cost $3,428,000)
$ 3,428,000 G.E. Capital,
4.200% due 8/1/94
3,428,000
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION STRIKE
DATE PRICE
<S> <C> <C> <C>
<C> <C>
PUT OPTION PURCHASED -- 0.4% (Cost $289,800)
United States Dollar
vs. German Deutche-
10,500 marks 12/19/94 1.64
486,607
TOTAL INVESTMENTS (Cost $107,120,807*)
87.3% 106,934,868
OTHER ASSETS AND LIABILITIES (NET)
12.7 15,573,989
NET ASSETS
100.0% $122,508,857
<FN>
* Aggregate cost for Federal tax purposes.
+ Security loaned at 7/31/94 has a market value of $2,900,000 (Note 7).
</TABLE>
See Notes to Financial Statements.
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS JULY 31, 1994
<TABLE>
<CAPTION>
CONTRACT VALUE MARKET
VALUE
DATE (NOTE
1)
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(Contract Amount $17,586,764)
27,819,972 German Deutschemarks 8/26/94 $
17,526,865
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
161,467,778 Belgium Francs 8/26/94 $
(4,941,028)
7,831,138 Canadian Dollars 8/26/94
(5,656,882)
75,874,956 Danish Kroners 8/26/94
(12,155,018)
20,128,969 Finnish Marrka 8/26/94
(3,852,824)
42,518,533 French Francs 8/26/94
(7,839,275)
19,140,000 German Deutschemarks 8/26/94
(12,058,394)
4,109,328 Great Britain Pounds Sterling 8/26/94
(6,326,491)
1,947,732 Irish Punts 8/26/94
(2,953,831)
4,143,626,092 Italian Lire 8/26/94
(2,601,509)
523,939,799 Spanish Pesetas 8/26/94
(4,005,232)
40,086,911 Swedish Krona 8/26/94
(5,157,246)
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $67,741,572) $
(67,547,730)
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1994
<TABLE>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $107,120,807) (Note 1)
See accompanying schedule
$106,934,868
Cash and foreign currency (Cost $22,063,924)
22,165,467
Receivable for forward foreign exchange contracts to sell
67,741,572
Forward foreign exchange contracts to buy, at value
(Contract cost $17,586,764) (Note 1)
See accompanying schedule
17,526,865
Interest receivable
2,754,582
Receivable for Fund shares sold
567,704
Other assets
502,177
TOTAL ASSETS
218,193,235
LIABILITIES:
Forward foreign exchange contracts to sell, at value
(Contract cost $67,741,572) (Note 1)
See accompanying schedule $
67,547,730
Payable for forward foreign exchange contracts to buy
17,586,764
Payable for investment securities purchased
6,277,058
Collateral for securities loaned (Note 7)
3,147,080
Dividends payable
605,484
Custodian fees payable (Note 2)
56,678
Interest withholding tax expense payable
51,520
Distribution fee payable (Note 3)
35,460
Transfer agent fees payable (Note 2)
34,546
Investment advisory fee payable (Note 2)
30,897
Service fee payable (Note 3)
26,273
Administration fee payable (Note 2)
23,419
Accrued Trustees' fees and expenses (Note 2)
11,000
Accrued expenses and other payables
250,469
TOTAL LIABILITIES
95,684,378
NET ASSETS
$122,508,857
NET ASSETS CONSIST OF:
Distributions in excess of net investment income
$ (3,516,824)
Accumulated net realized loss on securities, written op-
tions,
forward foreign exchange contracts and foreign currency
transactions
(3,052,163)
Net unrealized appreciation of securities, forward foreign
exchange contracts, foreign currencies and net other as-
sets
49,547
Par value
8,081
Paid-in capital in excess of par value
129,020,216
TOTAL NET ASSETS
$122,508,857
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($39,491,498 / 2,604,781 shares of beneficial interest
outstanding)
$15.16
Maximum offering price per share ($15.16 / 0.955) (based on
sales charge of 4.5% of the offering price on July 31,
1994)
$15.87
CLASS B SHARES:
NET ASSET VALUE and offering price per share+ ($82,989,381 /
5,473,974 shares of beneficial interest outstanding)
$15.16
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($27,978 / 1,846 shares of beneficial interest outstand-
ing)
$15.16
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1994
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $54,120)
$ 5,265,420
EXPENSES:
Investment advisory fee (Note 2) $
466,389
Distribution fee (Note 3)
365,326
Service fee (Note 3)
193,692
Administration fee (Note 2)
155,825
Custodian fees (Note 2)
117,148
Transfer agent fees (Notes 2 and 4)
109,043
Shareholder reports expense
100,521
Legal and audit fees
85,585
Trustees' fees and expenses (Note 2)
15,508
Other
49,456
Fees waived by investment adviser (Note 2)
(85,446)
TOTAL EXPENSES
1,573,047
NET INVESTMENT INCOME
3,692,373
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions
(1,044,174)
Written options
(11,307)
Forward foreign exchange contracts
(3,970,868)
Foreign currency transactions
581,484
Net realized loss on investments during the year
(4,444,865)
Net change in unrealized appreciation/(depreciation) of:
Securities
(41,720)
Forward foreign exchange contracts
(768,136)
Foreign currencies and net other assets
152,859
Net unrealized depreciation of investments during the year
(656,997)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(5,101,862)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(1,409,489)
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED ENDED
7/31/94 7/31/93
<S> <C>
<C>
Net investment income $
3,692,373 $ 2,884,186
Net realized gain/(loss) on securities, written options, for-
ward foreign exchange contracts and foreign currency transac-
tions during the year
(4,444,865) 2,959,075
Net unrealized depreciation of investments, forward foreign ex-
change contracts, foreign currencies and net other assets
during the year
(656,997) (895,869)
Net increase/(decrease) in net assets resulting from operations
(1,409,489) 4,947,392
Distributions to shareholders from net investment income:
Class A
(332,973) (55,127)
Class B
(3,671,937) (3,602,906)
Class D
(1,187) (438)
Distributions in excess of net investment income:
Class A
(36,182) (7,615)
Class B
(399,001) (497,707)
Class D
(129) (61)
Distributions to shareholders from net realized gain on
investments:
Class A
(45,122) --
Class B
(1,361,030) --
Class D
(430) --
Distributions from capital (tax basis):
Class A
(9,784) --
Class B
(109,471) --
Class D
(36) --
Net increase in net assets from Fund share transactions
(Note 6):
Class A
37,594,525 2,341,075
Class B
23,454,235 14,054,689
Class D
7,322 22,824
Net increase in net assets
53,679,311 17,202,126
NET ASSETS:
Beginning of year
68,829,546 51,627,420
End of year (including distributions in excess of net invest-
ment income and undistributed net investment income of
$3,516,824 and $313,723, respectively)
$122,508,857 $ 68,829,546
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94#@ 7/31/93*++
<S> <C>
<C>
Net Asset Value, beginning of period $ 16.53
$16.32
Income from investment operations:
Net investment income
0.84*** 0.61
Net realized and unrealized gain/(loss) on investments
(0.90) 0.60
Total from investment operations
(0.06) 1.21
Less distributions:
Distributions from net investment income
(0.88) (0.88)
Distributions in excess of net investment income
(0.10) (0.12)
Distributions from net realized gains
(0.30) --
Distributions from capital
(0.03) --
Total distributions
(1.31) (1.00)
Net Asset Value, end of period $ 15.16
$16.53
Total return+
(0.67)% 7.70%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $39,491
$2,389
Ratio of operating expenses to average net assets
1.58%+++ 1.71%**
Ratio of net investment income to average net assets
5.24% 5.37%**
Portfolio turnover rate
257% 216%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
*** Net investment income per share before waiver of fees by investment
adviser for the year ended July 31, 1994 was $0.82.
+ Total return represents aggregate total return for the period indi-
cated and does not reflect any applicable sales charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period since the use of the undistributed method does not accord with
results of operations.
+++ Annualized expense ratio before waiver of fees by investment adviser
for the year ended July 31, 1994 was 1.69%.
# As of March 21, 1994, the Fund changed its investment adviser from Leh-
man Brothers Global Asset Management Limited to its current investment
adviser.
@ The calculated per share amounts do not reflect the actual results of
operations due to the timing of the merger.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94#@ 7/31/93+++
<S> <C>
<C>
Net Asset Value, beginning of year $ 16.53
$ 16.32
Income from investment operations:
Net investment income
0.25*** 0.79
Net realized and unrealized gain/(loss) on investments
(0.41) 0.57
Total from investment operations
(0.16) 1.36
Less distributions:
Distributions from net investment income
(0.80) (1.01)
Distributions in excess of net investment income
(0.09) (0.14)
Distributions from net realized gains
(0.30) --
Distributions from capital
(0.02) --
Total distributions
(1.21) (1.15)
Net Asset Value, end of year $ 15.16
$ 16.53
Total return+
(1.19)% 8.67%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $82,989
$66,418
Ratio of operating expenses to average net assets
2.06%++ 2.22%
Ratio of net investment income to average net assets
4.75% 4.85%
Portfolio turnover rate
257% 216%
<FN>
* The Fund commenced operations on October 27, 1986. The Fund commenced
selling Class A shares on November 6, 1992 and Class D shares on Feb-
ruary 4, 1993. Those shares in existence prior to November 6, 1992
were designated Class B shares.
** Annualized.
*** Net investment income per share before waiver of fees by investment
adviser and/or sub-investment adviser and administrator and distribu-
tor for the year ended July 31, 1994 and period ended July 31, 1987
were $0.24 and $0.23, respectively.
+ Total return represents aggregate total return for the period indi-
cated and does not reflect any applicable sales charge.
++ Annualized expense ratio before waiver of fees by investment adviser
and/or sub-investment adviser and administrator and distributor for
the year ended July 31, 1994 and period ended July 31, 1987 were 2.17%
and 2.00%, respectively.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period since the use of the undistributed method does not accord with
results of operations.
# As of March 21, 1994, the Fund changed its investment adviser from Le-
hman Brothers Global Asset Management Limited to its current investment
adviser.
@ The calculated per share amounts do not reflect the actual results of
operations due to the timing of the merger.
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
YEAR
ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/92 7/31/91 7/31/90 7/31/89 7/31/88
7/31/87*
<S> <C> <C> <C> <C> <C>
$ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35 $
15.00
0.94 1.12 1.04 1.05 0.94
0.24***
1.43 (0.17) 0.29 0.02 0.73
1.35
2.37 0.95 1.33 1.07 1.67
1.59
(0.94) (1.39) (1.14) (0.94) (0.85)
(0.24)
-- -- -- -- --
- --
(0.26) -- -- (0.23) (0.47)
- --
(0.09) (1.11) -- -- --
- --
(1.29) (2.50) (1.14) (1.17) (1.32)
(0.24)
$ 16.32 $ 15.24 $ 16.79 $ 16.60 $ 16.70 $
16.35
16.11% 6.02% 8.43% 6.66% 10.53%
10.57%
$51,627 $48,951 $61,732 $101,273 $154,362
$162,757
2.02% 1.99% 2.04% 1.96% 2.00%
1.84%**++
5.87% 6.65% 5.95% 5.82% 5.55%
4.61%**
230% 397% 309% 374% 241%
112%
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94#@ 7/31/93*++
<S> <C>
<C>
Net Asset Value, beginning of period $16.53
$15.98
Income from investment operations:
Net investment income
0.29*** 0.45
Net realized and unrealized gain/(loss) on investments (0.45)
0.61
Total from investment operations (0.16)
0.99
Less distributions:
Distributions from net investment income (0.80)
(0.39)
Distributions in excess of net investment income (0.09)
(0.05)
Distributions from net realized gains (0.30)
- --
Distributions from capital (0.02)
- --
Total distributions (1.21)
(0.44)
Net Asset Value, end of period $15.16
$16.53
Total return+
(1.19)% 6.19%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 28
$ 23
Ratio of operating expenses to average net assets
2.48%+++ 2.18%**
Ratio of net investment income to average net assets 4.34%
4.89%**
Portfolio turnover rate 257%
216%
<FN>
* The Fund commenced selling Class D shares on February 4, 1993.
** Annualized.
*** Net investment income per share before waiver of fees by investment
adviser for the year ended July 31, 1994 was $0.29.
+ Total return represents aggregate total return for the period indi-
cated.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period since the use of the undistributed method does not accord with
results of operations.
+++ Annualized expense ratio before waiver of fees by investment adviser
for the year ended July 31, 1994 was 2.59%.
# As of March 21, 1994, the Fund changed its investment adviser from Leh-
man Brothers Global Asset Management Limited to its current investment
adviser.
@ The calculated per share amounts do not reflect the actual results of
operations due to the timing of the merger.
</TABLE>
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a "Mas-
sachusetts business trust" under the laws of the Commonwealth of Massachu-
setts on March 12, 1985. The Trust is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. As of the
date of this report, the Trust offered eight managed investment funds:
Smith Barney Shearson Premium Total Return Fund, Smith Barney Shearson
Convertible Fund, Smith Barney Shearson Global Bond Fund (the "Fund"),
Smith Barney Shearson High Income Fund, Smith Barney Shearson Tax-Exempt
Income Fund, Smith Barney Shearson Money Market Fund, Smith Barney Shear-
son Diversified Strategic Income Fund and Smith Barney Shearson Utilities
Fund. As of November 6, 1992, the Fund offered two classes of shares to
the general public: Class A shares and Class B shares. As of January 29,
1993, the Fund offered a third class of shares, Class D shares, to inves-
tors eligible to participate in the Smith Barney 401(k) Program. Class A
shares are sold with a front-end sales charge. Class B shares may be sub-
ject to a contingent deferred sales charge ("CDSC"). Class B shares will
convert automatically to Class A shares eight years after the date of
original purchase. Class D shares are offered without a front-end sales
charge or CDSC. Each class of shares has identical rights and privileges
except with respect to the effect of the respective sales charges, the
distribution and/or service fees borne by each class, expenses allocable
exclusively to each class, voting rights on matters affecting a single
class, the exchange privilege of each class and the conversion feature of
Class B shares. The following is a summary of significant accounting poli-
cies consistently followed by the Fund in the preparation of its financial
statements.
Portfolio valuation: Generally, the Fund's investments are valued at mar-
ket value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Trust's Board of Trustees. Portfolio securities that are traded primarily
on a domestic or foreign exchange are valued at the last sale price on
that exchange or, if there were no sales during the day, at the current
quoted bid price. Over-the-counter securities and securities listed or
traded on certain foreign exchanges whose operations are similar to the
United States over- the-counter market are valued on the basis of the bid
price at the close of business each day. Portfolio securities that are
traded primarily on foreign exchanges generally are valued at the preced-
ing closing values of such securities on their respective exchanges, ex-
cept that when an occurrence subsequent to the time that a value was so
established is likely to have changed such value, then the fair value of
those securities will be determined by consideration of other factors by
or under the direction of the Trust's Board of Trustees or its delegates.
Debt securities are valued by The Boston Company Advisors, Inc. ("Boston
Advisors"), after consultation with an independent pricing service (the
"Pricing Service") approved by the Trust's Board of Trustees. When, in the
judgment of the Pricing Service, quoted bid prices for investments are
readily available and are representative of the bid side of the market,
these investments are valued at the mean between the quoted bid prices and
asked prices. Investments for which, in the judgment of the Pricing Ser-
vice, there are no readily obtainable market quotations are carried at
fair value as determined by the Pricing Service. Investments in U.S. gov-
ernment securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued at amor-
tized cost.
Option accounting principles: Upon the purchase of a put option or a call
option by the Fund, the premium paid is recorded as an investment, the
value of which is marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the cost of the option. When
the Fund enters into a closing sale transaction, the Fund will realize a
gain or loss depending on whether the sales proceeds from the closing sale
transaction are greater or less than the cost of the option. When the Fund
exercises a put option, it will realize a gain or loss from the sale of
the underlying security and the proceeds from such sale will be decreased
by the premium originally paid. When the Fund exercises a call option, the
cost of the security which the Fund purchases upon exercise will be in-
creased by the premium originally paid.
When the Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Fund
realizes a gain equal to the amount of the premium received. When the Fund
enters into a closing purchase transaction, the Fund realizes a gain (or
loss if the cost of the closing purchase transaction exceeds the premium
re- ceived when the option was sold) without regard to any unrealized gain
or loss on the underlying security, and the liability related to such op-
tion is eliminated. When a call option is exercised, the Fund realizes a
gain or loss from the sale of the underlying security and the proceeds
from such sale are increased by the premium originally received. When a
put option is exercised, the amount of the premium originally received
will reduce the cost of the security that the Fund purchased upon exer-
cise.
The risk associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Fund may
forego the opportunity of profit if the market price of the underlying se-
curity or index increases and the option is exercised. The risk in writing
a put option is that the Fund may incur a loss if the market price of the
underlying security or index decreases and the option is exercised. In ad-
dition, there is the risk that the Fund may not be able to enter into a
closing transaction because of an illiquid secondary market.
Repurchase Agreements: The Fund engages in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of
the seller to repurchase, and the Fund to resell, the obligation at an
agreed- upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return
that is not subject to market fluctuations during the Fund's holding pe-
riod. The value of the collateral is at least equal at all times to the
total amount of the repurchase obligations, including interest. In the
event of counterparty default, the Fund has the right to use the collat-
eral to offset losses incurred. There is potential loss to the Fund in the
event the Fund is delayed or prevented from exercising its rights to dis-
pose of the collateral securities, including the risk of a possible de-
cline in the value of the underlying securities during the period while
the Fund seeks to assert its rights. The Fund's investment adviser, admin-
istrator or sub-administrator, acting under the supervision of the Trust's
Board of Trustees, reviews the value of the collateral and the creditwor-
thiness of those banks and dealers with which the Fund enters into repur-
chase agreements to evaluate potential risks.
Foreign Currency: The books and records of the Fund are maintained in
U.S. dollars. Foreign currencies, investments and other assets and liabil-
ities are translated into U.S. dollars at the exchange rates prevailing at
the end of the period, and purchases and sales of investment securities,
income and expenses are translated on the respective dates of such trans-
actions. Unrealized gains and losses which result from changes in foreign
currency exchange rates have been included in the unrealized appreciation/
(depreciation) of currencies and net other assets. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date
on investment securities transactions, foreign currency transactions and
the difference between the amounts of interest and dividends recorded on
the books of the Fund and the amount actually received. The portion of
foreign currency gains and losses related to fluctuation in the exchange
rates between the initial purchase trade date and subsequent sale trade
date is included in realized gains and losses on investment securities
sold.
Forward Foreign Exchange Contracts: Forward foreign exchange contracts
are valued at the forward rate and are marked-to-market daily. The change
in market value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time that
it was opened and the value at the time that it was closed.
The use of forward foreign exchange contracts does not eliminate fluctua-
tions in the underlying prices of the Fund's investment securities, but it
does establish a rate of exchange that can be achieved in the future. Al-
though forward foreign exchange contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential
gain that might result should the value of the currency increase. In addi-
tion, the Fund could be exposed to risks if the counterparties to the con-
tracts are unable to meet the terms of their contracts.
Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Realized gains and losses from securi-
ties sold are recorded on the identified cost basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Inter-
est income is recorded on the accrual basis. Investment income and real-
ized and unrealized gains and losses are allocated based upon the relative
net assets of each class of shares.
Dividends and distributions to shareholders: Dividends from net invest-
ment income, if any, are determined on a class level and will be declared
monthly and paid on the last day of the Smith Barney Inc. ("Smith Barney")
statement month. Distributions, if any, of net short- and long-term capi-
tal gains earned by the Fund will be made annually after the close of the
fiscal year in which they are earned. Additional distributions of net in-
vestment income and capital gains from the Fund may be made at the discre-
tion of the Trust's Board of Trustees in order to avoid the application of
a 4% nondeductible excise tax on certain undistributed amounts of ordinary
income and capital gains. Income distributions and capital gain distribu-
tions on a Fund level are determined in accordance with income tax regula-
tions which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and
gains on various investment securities held by the Fund and timing
differences.
Federal income taxes: The Trust intends that the Fund qualify as a regu-
lated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Reve-
nue Code of 1986, as amended, applicable to regulated investment companies
and by distributing substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
Prior to March 21, 1994, the Fund had entered into an investment advisory
agreement (the "Advisory Agreement") with Lehman Brothers Global Asset
Management Limited ("Global Asset Management"), a wholly owned subsidiary
of Lehman Brothers Holdings Inc. ("Lehman Holdings"), which at the time
was a wholly owned subsidiary of American Express Company ("American Ex-
press"). American Express owned 100% of Lehman Holdings' issued and out-
standing common stock, which represented approximately 92% of the issued
and outstanding voting stock. The remainder of Lehman Holdings' voting
stock was owned by Nippon Life Insurance Company. Under the Advisory
Agreement, the Fund paid a monthly fee at the annual rate of 0.60% of the
value of its average daily net assets.
As of the close of business on March 21, 1994, Smith Barney Global Capital
Management, Inc. ("Global Capital Management") succeeded Global Asset Man-
agement as the Fund's investement adviser. Global Capital Management is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Hold-
ings is a wholly owned subsidiary of The Travelers Inc. The new advisory
agreement contains substantially the same terms and conditions, including
the level of fees, as the predecessor agreement.
Prior to May 4, 1994, the Fund was a party to an administration agreement
with The Boston Company Advisors, Inc. ("Boston Advisors") an indirect
wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). Under this
administration agreement, the Fund paid a monthly fee at the annual rate
of 0.20% of the value of its average daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substan-
tially the same terms and conditions, including the level of fees, as the
predecessor agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with Boston Advisors. Under the Sub-Administration Agreement, SBA pays
Boston Advisors a portion of its fee at a rate agreed upon from time to
time between SBA and Boston Advisors.
From time to time, Smith Barney may voluntarily waive a portion or all of
its fees otherwise payable to it. For the year ended July 31, 1994, Smith
Barney waived fees in the amount of $85,446.
For the year ended July 31, 1994, Smith Barney received $13,847 from in-
vestors representing commissions (sales charges) on sales of Class A
shares.
A CDSC is generally payable by a shareholder in connection with the re-
demption of Class B shares within five years (eight years in the case of
certain 401(k) Plans) after the date of purchase. In circumstances in
which the CDSC is imposed, the amount of the charge ranges between 4.5%
and 1% of net asset value depending on the number of years since the date
of purchase (except in the case of purchases by certain 401(k) plans in
which case a 3% CDSC is imposed for the eight year period after the date
of purchase). For the year ended July 31, 1994, Smith Barney received from
shareholders $109,733 in CDSCs on the redemption of Class B shares.
No officer, director or employee of Smith Barney or any affiliate receives
any compensation from the Trust for serving as Trustee or officer of the
Trust. The Trust pays each Trustee who is not an officer, director or em-
ployee of Smith Barney or any of its affiliates $10,000 per annum plus
$1,500 per meeting attended and reimburses each such Trustee for travel
and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Trust's custodian. The Shareholder Services
Group, Inc., a subsidiary of First Data Corporation, serves as the Trust's
transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a dis-
tribution agreement with the Trust and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services
and distribution plan (the "Plan"). Under the Plan, the Fund compensates
Smith Barney for servicing shareholder accounts for Class A, Class B and
Class D shareholders and covers expenses incurred in distributing Class B
and Class D shares. Smith Barney is paid an annual service fee with re-
spect to Class A, Class B and Class D shares of the Fund at the annual
rate of 0.25% of the value of the average daily net assets of each respec-
tive class of shares. Smith Barney is also paid an annual distribution fee
with respect to Class B and Class D shares at the annual rate of 0.50% of
the value of the average daily net assets of each respective class of
shares. For the year ended July 31, 1994, the service fee for Class A,
Class B and Class D shares was $10,579, $183,065 and $48, respectively.
For the year ended July 31, 1994, the distribution fee for Class B and
Class D shares was $365,230 and $96, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class
of shares are charged to that class' operations. In addition to the above
service and distribution fees, class specific operating expenses include
transfer agent fees. For the year ended July 31, 1994, transfer agent fees
for Class A, Class B and Class D shares were $7,486, $101,391 and $166,
respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments and U.S. government securities, aggregated $205,816,163
and $174,399,009, respectively, for the year ended July 31, 1994.
At July 31, 1994, the aggregate gross unrealized appreciation for all se-
curities in which there was an excess of value over tax cost was $749,531,
and the aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $935,470.
Option activity for the year ended July 31, 1994 was as follows:
<TABLE>
<CAPTION>
#
OF
PREMIUMS
CONTRACTS
<S> <C> <C>
Options outstanding at July 31, 1993 0
0
Options written $144,728
11,500
Options closed (144,728)
(11,500)
Options outstanding at July 31, 1994 $0
0
</TABLE>
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest
of each class in each separate series with a $.001 par value. Changes in
shares of beneficial interest of the Fund which are divided into three
classes (Class A, Class B and Class D) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
ENDED
7/31/94
7/31/93*
CLASS A SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
Sold 1,468,604 $23,955,756 1,182,632
$19,303,134
Issued as reinvestment of
dividends 21,704 342,846 3,797
61,933
Issued in exchange for shares
of Short Term World Income
Fund (Note 10) 2,480,481 37,703,310 --
- --
Redeemed (1,510,560) (24,407,387) (1,041,877)
(17,023,992)
Net increase 2,460,229 $37,594,525 144,552
$2,341,075
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR
ENDED
7/31/94
7/31/93*
CLASS B SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
Sold 1,827,392 $30,747,555 2,174,986
$35,662,222
Issued as reinvestment of
dividends 285,115 4,614,096 214,872
3,486,967
Issued in exchange for shares
of Short Term World Income
Fund (Note 10) 1,108,398 16,836,575 --
- --
Redeemed (1,766,032) (28,743,991) (1,534,376)
(25,094,500)
Net increase 1,454,873 $23,454,235 855,482
$14,054,689
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
ENDED
7/31/94 7/31/93**
CLASS D SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
Sold 536 $8,508 1,422
$23,492
Issued as reinvestment of
dividends 110 1,783 30
498
Redeemed (182) (2,969) (71)
(1,166)
Net increase 464 $7,322 1,381
$22,824
<FN>
* The Fund commenced selling Class A shares on November 6, 1992. Any
shares outstanding prior to November 6, 1992 were designated Class B
shares.
** The Fund commenced selling Class D shares to the public on February 4,
1993.
</TABLE>
7. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers and
other financial organizations. Loans of securities by the Fund are collat-
eralized by cash, letters of credit or U.S. government securities that are
maintained at all times in an amount at least equal to the current market
value of the loaned securities.
At July 31, 1994, the Fund had an outstanding loan of one security to a
certain broker for which the Fund received $3,147,080 as collateral. At
July 31, 1994, this loaned security had an aggregate market value of
$2,900,000.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments in-
volves special risks and considerations not typically associated with in-
vesting in securities of U.S. companies and the United States government.
These risks include revaluation of currencies and future adverse political
and economic developments. Moreover, securities of many foreign companies
and foreign governments and their markets may be less liquid and their
prices more volatile than securities of comparable U.S. companies and the
United States government.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated
Line of Credit Agreement (the "Agreement") dated April 30, 1992, and re-
newed effective May 31, 1994, primarily for temporary or emergency pur-
poses, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. Under this Agreement, the
Fund may borrow up to the lesser of $25 million or 10% of its net assets.
Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus 0.375% on an annualized basis. Under
the terms of the Agreement, the Fund and the other affiliated entities are
charged an aggregate commitment fee of $100,000 which is allocated equally
among each of the participants. The Agreement requires, among other provi-
sions, each participating fund to maintain a ratio of net assets (not in-
cluding funds borrowed pursuant to the Agreement) to aggregate amount of
indebtedness pursuant to the Agreement of no less than 5 to 1. During the
year ended July 31, 1994, the Fund had an average outstanding daily bal-
ance of $63,652 with interest rates ranging from 3.313% to 4.250%. Inter-
est expense totalled $3,204 for the year ended July 31, 1994. At July, 31,
1994, the Fund had no oustanding borrowings under this Agreement.
10. REORGANIZATION
On July 15, 1994, the Fund (Acquiring Fund) acquired the assets and cer-
tain liabilities of Smith Barney Shearson Short Term World Income Fund
(Acquired Fund), in a tax-free exchange for shares of the Acquiring Fund,
pursuant to a plan of reorganization approved by the Acquired Fund's
shareholders on July 15, 1994. Total shares issued by the Acquiring Fund,
the value of the shares issued by the Acquiring Fund, the total net assets
of the Acquired Fund and the Acquiring Fund are as follows:
<TABLE>
<CAPTION>
SHARES TOTAL
NET TOTAL NET
ISSUED BY ASSETS
OF ASSETS OF
ACQUIRING ACQUIRED ACQUIRING
ACQUIRED ACQUIRING
FUND FUND FUND
FUND FUND
<S> <C> <C> <C>
<C>
The Fund Smith Barney Shearson Short Term World
Income Fund 3,588,879
$54,539,885 $70,297,535
</TABLE>
The total net assets of the Acquired Fund before acquisition included un-
realized depreciation of $101,942. The total net assets of the Acquiring
Fund immediately after the acquisition were $124,837,420.
Capital losses of the Acquired Fund, which may be used to offset future
gains amount to $1,150,509, which will expire in 2001.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
THE SMITH BARNEY SHEARSON GLOBAL BOND FUND OF
SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
the Smith Barney Shearson Global Bond Fund of Smith Barney Shearson Income
Funds, including the schedule of portfolio investments, as of July 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the seven years in
the period then ended and for the period October 27, 1986 (commencement of
operations) to July 31, 1987. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsi-
bility is to express an opinion on these financial statements and finan-
cial highlights based on our audits.
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 fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1994 by correspondence with the custodian
and brokers. 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 Shearson Global Bond Fund of Smith Barney Shearson
Income Funds as of July 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the
seven years in the period then ended and for the period October 27, 1986
(commencement of operations) to July 31, 1987, in conformity with gener-
ally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 30, 1994
TAX INFORMATION (unaudited)
FISCAL YEAR ENDED JULY 31, 1994
The following information represents fiscal year end disclosures of vari-
ous tax benefits passed through to shareholders at calendar year end.
The capital gains dividend distribution paid to shareholders for fiscal
year ended July 31, 1994, whether taken in shares or in cash, is as fol-
lows:
Long Term Capital Gains $994,228
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney Global Capital
Management Limited, Inc.
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit
and Trust Company
One Boston Place
Boston, Massachusetts 02108
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS) This is the increase (or decrease) in the market
value (price) of a security in your portfolio. If a stock or bond appreci-
ates in price, there is a capital gain; if it depreciates, there is a cap-
ital loss. A capital gain or loss is "realized" upon the sale of a
security; if net capital gains exceed net capital losses, there may be a
capital gain distribution to shareholders.
CONTINGENT DEFERRED SALES CHARGE (CDSC) One kind of back-end load, a CDSC
may be imposed if shares are redeemed during the first few years of owner-
ship. The CDSC may be expressed as a percentage of either the original
purchase price or the redemption proceeds. Most CDSCs decline over time,
and some will not be charged if shares are redeemed after a certain period
of time.
DIVIDEND This is income generated by securities in a portfolio and dis-
tributed after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge applied to an investment
at the time of initial purchase.
NET ASSET VALUE (NAV) Net asset value is the total market of all securi-
ties held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on
a given day. The total value of your investment would be the NAV multi-
plied by the number of shares you own.
TOTAL RETURN Total return measures a fund's performance, taking into ac-
count the combination of dividends paid and the gain or loss in the value
of the securities held in the portfolio. It may be expressed on an average
annual basis or cumulative basis (total change over a given period). In
addition, total return may be expressed with or without the effects of
sales charges or the reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the
average annual total return according to the standardized calculation de-
veloped by the SEC. The SEC average annual total return calculation in-
cludes the effects of all fees and sales charges and assumes the reinvest-
ment of all dividends and capital gains.
GLOBAL BOND
FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Victor S. Filatov
Vice President and
Investment Officer
Lewis E. Daidone
Treasurer
Christina T. Sydor
Secretary
Recycled
Recyclable
This report is submitted for
the general information of the
shareholders of Smith Barney
Shearson Global Bond Fund.
It is not authorized for distribution
to prospective investors unless
accompanied or preceded by an
effective Prospectus for the Fund,
which contains information
concerning the Fund's investment
policies, fees and expenses, as well
as other pertinent information.
SMITH BARNEY
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 30, 202, 244
FD0636 I4
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
A BLACK AND WHITE PICTURE OF
CERTIFICATES, THE AMERICAN FLAG,
BRITISH FLAG AND THE GLOBE.
1994 Smith Barney Shearson
ANNUAL DIVERSIFIED
REPORT STRATEGIC
INCOME
FUND
.......................................
JULY 31, 1994
[LOGO]
<PAGE>
Diversified Strategic Income Fund
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report,
which
includes the portfolio of investments for Smith Barney
Shearson Diversified Strategic Income Fund for the
fiscal
year ended July 31, 1994. During the past twelve months, the
Fund's
net asset value for all classes declined to $7.76 from $8.41 per
share
in response to market volatility. Investors owning Class A shares
received total distributions of $0.76 per share; investors owning
Class B shares received total distributions of $0.73 per share;
investors owning Class C shares received total distributions of
$0.79
per share; and investors owning Class D shares received total
distributions of $0.73 per share. The total return for this
fiscal
period was 1.16% for Class A shares, 0.66% for Class B shares,
1.43%
for Class C shares and 0.66% for Class D shares.
INVESTMENT STRATEGY
The investment objective of the Fund is to provide investors with
high
current income by investing in a combination of U.S. government
and
agency securities, high-yielding corporate bonds, and foreign
government bonds. Since not all sectors of the
fixed income market perform equally in the same market environment -- which
was
clearly the case during this past fiscal year -- the Fund's portfolio
management
team allocates assets based on analysis of current economic and market
conditions, taking into account the relative risks and income opportunities
within each of the fixed income sectors of the Fund.
Since its inception, the portfolio has had asset allocations of 30 to 50%
in
mortgage securities, 15 to 30% in high yield securities, and 25 to 40% in
foreign government issues. During the majority of this fiscal year, 40% of
the
Fund's assets were invested in foreign government securities because we
believed
that the foreign markets offered good opportunities for attractive levels
of
income and capital gains. After reviewing recent events overseas we
determined
that a recovery in these markets is unlikely to occur before year end. We
consequently reduced our foreign securities allocation to 33% of the
portfolio,
allocating these assets instead to the generic U.S. mortgage securities
market.
This sector now constitutes approximately 35% of the Fund. The generic
mortgage
market has been a "Rock of Gibraltar" this year from a performance
perspective,
and we believed the Fund would be better served by investing more heavily
in
this sector. We emphasize that, in this sector, the Fund invests
principally in
generic mortgage securities issued by Government National Mortgage
Association,
Federal Home Loan Mortgage
1
<PAGE>
Corporation and Federal National Mortgage Association. High yield corporate
issues represent approximately 30% of the Fund. This sector offers high
income,
and we have attempted to temper its volatility by investing in the higher
quality, higher coupon issues.
Following is a review of the three sectors in which the Fund invests and
market
conditions which influenced our investment decisions.
U.S. GOVERNMENT AND MORTGAGE SECURITIES
The economic and investment environment of this fiscal year is shaping up
to be
quite different from that of last year. When we last reported to you in
January,
the U.S. economy appeared to be growing and interest rates were rebounding
after
touching bottom earlier in 1993. Nevertheless, doubt as to the
sustainability of
these changes quite justifiably lingered in the minds of many investors
because
of the uneven growth and false starts the economy had exhibited in previous
months. During the last half of the Fund's fiscal year, it became clear
that the
economy's strong growth was both real and sustainable. Historically low
mortgage
rates encouraged a record number of homeowners to refinance existing
mortgages,
which increased their disposable income. After a long period of financial
anxiety and stifled spending, this additional money was a welcome relief
and
quickly reflected in higher consumer spending. Since consumer spending
accounts
for approximately two-thirds of GDP (Gross Domestic Product, which is the
broadest available measure of aggregate economic activity), the growth rate
of
the economy surged in the fourth quarter of 1993.
After maintaining an accommodative policy and keeping interest rates low to
encourage economic growth, on February 4, 1994, the Federal Reserve
signaled an
important shift in direction and tightened monetary policy for the first
time
since 1989. It subsequently increased the Federal funds rate (an important
indicator of the direction of short-term interest rates) four more times,
most
recently in August, and also increased the discount rate.
The goal of the Federal Reserve's actions was to control the level of
growth and
avoid rising inflation. The textbook result of an increase in short-term
rates
is slower economic growth and low long-term interest rates. However, at the
time
there were many leveraged investments in the marketplace based on short-
term
interest rates staying low. As short-term interest rates rose, investors
met
liquidity demands by selling U.S. Treasuries which caused an unintended and
unwarranted rise in interest rates across the maturity spectrum.
2
<PAGE>
It's clear to us from the Federal Reserve's actions of the last few months
that
it will continue to raise interest rates as long as it sees inflation
building
into the economy. The real issue is whether or not the economy reaches the
equilibrium state of growth with low inflation that the Federal Reserve is
striving for. Within the context of the Fund's current average maturity of
five
years, we have adopted a higher-coupon strategy that principally uses
generic
mortgage-backed securities.
HIGH INCOME AND CORPORATE SECURITIES
The high yield market continued to suffer along with the other financial
markets
during the past year as interest rates continued to move higher in response
to
the Federal Reserve's continued raising of short-term interest rates. The
first
seven months of 1994 were clearly the most challenging for fixed income
investors, with interest rates rising and bond prices continuing to
deteriorate
from the fourth quarter of 1993. This has been the first significant
downturn in
the fixed income markets in the past several years. While the strengthening
economic expansion continued to benefit the corporate sector of the
economy, the
overwhelmingly negative impact of more constrictive Federal Reserve
monetary
policy has caused weak performance returns across all of the financial
markets.
When investing the Fund's high yield allocation, we continue to emphasize
economically-sensitive companies that are benefiting from the improving
economy.
This would include such industries as automobile manufacturing and related
suppliers, general manufacturing, paper and forest products, containers,
basic
chemicals, transportation, and metals and mining, particularly steel
producers.
These industries continue to experience improving sales and profitability
in
reaction to the strengthening U.S. economy. We will also continue to
emphasize
the higher coupon issues because they are relatively less sensitive to
changing
interest rates.
FOREIGN GOVERNMENT SECURITIES
The market for foreign government securities remained strong until the end
of
January when real (post-inflation) yields below 4% virtually worldwide
signaled
an overbought condition. Following the United States' lead, Canada, New
Zealand,
Australia and the United Kingdom are showing solid signs of growth.
Continental
Europe turned the economic corner as well, and over the first half of 1994,
its
growth prospects were continually revised upwards. With this
3
<PAGE>
establishment of a global economic recovery, long absent inflationary fears
resurfaced and were exacerbated by rate hikes as investors assumed that the
central banks were concerned about inflation pressures.
Global bond markets sold off sharply in the spring and summer of 1994,
giving up
a large proportion of gains achieved in late 1993. However, higher-yielding
European markets were still up over the calendar year, returning up to 7%
in
local currency terms versus 0.2% for the U.S. market.
Despite good economic performance, the U.S. dollar lost ground against both
Far
Eastern and European currencies, partially because of trade concerns and
political uncertainty. The Fund has maintained sizable investments in
higher-yielding European bond markets, on an unhedged basis, where returns
of up
to 18.5% were achieved.
The interest rate cycle in Europe is now turning, with the next move likely
to
be upward as central banks move preemptively to curb excessive growth. This
will
maintain the yield advantage of short-term European issues, but will limit
the
potential for the U.S. dollar. Consequently, the Fund expects to maintain
its
present exposure to Europe, and expects to have 15-17% in European currency
denominated investments.
Dollar-bloc markets (Australia, New Zealand, Canada) have historically very
high
real yields of over 7% in each case, with steep yield curves in the three-
year
and under area. This is a result of skepticism over the fiscal and monetary
rigor that these governments will maintain in light of their previous track
records. However, all three have shown no sign of abandoning their
inflationary
targets. Given the current soft market conditions, positions are being
established in securities with shorter maturities to take advantage of
their
high yields while avoiding significant capital movement.
Longer-term emerging market debt has had a volatile year. Mainstream
markets
like Mexico, Brazil and Argentina returned up to 11%, while markets like
Nigeria
and Venezuela underperformed. The Fund has negligible exposure to the
emerging
markets, a policy which will be maintained. Shorter-maturity paper has
performed
well, with constant demand in the three- to five-year area causing spreads
to
tighten. Very short-term, cash-type instruments in the Far Eastern markets
also
have benefited the Fund, offering yields around 9% as well as some currency
appreciation. While these yields remain attractive, the Fund will continue
to
take advantage of these opportunities.
4
<PAGE>
With real yields now high throughout the dollar bloc and European markets,
there
is great potential to secure high income while taking minimal capital risk.
Our
allocation to this sector is expected to remain at 35%.
- --------------------------------------------------------------------
D I V I D E N D P O L I C Y
ALTHOUGH NOT EXPLICITLY STATED IN THE PROSPECTUS, THE FUND'S POLICY IS TO
PAY A LEVEL MONTHLY DIVIDEND BASED ON OUR PROJECTIONS FOR THE MARKETS IN
WHICH THE FUND INVESTS AND THE GENERAL DIRECTION OF INTEREST RATES. THIS
POLICY HAS NO APPRECIABLE AFFECT ON THE FUND'S INVESTMENT STRATEGIES OR
NET
ASSET VALUE PER SHARE SINCE IT IS GUIDED BY MARKET CONDITIONS. WE
CONTINUALLY MONITOR BOTH THE MARKET AND THE FUND'S INCOME STREAM TO SEE
THAT
OUR DIVIDEND PROJECTIONS ARE ON TARGET.
The past six months have been a difficult investment environment, but we
believe
our investment strategies have proven to be relatively successful in
meeting our
stated goals of providing investors with a high level of current income
using
diversified investments. During the next six months we will endeavor to do
the
same, and look forward to reporting to you in the Fund's Semi-Annual
Report.
Sincerely,
Heath B. McLendon James E. Conroy
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
AND INVESTMENT OFFICER INVESTMENT OFFICER
John C. Bianchi Victor S. Filatov
VICE PRESIDENT AND VICE PRESIDENT AND
INVESTMENT OFFICER INVESTMENT OFFICER
SEPTEMBER 12, 1994
5
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31, Beginning Ending Capital Distributed Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
11/6/92 - 7/31/93 $8.24 $8.41 -- $0.12 $0.45
9.30%
- ---------------------------------------------------------------------------
1994 8.41 7.76 $0.04 0.10 0.62
1.16
- ---------------------------------------------------------------------------
Total $0.04 $0.22 $1.07
- ---------------------------------------------------------------------------
Cumulative Total Return (11/6/92 through 7/31/94)
10.57%
- ---------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value and do not assume deduction of the front-end sales charge
(maximum 4.5%).
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without Sales Charge With Sales
Charge***
With Fee Without With Fee
Without
Waiver Fee Waiver Waiver
Fee Waiver
<S> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
Year Ended 7/31/94 1.16% 1.14% (3.39)%
(3.41)%
- ---------------------------------------------------------------------------
Inception (11/6/92) through 7/31/94 5.97% 5.97% 3.19%
3.19%
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment
of
dividends and capital gains distributions at net asset value. A
shareholder's
actual return for the period during which waivers were in effect would
be the
higher of the two numbers shown.
***Average annual total return figures shown assume the deduction of the
maximum
4.5% front-end sales charge.
</TABLE>
NOTE: The Fund began offering Class A shares on November 6, 1992. Class A
shares
are subject to a maximum 4.5% front-end sales charge and an annual service
fee
of 0.25% of the value of the average daily net assets attributable to that
class.
6
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Diversified Strategic Income Portfolio's Class A shares on November 6, 1992
through July 31, 1994 as compared with the growth of a $10,000 investment
in the
Lehman Brothers Aggregate Bond Index. The plot points used to draw the line
graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTED IN CLASS A INVESTMENT IN THE
MONTH SHARES OF THE LEHMAN BROTHERS
ENDED PORTFOLIO AGGREGATE BOND INDEX
<S> <C> <C>
10/30/92 $10,000 $10,000
11/6/92 9,550 --
11/92 9,528 10,004
12/92 9,638 10,161
03/93 10,067 10,581
06/93 10,375 10,862
09/93 10,604 11,145
12/93 10,916 11,151
03/94 10,698 10,831
06/94 10,511 10,720
07/94 10,560 10,933
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 4.5% sales charge at the time of
investment
and reinvestment of dividends and capital distributions at net asset
value
through July 31, 1994.
Lehman Brothers Aggregate Bond Index is composed of the Government
Corporate
Bond Index, the Asset-Backed Securities Index and the Mortgage-Backed
Securities Index and includes treasury issues, agency issues, corporate
bond
issues and mortgage-backed issues.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results.
7
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31, Beginning Ending Capital Distributed Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
12/28/89 - 7/31/90 $8.00 $8.06 -- -- $0.40
6.00%
- ---------------------------------------------------------------------------
- -
1991 8.06 7.98 $0.09 $0.06 0.71
10.42
- ---------------------------------------------------------------------------
- -
1992 7.98 8.55 0.07 -- 0.68
17.12
- ---------------------------------------------------------------------------
- -
1993 8.55 8.41 -- 0.14 0.58
7.28
- ---------------------------------------------------------------------------
- -
1994 8.41 7.76 0.03 0.10 0.60
0.66
- ---------------------------------------------------------------------------
- -
Total $0.19 $0.30 $2.97
- ---------------------------------------------------------------------------
- -
Cumulative Total Return (12/28/89 through 7/31/94)
48.02%
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value and do not assume deduction of the contingent deferred
sales
charge ("CDSC").
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without CDSC With CDSC***
With Fee Without With Fee
Without
Waiver Fee Waiver Waiver
Fee Waiver
<S> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
Year Ended 7/31/94 0.66% 0.64% (3.49)%
(3.51)%
- ---------------------------------------------------------------------------
- -
Inception (12/28/89) through 7/31/94 8.92% 8.92% 8.76%
8.76%
- ---------------------------------------------------------------------------
- -
<FN>
**All average annual total return figures shown reflect the reinvestment
of
dividends and capital gains distributions at net asset value. A
shareholder's
actual return for the period during which waivers were in effect would
be the
higher of the two numbers shown.
***Average annual total return figures assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: The Fund commenced operations on December 28, 1989 and on November 6,
1992
its existing shares were designated Class B. Class B shares are subject to
a
maximum 4.5% CDSC and annual service and distribution fees of 0.25% and
0.50%,
respectively, of the value of the average daily net assets attributable to
that
class.
8
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Diversified Strategic Income Portfolio's Class B shares on December 28,
1989
through July 31, 1994 as compared with the growth of a $10,000 investment
in
Lehman Brothers Aggregate Bond Index. The plot points used to draw the line
graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTED IN CLASS B INVESTMENT IN THE
MONTH SHARES OF THE LEHMAN AGGREGATE
ENDED PORTFOLIO BOND INDEX
<S> <C> <C>
12/28/89 $10,000 $10,000
3/90 $ 9,930 $ 9,919
6/90 $10,368 $10,281
9/90 $10,592 $10,368
12/90 $10,780 $10,893
3/91 $11,162 $11,196
6/91 $11,519 $11,379
9/91 $12,182 $12,026
12/91 $12,834 $12,636
3/92 $12,809 $12,475
6/92 $13,478 $12,979
9/92 $13,726 $13,537
12/92 $13,618 $13,572
3/93 $14,206 $14,133
6/93 $14,621 $14,509
9/93 $14,925 $14,887
12/93 $15,346 $14,895
3/94 $15,019 $14,467
6/94 $14,739 $14,318
7/94 $14,705 $14,604
</TABLE>
+ Illustration of $10,000 invested in Class B shares on December 28, 1989
assuming reinvestment of dividends and capital distributions at net asset
value through July 31, 1994.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on July
31,
1994).
Lehman Brothers Aggregate Bond Index is composed of the Government
Corporate
Bond Index, the Asset-Backed Securities Index and the Mortgage-Backed
Securities Index and includes treasury issues, agency issues, corporate
bond
issues and mortgage-backed issues.
Index information is available at month-end only; therefore, the
closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results.
9
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS C SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31, Beginning Ending Capital Distributed Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
11/6/92 - 7/31/93 $8.24 $8.41 -- $0.12 $0.47
9.47%
- ---------------------------------------------------------------------------
- -
1994 8.41 7.76 $0.04 0.10 0.65
1.43
- ---------------------------------------------------------------------------
- -
Total $0.04 $0.22 $1.12
- ---------------------------------------------------------------------------
- -
Cumulative Total Return (11/6/92 through 7/31/94)
11.04%
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value.
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS C SHARES (UNAUDITED)
<TABLE>
<CAPTION>
With Fee Without
Waiver Fee Waiver
<S> <C> <C>
- ------------------------------------------------------------
Year Ended 7/31/94 1.43% 1.41%
- ------------------------------------------------------------
Inception (11/6/92) through 7/31/94 6.23% 6.23%
- ------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment
of
dividends and capital gains distributions at net asset value. A
shareholder's
actual return for the period during which waivers were in effect would
be the
higher of the two numbers shown.
</TABLE>
NOTE: The Fund began offering Class C shares on November 6, 1992. Class C
shares
are neither subject to a sales charge nor to annual service and
distribution
fees.
10
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Diversified Income Portfolio's Class C shares on November 6, 1992 through
July
31, 1994 as compared with the growth of a $10,000 investment in Lehman
Brothers
Aggregate Bond Index. The plot points used to draw the line graph were as
follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTED IN CLASS C INVESTMENT IN THE
MONTH SHARES OF THE LEHMAN BROTHERS
ENDED PORTFOLIO AGGREGATE BOND INDEX
<S> <C> <C>
10/30/92 -- $10,000
11/06/92 $10,000 --
11/92 $ 9,978 $10,004
12/92 $10,096 $10,161
3/93 $10,551 $10,581
6/93 $10,878 $10,862
9/93 $11,124 $11,145
12/93 $11,459 $11,151
3/94 $11,238 $10,831
6/94 $11,050 $10,720
7/94 $11,104 $10,933
</TABLE>
+ Illustration of $10,000 invested in Class C shares on November 6, 1992
assuming reinvestment of dividends and capital distributions at net asset
value through July 31, 1994.
Lehman Brothers Aggregate Bond Index is composed of the Government
Corporate
Bond Index, the Asset-Backed Securities Index and the Mortgage-Backed
Securities Index and includes treasury issues, agency issues, corporate
bond
issues and mortgage-backed issues.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results.
11
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS D SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31, Beginning Ending Capital Distributed Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
3/19/93 - 7/31/93 $8.36 $8.41 -- $0.03 $0.20
3.41%
- ---------------------------------------------------------------------------
- -
1994 8.41 7.76 $0.03 0.10 0.60
0.66
- ---------------------------------------------------------------------------
- -
Total $0.03 $0.13 $0.80
- ---------------------------------------------------------------------------
- -
Cumulative Total Return (3/19/93 through 7/31/94)
4.09%
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value.
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS D SHARES (UNAUDITED)
<TABLE>
<CAPTION>
With Fee Without
Waiver Fee Waiver
<S> <C> <C>
- ------------------------------------------------------------
Year Ended 7/31/94 0.66% 0.64%
- ------------------------------------------------------------
Inception (3/19/93) through 7/31/94 2.98% 2.96%
- ------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment
of
dividends and capital gains distributions at net asset value. A
shareholder's
actual return for the period during which waivers were in effect would
be the
higher of the two numbers shown.
</TABLE>
NOTE: The Fund began offering Class D shares on March 19, 1993. Class D
shares
are not subject to a sales charge. Class D shares are subject to annual
service
and distribution fees of 0.25% and 0.50%, respectively, of the value of the
average daily net assets attributable to that class.
12
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Diversified Strategic Income Portfolio's Class D shares on March 31, 1993
through July 31, 1994 as compared with the growth of a $10,000 investment
in
Lehman Brothers Aggregate Bond Index. The plot points used to draw the line
graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTED IN CLASS D INVESTMENT IN THE
MONTH SHARES OF THE LEHMAN BROTHERS
ENDED PORTFOLIO AGGREGATE BOND INDEX
<S> <C> <C>
3/19/93 $10,000 --
3/93 $ 9,989 $10,000
6/93 $10,282 $10,265
9/93 $10,495 $10,533
12/93 $10,792 $10,538
3/94 $10,562 $10,236
6/94 $10,365 $10,130
7/94 $10,409 $10,332
</TABLE>
+ Illustration of $10,000 invested in Class D shares on March 19, 1993
assuming
reinvestment of dividends and capital distributions at net asset value
through
July 31, 1994.
Lehman Brothers Aggregate Bond Index is composed of the Government
Corporate
Bond Index, the Asset-Backed Securities Index and the Mortgage-Backed
Securities Index and includes treasury issues, agency issues, corporate
bond
issues and mortgage-backed issues.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results.
13
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JULY 31,
1994
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Income Funds -- Diversified
Strategic
Income Fund's investment securities held at July 31, 1994 by security
classification. The pie is broken in pieces representing securities in the
following percentages:
<TABLE>
<CAPTION>
SECURITY TYPE PERCENTAGE
<S> <C>
Preferred and Common Stocks 1.5%
Corporate Bond and Notes 27.6%
U.S. Government and Agency Securities 0.9%
Mortgaged-Backed Securities 35.0%
U.S. Treasury Notes 0.6%
Warrants, Repurchase Agreements and Net Other
Assets and Liabilities 1.4%
Foreign Bonds and Notes 33.0%
</TABLE>
AVERAGE MATURITY 5 years
14
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31,
1994
-------------------------------------------------------------
<TABLE>
<CAPTION>
KEY TO CURRENCY ABBREVIATIONS
<S> <C> <C> <C>
AUD -- Australian Dollar GBP -- Great Britain Pound Sterling
THB -- Thailand Baht IEP -- Irish Punt
CAD -- Canadian Dollar ITL -- Italian Lira
DEM -- German Deutschemark MXP -- Mexican Peso
DKK -- Danish Kroner NZD -- New Zealand Dollar
ECU -- European Currency Unit PTE -- Portuguese Escudo
ESP -- Spanish Peseta SEK -- Swedish Krona
FIM -- Finnish Markka USD -- United States Dollar
CSK -- Czech Koruna
</TABLE>
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
--------------------------------------------------------------------------
- ---
FOREIGN BONDS AND NOTES -- 33.0%
SPANISH PESETA BONDS -- 5.4%
Bancomext:
ESP 250,000,000 13.00% due 1/29/97 $
2,010,255
300,000,000 12.650% due 6/21/98
2,300,173
400,000,000 Eurofima,
11.350% due 7/22/97
3,151,236
European Investment Bank:
250,000,000 14.000% due 2/21/01
2,206,824
240,000,000 11.700% due 2/10/03
1,934,353
350,000,000 11.250% due 4/20/03
2,760,552
Kingdom of Spain:
700,000,000 11.900% due 7/15/96
5,596,780
1,300,000,000 10.250% due 11/30/98
10,009,277
4,500,000,000 8.300% due 12/15/98
32,463,485
1,440,000,000 12.250% due 3/25/00
11,935,135
2,000,000,000 10.900% due 8/30/03
15,627,372
6,000,000,000 11.600% due 1/15/97
47,838,988
320,000,000 Nafinsa,
13.600% due 4/2/98
2,533,257
--------------------------------------------------------------------------
- ---
140,367,687
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
ITALIAN LIRA BONDS -- 5.3%
Buoni Poliennali Del Tes,
Italian Government:
ITL 50,000,000,000 8.500% due 1/1/99 $
29,149,874
7,000,000,000 11.500% due 3/1/96
4,475,504
79,250,000,000 12.000% due 1/1/98
51,003,463
30,000,000,000 11.500% due 3/1/03
18,833,123
10,000,000,000 Cert Di Credito Del Tes,
Floating Rate Note,
9.900% due 8/1/99
6,295,970
Credit Lyonnais:
18,400,000,000 7.938% due 8/2/94
11,586,902
18,500,000,000 8.000% due 8/8/94
11,649,874
3,000,000,000 Nordiska Investerin,
10.800% due 5/24/03
1,859,887
--------------------------------------------------------------------------
- ---
134,854,597
--------------------------------------------------------------------------
- ---
SWEDISH KRONA BONDS -- 3.8%
SEK 20,000,000 Credit Foncier,
6.500% due 2/22/99
2,184,474
26,400,000 Credit Lyonnais,
6.688% due 8/8/94
3,403,619
35,000,000 European Investment Bank,
10.000% due 2/26/99
4,377,002
Kingdom of Sweden:
50,000,000 10.750% due 1/23/97
6,562,925
424,000,000 11.000% due 1/21/99
55,948,791
77,000,000 13.000% due 6/15/01
11,061,903
30,000,000 9.000% due 4/20/09
3,295,167
50,000,000 Nordic Investment Bank,
10.250% due 1/7/99
6,297,984
26,400,000 Mellon Bank,
6.625% due 8/2/94
3,390,726
--------------------------------------------------------------------------
- ---
96,522,591
--------------------------------------------------------------------------
- ---
IRISH PUNT BONDS -- 3.1%
Republic of Ireland:
IEP 22,500,000 8.750% due 7/27/97
34,851,714
13,500,000 6.250% due 4/1/99
18,779,968
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
IRISH PUNT BONDS -- (CONTINUED)
Republic of Ireland
(continued):
IEP 4,000,000 9.000% due 7/15/01 $
6,195,860
11,900,000 9.250% due 7/11/03
18,857,151
--------------------------------------------------------------------------
- ---
78,684,693
--------------------------------------------------------------------------
- ---
CANADIAN DOLLAR BONDS -- 3.1%
CAD 7,000,000 Asfinag (Autobahn Schnell),
10.125% due 3/15/01
5,147,959
3,500,000 Canadian Government Bonds,
7.750% due 9/15/96
2,516,538
Credit Lyonnais:
9,200,000 5.250% due 8/2/94
6,651,484
10,000,000 5.063% due 8/5/94
7,229,874
6,500,000 Electric Power Development,
8.750% due 6/11/97
4,689,079
11,000,000 Electricite de France,
9.750% due 9/8/99
8,096,808
6,000,000 Eurofima,
10.750% due 7/31/01
4,556,556
1,500,000 Export Finance,
10.250% due 5/29/96
1,113,762
5,400,000 International Finance
Corporation,
7.750% due 8/18/98
3,731,179
9,000,000 Kingdom of Sweden,
10.625% due 6/3/98
6,786,682
Oest KontrolBank:
2,000,000 9.000% due 5/21/97
1,449,445
8,000,000 10.250% due 7/27/99
5,994,433
10,000,000 10.750% due 8/8/01
7,528,468
10,725,000 Stelco Inc.,
10.400% due 11/30/09
7,327,568
7,000,000 Tokyo Electric Power,
10.500% due 6/14/01
5,213,245
--------------------------------------------------------------------------
- ---
78,033,080
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
AUSTRALIAN DOLLAR BONDS -- 2.9%
AUD 4,300,000 Credit Lyonnais,
4.625% due 8/2/94 $
3,178,776
4,300,000 National Australian Bank,
4.563% due 8/8/94
3,178,776
17,100,000 New South Wales Treasury,
12.000% due 12/1/01
14,209,960
Queensland Treasury:
25,000,000 8.000% due 5/14/97
18,234,058
55,000,000 8.000% due 5/14/03
36,340,800
--------------------------------------------------------------------------
- ---
75,142,370
--------------------------------------------------------------------------
- ---
GREAT BRITAIN POUND STERLING BONDS -- 2.5%
GBP 3,000,000 Auto-Bahn Schnell,
10.375% due 10/1/01
4,900,382
3,500,000 European Investment Bank,
9.000% due 7/16/01
5,423,841
5,000,000 Hydro Quebec,
6.500% due 12/9/98
7,028,504
7,500,000 Republic of Finland,
8.000% due 4/7/03
10,690,692
7,500,000 Smithkline Beecham,
8.125% due 11/25/98
11,280,125
15,550,000 United Kingdom Treasury
Dividend,
9.750% due 8/27/02
25,280,501
--------------------------------------------------------------------------
- ---
64,604,045
--------------------------------------------------------------------------
- ---
UNITED STATES DOLLAR BONDS -- 2.1%
USD 2,000,000 Development Bank of
Philippines,
8.000% due 7/22/98
1,950,000
1,000,000 Government of Barbados,
10.500% due 6/9/97
1,000,602
2,000,000 Government of Brazil,
Floating Rate Note,
6.063% due 1/1/01
1,465,000
Mexico Government Bonds:
Floating Rate Note,
2,000,000 5.813% due 3/31/08
1,945,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
UNITED STATES DOLLAR BONDS -- (CONTINUED)
Mexico Government Bonds:
(continued)
USD 14,000,000 Series B,
6.250% due 12/31/19 $
9,187,500
Philippines Peso:
5,000,000 Zero coupon, 8/9/94
4,983,999
5,000,000 Zero coupon, 8/22/94
4,964,576
3,500,000 Republic of Argentina,
Zero coupon, 5/31/96
1,583,750
Republic of Argentina,
Floating Rate Notes:
16,000,000 4.250% due 3/31/23
8,160,000
3,000,000 5.813% due 3/31/23
2,197,500
Republic of Venezuela:
1,000,000 9.000% due 5/27/96
900,000
1,000,000 4.625% due 12/28/98
739,364
7,000,000 Floating Rate Note,
6.125% due 12/30/03
2,730,000
7,925,000 Rogers Cablesystem Ltd.,
9.650% due 1/15/14
4,798,875
2,000,000 Trinidad & Tobago,
11.500% due 11/20/97
2,035,000
Uruguay Government Bonds:
1,500,000 8.250% due 6/8/95
1,500,000
2,000,000 Floating Rate Note,
6.125% due 2/18/07
1,416,016
4,500,000 Series A,
6.750% due 2/19/21
2,700,000
--------------------------------------------------------------------------
- ---
54,257,182
--------------------------------------------------------------------------
- ---
PORTUGUESE ESCUDO BONDS -- 1.3%
PTE 550,000,000 Eurofima,
8.875% due 12/6/00
2,926,621
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
PORTUGUESE ESCUDO BONDS -- (CONTINUED)
European Investment Bank:
PTE 200,000,000 15.500% due 7/12/95 $
1,266,290
1,150,000,000 8.875% due 12/15/98
6,440,428
1,196,000,000 10.400% due 5/26/99
7,069,128
950,000,000 10.125% due 8/3/00
5,408,781
750,000,000 Republic of Ireland,
8.750% due 11/25/98
4,153,739
970,000,000 World Bank,
11.500% due 2/28/97
5,919,919
--------------------------------------------------------------------------
- ---
33,184,906
--------------------------------------------------------------------------
- ---
FINNISH MARKKA BONDS -- 1.2%
FIM 50,000,000 Finnish Export Credit,
6.000% due 1/15/99
8,290,430
Republic of Finland Treasury
Notes:
58,000,000 11.000% due 1/15/99
11,765,733
56,000,000 9.500% due 3/15/04
10,373,310
--------------------------------------------------------------------------
- ---
30,429,473
--------------------------------------------------------------------------
- ---
DANISH KRONER BONDS -- 0.9%
Kingdom of Denmark:
DKK 54,000,000 8.000% due 8/20/94
8,655,414
60,000,000 9.000% due 11/15/98
10,071,283
15,000,000 Great Belt,
7.000% due 9/2/03
2,180,497
20,000,000 Oeresundsforbindeosen,
6.500% due 9/22/98
3,040,727
--------------------------------------------------------------------------
- ---
23,947,921
--------------------------------------------------------------------------
- ---
NEW ZEALAND DOLLAR BONDS -- 0.8%
NZD 27,000,000 New Zealand Government Bonds,
10.000% due 3/15/02
17,975,901
National Australia Bank:
1,800,000 6.000% due 8/2/94
1,083,150
1,800,000 5.813% due 8/8/94
1,083,150
--------------------------------------------------------------------------
- ---
20,142,201
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
THAILAND BONDS -- 0.3%
THB 100,000,000 Bank of Agriculture,
5.900% due 12/26/94 $
3,957,680
100,000,000 Industrial Financial
Corporation,
Zero coupon due 12/16/94
3,869,904
--------------------------------------------------------------------------
- ---
7,827,584
--------------------------------------------------------------------------
- ---
GERMAN DEUTSCHEMARK BOND -- 0.2%
DEM 8,500,000 Hungary National Bank,
9.250% due 3/17/00
5,499,685
--------------------------------------------------------------------------
- ---
CZECH KORUNA BOND -- 0.1%
CSK 40,000,000 Czech Electric Company,
14.375% due 1/27/01
1,524,305
--------------------------------------------------------------------------
- ---
TOTAL FOREIGN BONDS AND NOTES
(Cost $874,063,846)
845,022,320
--------------------------------------------------------------------------
- ---
CORPORATE BONDS AND NOTES -- 27.6%
PACKAGING AND CONTAINERS -- 3.0%
Container Corporation of
America, Sr. Sub. Note,
$17,350,000 13.500% due 12/1/99
19,041,625
7,000,000 11.250% due 5/1/04
7,218,750
Gaylord Container
Corporation, Sr. Notes:
11,350,000 11.500% due 5/15/01
11,534,438
2,000,000 Non-interest bearing until
5/15/96,
12.750% due 5/15/05
1,662,500
1,375,000 Sea Containers, Ltd.,
12.500% due 12/1/04
1,448,906
4,900,000 Silgan Holdings, Sr.
Discounted Deb.,
Non-interest bearing until
6/15/96,
13.250% due 12/15/02
3,828,125
7,800,000 Stone-Consolidated
Corporation, Sr. Secured
Note,
10.250% due 12/15/00
7,624,500
Stone Container:
2,100,000 12.625% due 7/15/98
2,207,625
13,750,000 9.875% due 2/1/01
12,856,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
PACKAGING AND CONTAINERS -- (CONTINUED)
$ 3,350,000 Sweetheart Cup Company, Inc.,
Sr. Sub. Note:
10.500% due 9/1/03 $
3,232,750
5,345,000 United States Can Company,
Sr. Sub. Note,
13.500% due 1/15/02
5,979,718
--------------------------------------------------------------------------
- ---
76,635,187
--------------------------------------------------------------------------
- ---
HOTELS AND GAMING -- 2.6%
6,225,000 Boyd Gaming Corporation,
10.750% Due 9/1/03
6,240,562
7,350,000 Empress River Casino,
10.750% due 4/1/02
7,138,688
7,525,000 GNF Corporation Guaranteed,
10.625% due 4/1/03
5,276,906
11,075,000 Lady Luck Gaming,
10.500% due 3/1/01
9,303,000
4,850,000 Santa Fe Hotel Inc.,
Guaranteed First Mortgage,
11.000% due 12/15/00
4,753,000
13,175,000 Station Casinos, Inc., Sr.
Sub. Note,
9.625% due 6/1/03
12,071,594
8,850,000 Trump Plaza Funding, Inc.,
Note,
10.875% due 6/15/01
7,046,813
19,927,999 Trump Taj Mahal Funding Inc.,
First Mortgage,
Pay-in-kind,
11.350% due 11/15/99
15,743,119
--------------------------------------------------------------------------
- ---
67,573,682
--------------------------------------------------------------------------
- ---
BUILDING AND CONSTRUCTION -- 2.5%
American Standard Inc.:
16,700,000 11.375% due 5/15/04
17,555,875
7,650,000 Sr. Sub. Discount Deb.,
Non-interest bearing until
6/1/98,
10.500% due 6/1/05
4,809,938
9,075,000 Greystone Homes, Inc.,
10.750% due 3/1/04
8,882,156
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
BUILDING AND CONSTRUCTION -- (CONTINUED)
Hovnaninan K Enterprises
Inc.:
$ 4,850,000 Guaranteed Note,
11.250% due 4/15/02 $
5,195,562
5,335,000 Sub. Note,
9.750% due 6/1/05
5,281,650
5,200,000 Miles Home Services,
12.000% due 4/1/01
5,102,500
8,325,000 UDC Homes, Inc., Sr. Note,
11.750% due 4/30/03
8,085,656
8,575,000 U.S. Home Corporation, Sr.
Note,
9.750% due 6/15/03
7,835,406
--------------------------------------------------------------------------
- ---
62,748,743
--------------------------------------------------------------------------
- ---
HEALTH CARE -- 1.8%
2,884,569 Alco Health District
Corporation, Sr. Deb.,
Pay-in-kind,
11.250% due 7/15/05
2,909,809
12,715,000 American Medical
International Inc., Sr.
Sub. Note,
13.500% due 8/15/01
14,336,163
5,300,000 Charter Medical,
11.250% due 4/15/04
5,432,500
10,115,000 Healthtrust Inc., The
Hospital Company, Sub.
Note,
10.750% due 5/1/02
10,405,806
12,025,000 Ornda Healthcorp, Sr. Sub.
Note,
12.250% due 5/15/02
12,941,906
--------------------------------------------------------------------------
- ---
46,026,184
--------------------------------------------------------------------------
- ---
GROCERY AND CONVENIENCE STORES -- 1.6%
3,500,000 Big V Supermarkets Inc., Sr.
Sub. Note,
11.000% due 2/15/04
3,255,000
4,225,000 Farm Fresh, Inc.
12.250% due 10/1/00
4,087,688
10,415,000 Grand Union Company, Sr.
Note,
11.250% due 7/15/00
9,907,269
3,195,000 P & C Food Markets Inc.,
Deb.,
11.500% due 10/15/01
3,422,643
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
GROCERY AND CONVENIENCE STORES --
(CONTINUED)
Pathmark Stores, Inc.:
Sub. Note:
$ 5,725,000 11.625% due 6/15/02 $
5,782,250
6,515,000 12.625% due 6/15/02
7,044,344
8,100,000 Penn Traffic Company, Sr.
Sub. Note,
9.625% due 4/15/05
7,543,125
--------------------------------------------------------------------------
- ---
41,042,319
--------------------------------------------------------------------------
- ---
PAPER AND FOREST PRODUCTS -- 1.5%
Domtar, Inc.:
3,575,000 Deb.,
11.750% due 3/15/99
3,718,000
7,400,000 Sr. Note,
12.000% due 4/15/01
7,816,250
Indah Kiat International:
1,500,000 11.375% due 6/15/99
1,516,875
3,300,000 11.875% due 6/15/02
3,300,000
3,900,000 Malette, Inc.,
12.250% due 7/15/04
3,924,375
7,400,000 Repap Wisconsin Second
Priority,
9.875% due 5/1/06
6,613,750
Riverwood International
Corporation, Sr. Sub.
Notes:
5,140,000 11.250% due 6/15/02
5,345,600
6,960,000 11.250% due 6/15/02
7,273,200
--------------------------------------------------------------------------
- ---
39,508,050
--------------------------------------------------------------------------
- ---
PUBLISHING -- 1.2%
18,400,000 Bell & Howell Holdings
Company, Sr. Deb., Series
A, Non-interest bearing
until 3/1/00,
11.500% due 3/1/05
9,936,000
12,525,000 Marvel Holdings, Inc., Sr.
Secured Note, Series B,
Zero coupon due 4/15/98
7,828,125
7,475,000 MARVEL III,
9.125% due 2/15/98
6,596,687
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
PUBLISHING -- (CONTINUED)
$10,750,000 News American Holdings Inc.,
Deb.,
8.625% due 2/7/04 $
6,198,612
--------------------------------------------------------------------------
- ---
30,559,424
--------------------------------------------------------------------------
- ---
BROADCASTING -- 1.2%
14,050,000 Bell Cablemedia, Non-interest
bearing until 7/15/99,
11.950% due 7/15/04
7,903,125
2,600,000 Continental Cablevision Inc.,
Sr. Sub. Deb.,
11.000% due 6/1/07
2,642,250
Cablevision System
Corporation:
2,750,000 9.875% due 2/15/13
2,533,438
1,000,000 9.875% due 4/1/23
893,750
2,050,000 Jones Intercable,
10.500% due 3/1/08
2,093,563
3,125,000 Rogers Cablesystems Ltd., Sr.
Secured Deb.,
10.125% due 9/1/12
3,113,281
4,400,000 Rogers Communications Inc.,
Sr. Deb.,
10.875% due 4/15/04
4,515,500
11,575,000 Videotron, Non-interest
bearing until 7/1/99,
11.125% due 7/1/04
6,482,000
--------------------------------------------------------------------------
- ---
30,176,907
--------------------------------------------------------------------------
- ---
METALS AND MINING -- 1.2%
1,500,000 Armco, Inc.,
11.375% due 10/15/99
1,571,250
8,375,000 A.K. Steel Corporation,
10.750% due 4/1/04
8,437,813
6,450,000 Essex Group, Inc., Sr. Note,
10.000% due 5/1/03
6,135,562
2,000,000 Geneva Steel Company, Sr.
Note,
11.125% due 3/15/01
2,042,500
2,400,000 Inland Steel Company, First
Mortgage Note, Series T,
12.000% due 12/1/98
2,646,000
2,750,000 Jorgensen (Earle M.) Company,
Sr. Note,
10.750% due 3/1/00
2,767,188
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
METALS AND MINING -- (CONTINUED)
$ 8,400,000 Republic Engineered Steel,
First Mortgage Bond,
9.875% due 12/15/01 $
7,990,500
--------------------------------------------------------------------------
- ---
31,590,813
--------------------------------------------------------------------------
- ---
CONSUMER DURABLES -- 1.1%
18,200,000 Coleman Holdings Inc., Sr.
Secured Note,
Zero Coupon due 5/27/98
12,216,750
32,875,000 International Semi-Tech
Micro, Sr. Secured Note,
Non-interest bearing until
8/15/00,
11.500% due 8/15/03
16,355,312
--------------------------------------------------------------------------
- ---
28,572,062
--------------------------------------------------------------------------
- ---
TELEPHONE AND COMMUNICATIONS -- 1.0%
9,150,000 Pagemart Inc., Discount Note,
144A, Non-interest bearing
until 11/1/98,
12.250% due 11/1/03++
5,718,750
6,000,000 Paging Network Inc., Sr. Sub.
Note,
11.750% due 5/15/02
6,270,000
2,500,000 MFS Communications Inc.,
Non-interest bearing until
1/15/99,
9.375% due 1/15/04
1,443,750
Nextel Communications, Inc.:
5,025,000 Non-interest bearing until
9/1/98,
11.500% due 9/1/03
3,090,375
14,025,000 Non-interest bearing until
2/15/99,
9.750% due 8/15/04
7,783,875
2,600,000 USA Mobile Communications,
9.500% due 2/1/04
2,372,500
--------------------------------------------------------------------------
- ---
26,679,250
--------------------------------------------------------------------------
- ---
RETAIL -- 1.0%
7,975,000 Barnes & Noble Inc., Sr. Sub.
Note, Series B,
11.875% due 1/15/03
8,662,844
9,775,000 Bradlees Inc., Sr. Sub. Note,
11.000% due 8/1/02
9,921,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
RETAIL -- (CONTINUED)
$ 6,300,000 Wickes Lumber Company, Sr.
Sub. Note,
11.625% due 12/15/03 $
6,465,375
--------------------------------------------------------------------------
- ---
25,049,844
--------------------------------------------------------------------------
- ---
OIL AND NATURAL GAS -- 1.0%
1,800,000 Dual Drilling Company, Sr.
Sub. Note,
9.875% due 1/15/04
1,680,750
4,250,000 Giant Industries, Inc.,
Guaranteed Sr. Sub. Note,
9.750% due 11/15/03
4,010,937
17,025,000 Mesa Capital Corporation,
Secured Discount Note,
Non-interest bearing until
6/30/95,
12.750% due 6/30/98
15,577,875
3,725,000 Santa Fe Energy Resources,
11.000% due 5/15/04
3,776,219
--------------------------------------------------------------------------
- ---
25,045,781
--------------------------------------------------------------------------
- ---
COMPUTERS -- 0.8%
18,250,000 Anacomp, Inc., Sr. Sub. Note,
15.000% due 11/1/00
20,440,000
--------------------------------------------------------------------------
- ---
PERSONAL CARE -- 0.8%
4,635,000 MacAndrews & Forbes Group,
Sub. Note,
12.250% due 7/1/96
4,629,206
6,700,000 Revlon Consumer Products
Corporation, Sr. Sub. Note,
Series B,
10.500% due 2/15/03
5,552,625
25,425,000 Revlon Worldwide Corporation,
Sr. Secured Note, Series B,
Zero Coupon due 3/15/98
10,042,875
--------------------------------------------------------------------------
- ---
20,224,706
--------------------------------------------------------------------------
- ---
TEXTILE AND APPAREL -- 0.8%
7,150,000 CMI Industries Inc., Sr. Sub.
Note,
9.500% due 10/1/03
6,712,062
6,000,000 Dan River, Inc., Sr. Sub.
Note,
10.125% due 12/15/03
5,347,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
TEXTILE AND APPAREL -- (CONTINUED)
$ 7,475,000 Hartmarx Corporation,
10.875% due 1/15/02 $
7,353,531
1,990,000 JPS Textile Group, Inc., Sr.
Sub. Note,
10.250% due 6/1/99
1,860,650
--------------------------------------------------------------------------
- ---
21,273,743
--------------------------------------------------------------------------
- ---
DIVERSIFIED INDUSTRIAL AND CONGLOMERATE
MANUFACTURING -- 0.7%
7,375,000 Federal Industries Ltd., Sr.
Note,
10.250% due 6/15/00
7,162,969
3,725,000 Interlake Corporation,
12.125% due 3/1/02
3,576,000
5,700,000 NL Industries,
11.750% due 10/15/03
5,942,250
Thermadyne Industries Inc.,
Sr. Note:
408 Pay-in-kind,
10.250% due 5/1/02
392
565 10.750% due 11/1/03
532
--------------------------------------------------------------------------
- ---
16,682,143
--------------------------------------------------------------------------
- ---
INSURANCE -- 0.7%
7,455,000 Bankers Life Holding
Corporation, Sr. Sub. Note,
Series B,
13.000% due 11/1/02
8,573,250
8,720,000 Life Partners Group, Inc.,
Sr. Sub. Note,
12.750% due 7/15/02
9,820,900
--------------------------------------------------------------------------
- ---
18,394,150
--------------------------------------------------------------------------
- ---
ELECTRICAL EQUIPMENT -- 0.6%
14,200,743 Midland Funding Corporation
I, Sr. Secured Lease
Obligation Bond, Series C,
144A,
10.330% due 7/23/02++
14,094,238
--------------------------------------------------------------------------
- ---
CHEMICALS -- 0.6%
2,125,000 Buckeye Celluose Corporation,
Sr. Note,
10.250% due 5/15/01
2,087,813
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
CHEMICALS -- (CONTINUED)
$ 4,975,000 Huntsman Corporation,
11.000% due 4/15/04 $
5,086,938
UCC Investors Holdings, Inc.:
5,750,000 Sr. Sub. Note,
11.000% due 5/1/03
5,865,000
2,571,000 Sub. Discount Note,
Non-interest bearing
until 5/1/98,
12.000% due 5/1/05
1,703,288
--------------------------------------------------------------------------
- ---
14,743,039
--------------------------------------------------------------------------
- ---
LEISURE AND ENTERTAINMENT -- 0.5%
4,200,000 Gillett Holdings Inc., Sr.
Sub. Note, Series A,
12.250% due 6/30/02
4,488,750
8,350,000 Remington Arms Inc., New, Sr.
Sub. Note, 144A,
10.500% due 12/1/03++
7,577,625
--------------------------------------------------------------------------
- ---
12,066,375
--------------------------------------------------------------------------
- ---
BANKING AND FINANCE -- 0.5%
6,225,000 Lomas Mortgage USA Inc., Sr.
Note,
10.250% due 10/1/02
6,030,468
Reliance Group Holdings Inc.:
3,150,000 Sr. Note,
9.000% due 11/15/00
2,874,375
3,250,000 Sr. Sub. Deb.,
9.750% due 11/15/03
2,908,750
--------------------------------------------------------------------------
- ---
11,813,593
--------------------------------------------------------------------------
- ---
AUTOMOBILES -- 0.5%
4,150,000 Fairfield Manufacturing Inc.,
Sr. Sub. Note,
11.375% due 7/1/01
4,170,750
8,200,000 Truck Components,
12.750% due 6/30/01
8,722,750
--------------------------------------------------------------------------
- ---
12,893,500
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
AEROSPACE -- 0.2%
$ 3,925,000 Tracor, Inc. Sr. Sub. Note,
10.875% due 8/15/01 $
4,023,125
--------------------------------------------------------------------------
- ---
AGRICULTURE -- 0.1%
3,800,000 Harvard Industries, Inc.,
12.000% due 7/15/04
3,809,500
--------------------------------------------------------------------------
- ---
MACHINERY -- 0.1%
3,725,000 SPX Corporation,
11.750% due 6/1/02
3,818,125
--------------------------------------------------------------------------
- ---
TOTAL CORPORATE BONDS AND
NOTES
(Cost $734,894,208)
705,484,483
--------------------------------------------------------------------------
- ---
MORTGAGE-BACKED SECURITIES -- 35.0%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) CERTIFICATES -- 21.7%
GNMA:
334,997,761 9.000% due 9/15/08 --
5/15/23
349,965,461
100,000,000 9.000% due 2/15/19 --
9/15/21
104,468,000
95,359,820 9.500% due 8/15/09 --
12/15/21
101,349,370
--------------------------------------------------------------------------
- ---
TOTAL GNMA POOLS -- 1,106
555,782,831
--------------------------------------------------------------------------
- ---
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC)
CERTIFICATES -- 9.0%
FHLMC:
59,647,188 Multi-class 6.500% due
1/15/16
58,435,754
3,503,725 7.000% due 1/1/08 -- 2/1/08
3,436,909
15,076,293 7.500% due 12/1/22 --
2/1/23 Gold
14,765,269
90,776,882 8.000% due 1/1/22 -- 1/1/23
90,974,776
114,730 8.500% due 10/1/07
116,665
11,379,600 8.500% due 11/1/16 --
7/1/21
11,571,574
3,159,160 9.000% due 5/1/03 -- 7/1/09
3,269,337
27,901,379 9.000% due 11/1/10 --
9/1/21
28,930,103
5,661,475 9.500% due 8/1/16 --
10/1/20
5,955,136
11,975,432 10.000% due 7/1/15 --
8/1/20
12,738,865
--------------------------------------------------------------------------
- ---
TOTAL FHLMC POOLS -- 443
230,194,388
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA)
-- 4.3%
FNMA:
$ 9,800,963 8.000% due 3/1/02 -- 1/1/08 $
9,975,519
14,750,000 FNMA Medium Term Note,
12.950% due 3/9/95
5,605,000
19,000,000 FNMA Medium Term Note,
Canadian Dollar Reverse
Yen, Principal Exchange
Rate Linked Security,
13.050% due 6/7/95
4,655,000
FNMA Strips:
20,000,000 Non-interest bearing until
12/18/95,
7.050% due 12/18/98
17,584,800
31,125,000 Non-interest bearing until
10/10/96,
8.040% due 10/10/01
26,955,806
20,000,000 Non-interest bearing until
11/22/96,
7.940% due 11/22/01
16,540,000
32,500,000 Non-interest bearing until
3/9/97,
7.890% due 3/9/02
27,063,400
--------------------------------------------------------------------------
- ---
TOTAL FNMA POOLS -- 48
108,379,525
--------------------------------------------------------------------------
- ---
TOTAL MORTGAGE-BACKED
SECURITIES
(Cost $924,750,222)
894,356,744
--------------------------------------------------------------------------
- ---
U.S. GOVERNMENT AND AGENCY SECURITIES -- 0.9%
STUDENT LOAN MARKETING ASSOCIATION (SLMA) -
- -
0.9%
14,500,000 SLMA European Currency Unit
Reverse Yen, Principal
Exchange Rate Linked
Security,
10.375% due 1/30/95
7,830,000
17,750,000 SLMA Multi Currency Index
Reverse European Currency
Unit Principal Exchange
Rate Linked Security,
11.150% due 4/7/97
5,236,250
15,000,000 SLMA New Zealand Dollars
Reverse Yen, Principal
Exchange Rate Linked
Security,
12.050% due 3/19/96
9,825,000
--------------------------------------------------------------------------
- ---
TOTAL U.S. GOVERMENT AND
AGENCY SECURITIES
(Cost $42,326,500)
22,891,250
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
U.S. TREASURY NOTE -- 0.6% (Cost $15,063,914)
$15,000,000 U.S. Treasury Notes,
5.250% due 7/31/98 $
14,323,350
--------------------------------------------------------------------------
- ---
<CAPTION>
SHARES
<C> <S> <C>
--------------------------------------------------------------------------
- ---
PREFERRED STOCKS -- 1.5%
554,102 Algoma, Series A, 5.500%
8,813,393
34,350 Geneva Steel Company, Series
B,
Exchangeable Pfd.,
Adjustable Rate,
Pay-in-kind,
14.000%
4,499,850
702,350 Gulf Canada Resources Ltd.,
Series 1
1,878,688
K-III Communications
Corporation, Sr.
Exchangeable Pfd.:
138,300 11.500%
3,647,662
73,973 Series B, Pay-in-kind,
11.625%
7,323,288
179,795 National Intergroup, Series A
Pfd., $4.20
6,360,248
143,300 Navistar International
Corporation, Series G,
Conv. Pfd., $6.00
7,236,650
--------------------------------------------------------------------------
- ---
TOTAL PREFERRED STOCKS
(Cost $41,434,133)
39,759,779
--------------------------------------------------------------------------
- ---
WARRANTS -- 0.1%
320 Trump Plaza Holding Warrants,
expire 6/15/03+
160,000
372,725 Gaylord Warrants, expire
7/31/96+
1,723,853
--------------------------------------------------------------------------
- ---
TOTAL WARRANTS
(Cost $2,005,294)
1,883,853
--------------------------------------------------------------------------
- ---
COMMON STOCK -- 0.0% (Cost $2,080,000)
104,000 Station Casinos Inc.+
1,170,000
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------------
- ---
<C> <S> <C>
REPURCHASE AGREEMENTS -- 4.7%
$25,214,000 Agreement with Citibank,
N.A., 4.200% dated 7/31/94
to be repurchased at
$25,216,942 on 8/1/94,
collateralized by
$27,220,000 U.S. Treasury
Note 4.750% due 9/30/98 $
25,214,000
95,000,000 Agreement with Kidder,
Peabody & Co. Inc., 4.240%
dated 7/31/94 to be
repurchased at $95,011,189
on 8/1/94, collateralized
by $166,715,000 U.S.
Treasury Principal Strips
Zero coupon due 2/15/02
95,000,000
--------------------------------------------------------------------------
- ---
TOTAL REPURCHASE AGREEMENTS
(Cost $120,214,000)
120,214,000
--------------------------------------------------------------------------
- ---
TOTAL INVESTMENTS (Cost $2,756,832,117) 103.4%
2,645,105,779
--------------------------------------------------------------------------
- ---
OTHER ASSETS AND LIABILITIES (NET) (3.4)%
(87,548,113)
--------------------------------------------------------------------------
- ---
TOTAL NET ASSETS 100.0%
$2,557,557,666
--------------------------------------------------------------------------
- ---
<FN>
* Aggregate cost for Federal tax purposes is $2,758,622,690.
+ Non-income producing security.
++ Security exempt from registration under Rule 144A of the Securities Act
of
1933, as amended. These securities may be resold in transactions exempt
from
registration, generally to qualified institutional buyers.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ------------------------------------------
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS JULY 31,
1994
<TABLE>
<CAPTION>
CONTRACT
MARKET VALUE
VALUE DATE
(NOTE 1)
<S> <C>
<C>
- ---------------------------------------------------------------------------
- ----------
FORWARD FOREIGN EXCHANGE CONTRACT TO BUY
1,177,811 German Deutschemarks 8/2/94
$ 742,396
4,110,256 German Deutschemarks 8/3/94
2,590,699
63,677,458 German Deutschemarks 8/12/94
40,127,178
10,853,569,114 Italian Lira 8/12/94
6,825,279
71,033,135 New Zealand Dollars 8/12/94
42,716,600
- ---------------------------------------------------------------------------
- ----------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACT TO BUY
(Contract Amount $93,541,646)
93,002,152
- ---------------------------------------------------------------------------
- ----------
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
96,957,416 Spanish Pesetas 8/2/94
$ (743,396)
1,714,750 Irish Punts 8/3/94
(2,602,620)
147,651,243 Finnish Markka 8/12/94
(28,269,757)
87,839,837 German Deutschemarks 8/12/94
(55,353,416)
34,505,506 Great Britain Pound Sterling 8/12/94
(53,153,512)
19,495,091 Irish Punts 8/12/94
(29,579,249)
5,875,616,000 Portuguese Escudo 8/12/94
(36,350,992)
5,520,766,297 Spanish Pesetas 8/12/94
(42,269,063)
251,864,342 Swedish Krona 8/12/94
(32,440,595)
- ---------------------------------------------------------------------------
- ----------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $281,213,420)
$(280,762,600)
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JULY 31,
1994
<TABLE>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $2,756,832,117) (Note 1)
See accompanying schedule
$2,645,105,779
Cash and foreign currency (Cost $28,313,483)
28,171,917
Receivable for forward foreign exchange contract to sell
281,213,420
Forward foreign exchange contracts to buy, at value
(Contract cost $93,541,646) (Note 1)
See accompanying schedule
93,002,152
Dividends and interest receivable
51,506,966
Receivable for Fund shares sold
16,723,545
Receivable for investment securities sold
10,255,265
Unamortized organization costs (Note 7)
14,735
- ---------------------------------------------------------------------------
- ----------
TOTAL ASSETS
3,125,993,779
- ---------------------------------------------------------------------------
- ----------
LIABILITIES:
Forward foreign exchange contracts to sell, at value
(Contract cost $281,213,420) (Note 1)
See accompanying schedule
$280,762,600
Payable for investment securities purchased
169,737,656
Payable for forward foreign exchange contracts to buy
93,541,646
Dividends payable
18,224,033
Payable for Fund shares redeemed
1,620,696
Distribution fee payable (Note 3)
1,046,936
Investment advisory fee payable (Note 2)
757,594
Service fee payable (Note 3)
539,451
Custodian fees payable (Note 2)
532,149
Administration fee payable (Note 2)
432,911
Transfer agent fees payable (Note 2)
184,980
Sub-investment advisory fee payable (Note 2)
108,228
Accrued Trustees' fees and expenses (Note 2)
3,250
Accrued expenses and other payables
943,983
- ---------------------------------------------------------------------------
- ----------
TOTAL LIABILITIES
568,436,113
- ---------------------------------------------------------------------------
- ----------
NET ASSETS
$2,557,557,666
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) JULY 31,
1994
<TABLE>
<S>
<C>
NET ASSETS consist of:
Distributions in excess of net investment income
$ (40,386,368)
Accumulated net realized loss on securities, forward
foreign exchange contracts, written options and
foreign currency transactions
(4,057,496)
Net unrealized depreciation of securities, forward
foreign exchange contracts, foreign currencies and
net other assets
(111,470,602)
Par value
329,439
Paid-in capital in excess of par value
2,713,142,693
- ---------------------------------------------------------------------------
- ----------
TOTAL NET ASSETS
$2,557,557,666
- ---------------------------------------------------------------------------
- ----------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($76,018,931 DIVIDED BY 9,791,914 shares of beneficial interest
outstanding) $7.76
- ---------------------------------------------------------------------------
- ----------
MAXIMUM OFFERING PRICE PER SHARE ($7.76 DIVIDED BY 0.955)
(based on sales charge of 4.5% of the offering price on July 31, 1994)
$8.13
- ---------------------------------------------------------------------------
- ----------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($2,468,922,039 DIVIDED BY 318,021,578 shares of beneficial interest
outstanding) $7.76
- ---------------------------------------------------------------------------
- ----------
CLASS C SHARES:
NET ASSET VALUE, offering and redemption price per share
($11,551,635 DIVIDED BY 1,488,000 shares of beneficial interest
outstanding) $7.76
- ---------------------------------------------------------------------------
- ----------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($1,065,061 DIVIDED BY 137,173 shares of beneficial interest
outstanding) $7.76
- ---------------------------------------------------------------------------
- ----------
<FN>
+ Redemption price per share is equal to Net Asset Value less any
applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31,
1994
<TABLE>
<S> <C>
<C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $2,017,026)
$ 212,999,145
Dividends (net of foreign withholding taxes of $21,179)
6,534,953
- ---------------------------------------------------------------------------
- ----------
TOTAL INVESTMENT INCOME
219,534,098
- ---------------------------------------------------------------------------
- ----------
EXPENSES:
Distribution fee (Note 3) $
12,111,168
Investment advisory fee (Note 2)
8,761,857
Service fee (Note 3)
6,225,257
Administration fee (Note 2)
5,006,775
Sub-investment advisory fee (Note 2)
2,503,388
Custodian fees (Note 2)
2,072,039
Transfer agent fees (Notes 2 and 4)
1,848,217
Legal and audit fees
66,528
Amortization of organization costs (Note 7)
35,799
Trustees' fees and expenses (Note 2)
13,495
Other
731,992
Fees waived by sub-investment adviser (Note 2)
(470,248)
- ---------------------------------------------------------------------------
- ----------
TOTAL EXPENSES
38,906,267
- ---------------------------------------------------------------------------
- ----------
NET INVESTMENT INCOME
180,627,831
- ---------------------------------------------------------------------------
- ----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities
(5,199,479)
Forward foreign exchange contracts
(33,887,020)
Foreign currency transactions
1,087,408
Written options
50,948
- ---------------------------------------------------------------------------
- ----------
Net realized loss on investments during the year
(37,948,143)
- ---------------------------------------------------------------------------
- ----------
Net change in unrealized appreciation/(depreciation) of:
Securities
(129,472,233)
Written options
284,139
Forward foreign exchange contracts
(5,751,631)
Foreign currencies and net other assets
1,009,666
- ---------------------------------------------------------------------------
- ----------
Net unrealized depreciation of investments during the year
(133,930,059)
- ---------------------------------------------------------------------------
- ----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(171,878,202)
- ---------------------------------------------------------------------------
- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
8,749,629
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C>
<C>
Net investment income $ 180,627,831
$ 138,378,605
Net realized gain/(loss) on securities, forward foreign
exchange contracts, written options and foreign
currency transactions during the year (37,948,143)
16,395,153
Net unrealized depreciation on investments, forward
foreign exchange contracts, written options, foreign
currencies and net other assets during the year (133,930,059)
(24,475,949)
- ---------------------------------------------------------------------------
- ----------
Net increase in net assets resulting from operations 8,749,629
130,297,809
Distributions to shareholders from net investment
income:
Class A (4,706,348)
(1,117,897)
Class B (158,059,325)
(121,525,007)
Class C (957,973)
(502,947)
Class D (25,994)
(103)
Distributions to shareholders in excess of net
investment income:
Class A (496,837)
- --
Class B (16,685,917)
- --
Class C (101,131)
- --
Class D (2,744)
- --
Distributions to shareholders from net realized gain on
investments:
Class A (764,707)
(172,715)
Class B (27,997,349)
(28,728,883)
Class C (162,730)
(119,317)
Class D (2,015)
(15)
Distributions to shareholders from capital:
Class A (301,769)
- --
Class B (10,134,711)
- --
Class C (61,425)
- --
Class D (1,667)
- --
Net increase in net assets from share transactions
(Note 6):
Class A 33,859,808
47,910,472
Class B 568,199,512
662,838,648
Class C 873,754
11,601,935
Class D 1,100,257
11,328
- ---------------------------------------------------------------------------
- ----------
Net increase in net assets 392,320,318
700,493,308
NET ASSETS:
Beginning of year 2,165,237,348
1,464,744,040
- ---------------------------------------------------------------------------
- ----------
End of year (including distributions in excess of net
investment income of $40,386,368 and undistributed
net investment income of $8,074,931, respectively) $2,557,557,666
$2,165,237,348
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94++ 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 8.41 $ 8.24
- -------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.63 0.47
Net realized and unrealized gain/(loss) on
investments (0.52) 0.27
- -------------------------------------------------------------------------
Total from investment operations 0.11 0.74
Less distributions:
Distributions from net investment income (0.56) (0.45)
Distributions in excess of net investment
income (0.06) --
Distributions from net realized gains (0.10) (0.12)
Distributions from capital (0.04) --
- -------------------------------------------------------------------------
Total distributions (0.76) (0.57)
- -------------------------------------------------------------------------
Net Asset Value, end of period $ 7.76 $ 8.41
- -------------------------------------------------------------------------
Total return+ 1.16% 9.30%
- -------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $76,019 $48,334
Ratio of operating expenses to average net
assets 1.10%*** 1.10%**
Ratio of net investment income to average net
assets 7.67% 8.26%**
Portfolio turnover rate 93% 116%
- -------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment
adviser
was 1.12% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-
investment
adviser was $0.63 for the year ended July 31, 1994.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR PERIOD
ENDED ENDED
ENDED ENDED ENDED
7/31/94++ 7/31/93
7/31/92 7/31/91 7/31/90*
<S> <C> <C> <C>
<C> <C>
Net Asset Value, beginning of year $ 8.41 $ 8.55 $
7.98 $ 8.06 $ 8.00
- ---------------------------------------------------------------------------
- ----------
Income from investment operations:
Net investment income+++ 0.59 0.65
0.68 0.71 0.41
Net realized and unrealized gain/
(loss) on investments (0.51) (0.07)
0.64 0.07 0.05
- ---------------------------------------------------------------------------
- ----------
Total from investment operations 0.08 0.58
1.32 0.78 0.46
Less distributions:
Distributions from net investment
income (0.54) (0.58)
(0.68) (0.71) (0.40)
Distributions in excess of net
investment income (0.06) --
- -- -- --
Distributions from net realized
gains (0.10) (0.14)
- -- (0.06) --
Distributions from capital (0.03) --
(0.07) (0.09) --
- ---------------------------------------------------------------------------
- ----------
Total distributions (0.73) (0.72)
(0.75) (0.86) (0.40)
- ---------------------------------------------------------------------------
- ----------
Net Asset Value, end of year $ 7.76 $ 8.41 $
8.55 $ 7.98 $ 8.06
- ---------------------------------------------------------------------------
- ----------
Total return+ 0.66% 7.28%
17.12% 10.42% 6.00%
- ---------------------------------------------------------------------------
- ----------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in 000's) $2,468,922 $2,105,089
$1,464,744 $502,571 $179,496
Ratio of operating expenses to
average net assets 1.57%*** 1.59%
1.62% 1.63% 1.74%**
Ratio of net investment income to
average net assets 7.20% 7.77%
7.99% 9.21% 9.59%**
Portfolio turnover rate 93% 116%
125% 131% 56%
- ---------------------------------------------------------------------------
- ----------
<FN>
* The Fund commenced operations on December 28, 1989. Those shares in
existence
prior to November 6, 1992 were designated Class B shares.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment
adviser
was 1.59% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-
investment
adviser was $0.59 for the year ended July 31, 1994.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94++ 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 8.41 $ 8.24
- -------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.68 0.51
Net realized and unrealized gain/(loss) on
investments (0.54) 0.25
- -------------------------------------------------------------------------
Total from investment operations 0.14 0.76
Less distributions:
Distributions from net investment income (0.59) (0.47)
Distributions in excess of net investment
income (0.06) --
Distributions from net realized gains (0.10) (0.12)
Distributions from capital (0.04) --
- -------------------------------------------------------------------------
Total distributions (0.79) (0.59)
- -------------------------------------------------------------------------
Net Asset Value, end of period $ 7.76 $ 8.41
- -------------------------------------------------------------------------
Total return+ 1.43% 9.47%
- -------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $11,552 $11,803
Ratio of operating expenses to average net
assets 0.75%*** 0.80%**
Ratio of net investment income to average net
assets 8.02% 8.56%**
Portfolio turnover rate 93% 116%
- -------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares on November 6, 1992.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment
adviser
was 0.77% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period
indicated.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-
investment
adviser was $0.68 for the year ended July 31, 1994.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94++ 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 8.41 $ 8.36
- -----------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.55 0.22
Net realized and unrealized gain/(loss) on
investments (0.47) 0.06
- -----------------------------------------------------------------------
Total from investment operations 0.08 0.28
Less distributions:
Distributions from net investment income (0.54) (0.20)
Distributions in excess of net investment
income (0.06) --
Distributions from net realized gains (0.10) (0.03)
Distributions from capital (0.03) --
- -----------------------------------------------------------------------
Total distributions (0.73) (0.23)
- -----------------------------------------------------------------------
Net Asset Value, end of period $ 7.76 $ 8.41
- -----------------------------------------------------------------------
Total return+ 0.66% 3.41%
- -----------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $1,065 $ 11
Ratio of operating expenses to average net
assets 1.57%*** 1.50%**
Ratio of net investment income to average net
assets 7.20% 7.87%**
Portfolio turnover rate 93% 116%
- -----------------------------------------------------------------------
<FN>
* The Fund commenced selling Class D shares on March 19, 1993.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment
adviser
was 1.58% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period
indicated.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-
investment
adviser was $0.55 for the year ended July 31, 1994.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a
"Massachusetts business trust" under the laws of the Commonwealth of
Massachusetts on March 12, 1985. The Trust is registered with the
Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the
"1940 Act"), as an open-end management investment company. As of the date
of
this report, the Trust offered eight managed investment funds: Smith Barney
Shearson Premium Total Return Fund, Smith Barney Shearson Convertible Fund,
Smith Barney Shearson Global Bond Fund, Smith Barney Shearson High Income
Fund,
Smith Barney Shearson Tax-Exempt Income Fund, Smith Barney Shearson Money
Market
Fund, Smith Barney Shearson Diversified Strategic Income Fund (the "Fund")
and
Smith Barney Shearson Utilities Fund. As of November 6, 1992, the Fund
offered
three classes of shares: Class A shares, Class B shares and Class C shares.
As
of January 29, 1993, the Fund offered a fourth class of shares, Class D
shares,
to investors eligible to participate in the Smith Barney 401(k) Program.
Class A
shares are sold with a front-end sales charge. Class B shares may be
subject to
a contingent deferred sales charge ("CDSC"). Class B shares will convert
automatically to Class A shares eight years after the date of original
purchase.
Class C shares are offered exclusively to tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and certain unit
investment trusts sponsored by Smith Barney and its affilitates. Class C
and
Class D shares are offered without a front-end sales charge or a CDSC. Each
class of shares has identical rights and privileges except with respect to
the
effect of the respective sales charges, the distribution and/or service
fees
borne by each class, expenses allocable exclusively to each class, voting
rights
on matters affecting a single class, the exchange privilege of each class
and
the conversion feature of Class B shares. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Trust's
Board of Trustees. Portfolio securities that are traded primarily on a
domestic
or foreign exchange are valued at the last sale price on that
43
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exchange or, if there were no sales during the day, at the current quoted
bid
price. Over-the-counter securities listed or traded on certain foreign
exchanges
whose operations are similar to the United States over-the-counter market
are
valued on the basis of the bid price at the close of business on each day.
Portfolio securities that are traded primarily on foreign exchanges
generally
are valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time
a
value was so established is likely to have changed such value, then the
fair
value of those securities will be determined by consideration of other
factors
by or under the direction of the Board of Trustees or its delegates. Debt
securities are valued by The Boston Company Advisors, Inc. ("Boston
Advisors"),
after consultation with an independent pricing service (the "Pricing
Service")
approved by the Board of Trustees. When, in the judgment of the Pricing
Service,
quoted bid prices for investments are readily available and are
representative
of the bid side of the market, these investments are valued at the mean
between
the quoted bid prices and asked prices. Investments for which, in the
judgment
of the Pricing Service, there are no readily obtainable market quotations
are
carried at fair value as determined by the Pricing Service. Investments in
U.S.
government securities (other than short-term securities) are valued at the
average of the quoted bid and asked price in the over-the-counter market.
Other
securities including restricted securities and other assets are valued at
fair
value as determined in accordance with policies established in good faith
by the
Board of Trustees. Short-term investments that mature in 60 days or less
are
valued at amortized cost.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes
possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price
and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right
to use the collateral to offset losses incurred. There is potential loss to
the
Fund in the event that the Fund is delayed or prevented from
44
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exercising its rights to dispose of the collateral securities including the
risk
of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights. The Fund's investment
adviser,
administrator and/or sub-administrator, acting under the supervision of the
Board of Trustees, reviews the value of the collateral and the
creditworthiness
of those banks and dealers with which the Fund enters into repurchase
agreements
to evaluate potential risks.
FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities
are
translated into U.S. dollars at the exchange rates prevailing at the end of
the
period, and purchases and sales of investment securities, income and
expenses
are translated on the respective dates of such transactions. Unrealized
gains
and losses which result from changes in foreign currency exchange rates
have
been included in the unrealized appreciation/(depreciation) of currencies
and
net other assets. Net realized foreign currency gains and losses resulting
from
changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions,
foreign
currency transactions and the difference between the amounts of interest
and
dividends recorded on the books of a Fund and the amount actually received.
The
portion of foreign currency gains and losses related to fluctuation in the
exchange rates between the initial purchase trade date and subsequent sale
trade
date is included in realized gains and losses on investment securities
sold.
FORWARD FOREIGN EXCHANGE CONTRACTS: Forward foreign exchange contracts are
valued at the forward rate and are marked-to-market daily. The change in
market
value is recorded by the Fund as an unrealized gain or loss. When the
contract
is closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value
at the
time it was closed.
The use of forward foreign exchange contracts does not eliminate
fluctuations in
the underlying prices of the Fund's investment securities, but it does
establish
a rate of exchange that can be achieved in the future. Although forward
foreign
exchange contracts limit the risk of loss due to a decline in the value of
the
hedged currency, they also limit any potential gain that
45
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
might result should the value of the currency increase. In addition, the
Fund
could be exposed to risks if the counterparties to the contracts are unable
to
meet the terms of their contracts.
OPTION CONTRACTS: Upon the purchase of a put option or a call option by the
Fund, the premium paid is recorded as an investment, the value of which is
marked-to-market daily to reflect the current market value. When a
purchased
option expires, the Fund will realize a loss in the amount of the cost of
the
option. When the Fund enters into a closing sale transaction, the Fund will
realize a gain or loss depending on whether the sales proceeds from the
closing
sale transaction are greater or less than the cost of the option. When the
Fund
exercises a put option, it will realize a gain or loss from the sale of the
underlying security and the proceeds from such sale will be decreased by
the
premium originally paid. When the Fund exercises a call option, the cost of
the
security which the Fund purchases upon exercise will be increased by the
premium
originally paid.
When the Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which
is
marked-to-market daily to reflect the current market value of the written
option. When a written option expires, the Fund realizes a gain equal to
the
amount of the premium received. When the Fund enters into a closing
purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security,
and
the liability related to such option is eliminated. When a call option is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium
originally
received. When a put option is exercised, the amount of the premium
originally
received will reduce the cost of the security which the Fund purchased upon
exercise.
The risk associated with purchasing options is limited to the premium
originally
paid. The risk in writing a call option is the Fund may forego the
opportunity
of profit if the market price of the underlying security increases and the
option is exercised. The risk in writing a put option is that the Fund
46
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
may incur a loss if the market price of the underlying security decreases
and
the option is exercised. In addition, there is the risk the Fund may not be
able
to enter into a closing transaction because of an illiquid secondary
market.
PAY-IN-KIND BONDS: The Fund may invest in pay-in-kind ("PIK") bonds. PIK
bonds
pay interest through the issuance of additional bonds. PIK bonds are
recorded at
fair market value on the ex-dividend date. PIK bonds carry a risk in that,
unlike bonds which pay interest throughout the period to maturity, the Fund
will
realize no cash until the cash payment dates unless a portion of such
securities
is sold. If the issuer of a PIK bond defaults, the Fund may obtain no
return at
all on its investment.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
sold
are recorded on the identified cost basis. Dividend income and
distributions to
shareholders are recorded on the ex-dividend date. Interest income is
recorded
on the accrual basis. Pay-in-kind securities are recorded at fair market
value
on the date of payment. Investment income and realized and unrealized gains
and
losses are allocated based upon the relative net assets of each class of
shares.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level, are declared on each day
that
the Fund is open for business and are paid on the last day of the Smith
Barney
statement month. Distributions of any short-term and long-term capital
gains
earned will be paid annually after the close of the fiscal year in which
they
are earned. Additional distributions of net investment income and capital
gains
from the Fund may be made at the discretion of the Trust's Board of
Trustees in
order to avoid the application of a 4% nondeductible excise tax on certain
amounts of undistributed ordinary income and capital gains. Income
distributions
and capital gain distributions on a Fund level are determined in accordance
with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by the Fund, timing
differences and differing characterization of distributions made by the
Fund as
a whole.
47
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES: The Trust intends that the Fund qualify as a
regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue
Code of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, SUB-INVESTMENT ADVISORY
FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which is controlled by Smith Barney Holdings Inc. ("Holdings").
Holdings
is a wholly owned subsidiary of The Travelers Inc. Under the Advisory
Agreement,
the Fund pays a monthly fee at the annual rate of 0.35% of the value of its
average daily net assets.
Prior to March 21, 1994, the Fund had entered into a sub-investment
advisory
agreement (the "Sub-Advisory Agreement") with Lehman Brothers Global Asset
Management Limited ("Global Asset Management"), a wholly owned subsidiary
of
Lehman Brothers Holdings Inc. ("Lehman Holdings"), which at the time was a
wholly owned subsidiary of American Express Company ("American Express").
American Express owned 100% of Lehman Holdings' issued and outstanding
common
stock, which represented approximately 92% of the issued and outstanding
voting
stock. The remainder of Holdings' voting stock was owned by Nippon Life
Insurance Company. Under the Sub-Advisory Agreement, the Fund paid a fee
computed daily and paid monthly at the annual rate of 0.10% of the value of
its
average daily net assets.
As of the close of business on March 21, 1994, Smith Barney Global Capital
Management Inc. ("Global Capital Management"), which is a wholly owned
subsidiary of Holdings, succeeded Global Asset Management as the Fund's
sub-investment adviser. The new sub-investment advisory agreement contains
substantially the same terms and conditions, including the level of fees,
as the
predecessor agreement. Global Capital Management has agreed to waive 50% of
its
sub-investment advisory fee until such time as the Fund's Board
48
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of Trustees and Global Capital Management mutual agree otherwise. For the
year
ended July 31, 1994, Global Capital Management voluntarily agreed to waive
$470,248 in sub-investment advisory fees.
Prior to May 4, 1994, the Fund was party to an administration agreement
(the
"Administration Agreement') with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Administration
Agreement, the Fund paid a monthly fee at the annual rate of 0.20% of the
value
of its average daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains
substantially
the same terms and conditions, including the level of fees, as the
predecessor
agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston
Advisors. Under the Sub-Administration Agreement, SBA pays Boston Advisors
a
portion of its fee at a rate agreed upon from time to time between SBA and
Boston Advisors.
For the year ended July 31, 1994, the Fund incurred total brokerage
commissions
of $106,421, of which none was paid to Smith Barney.
For the year ended July 31, 1994, Smith Barney received $818,088 from
investors
representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption
of Class B shares within five years (eight years in the case of purchases
by
certain 401(k) plans) after the date of purchase. In circumstances in which
the
CDSC is imposed, the amount of the charge ranges between 4.5% and 1% of net
asset value depending on the number of years since the date of purchase
(except
in the case of purchases by certain 401(k) plans in which case a 3% CDSC is
imposed for the eight year period after
49
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the date of purchase). For the year ended July 31, 1994, Smith Barney
received
from shareholders $5,301,256 in CDSCs on the redemption of Class B shares.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as a Trustee or
officer of
the Trust. The Trust pays each Trustee who is not an officer, director or
employee of Smith Barney or any of its affiliates $10,000 per annum plus
$1,500
per meeting attended and reimburses each such Trustee for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of
Mellon, serves as the Trust's custodian. The Shareholder Services Group,
Inc., a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Trust's shares pursuant to a
distribution agreement with the Trust and sells shares of the Fund through
Smith
Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund adopted a services and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class D
shareholders, and covers expenses incurred in distributing Class B and
Class D
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the annual rate of 0.25% of the
value
of the average daily net assets of each respective class of shares. Smith
Barney
is also paid an annual distribution fee with respect to Class B and Class D
shares at the annual rate of 0.50% of the value of the average daily net
assets
of each respective class of shares. For the year ended July 31, 1994, the
service fee for Class A, Class B and Class D shares was $169,673,
$6,054,604 and
$980, respectively. For the year ended July 31, 1994, the distribution fee
for
Class B and Class D shares was $12,109,208 and $1,960, respectively.
50
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of
shares are prorated among the classes based upon the relative net assets of
each
class. Operating expenses directly attributable to a class of shares are
charged
to that class' operations. In addition to the above service and
distribution
fees, class specific operating expenses include transfer agent fees. For
the
year ended July 31, 1994, transfer agent fees for Class A, Class B, Class C
and
Class D shares were $67,964, $1,779,534, $452 and $267, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term
investments and U.S. government securities, aggregated, $1,829,444,965 and
$1,812,859,099, respectively, for the year ended July 31, 1994. Costs of
purchases and proceeds from sales of long-term U.S. government securities
aggregated $775,340,882 and $388,559,247, respectively, for the year ended
July
31, 1994.
At July 31, 1994, aggregate gross unrealized appreciation for all
securities in
which there was an excess of value over tax cost was $14,376,186 and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of
tax cost over value was $127,893,097.
Option activity for the year ended July 31, 1994 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts
Premiums
<S> <C> <C>
- ---------------------------------------------------------------------------
- ------
Options outstanding at July 31, 1993 18 $
50,948
Options expired (18)
(50,948)
- ---------------------------------------------------------------------------
- ------
Options outstanding at July 31, 1994 0 $
0
- ---------------------------------------------------------------------------
- ------
</TABLE>
51
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
each
class in each separate series with a $.001 par value. Changes in shares of
beneficial interest of the Fund, which are divided into four classes (Class
A,
Class B, Class C and Class D), were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
07/31/94
07/31/93*
CLASS A SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 5,922,523 $ 49,276,958
5,992,384 $ 49,938,079
Issued as reinvestment of dividends 527,613 4,331,434
102,084 853,625
Redeemed (2,408,094) (19,748,584)
(344,596) (2,881,232)
- ---------------------------------------------------------------------------
- ----------
Net increase 4,042,042 $ 33,859,808
5,749,872 $ 47,910,472
- ---------------------------------------------------------------------------
- ----------
<CAPTION>
YEAR ENDED
YEAR ENDED
07/31/94
07/31/93
CLASS B SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 98,298,288 $ 819,073,265
101,351,160 $ 848,750,560
Issued as reinvestment of dividends 15,557,855 128,023,970
10,454,096 86,939,886
Redeemed (46,268,945) (378,897,723)
(32,720,132) (272,851,798)
- ---------------------------------------------------------------------------
- ----------
Net increase 67,587,198 $ 568,199,512
79,085,124 $ 662,838,648
- ---------------------------------------------------------------------------
- ----------
<CAPTION>
YEAR ENDED
PERIOD ENDED
07/31/94
07/31/93*
CLASS C SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 958,456 $ 7,950,340
1,412,944 $ 11,675,446
Issued as reinvestment of dividends 154,190 1,271,890
74,661 619,916
Redeemed (1,028,793) (8,348,476)
(83,458) (693,427)
- ---------------------------------------------------------------------------
- ----------
Net increase 83,853 $ 873,754
1,404,147 $ 11,601,935
- ---------------------------------------------------------------------------
- ----------
<FN>
* The Fund commenced selling Class A and Class C shares on November 6,
1992.
Any shares outstanding prior to November 6, 1992 were designated Class
B
shares.
</TABLE>
52
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
07/31/94
07/31/93**
CLASS D SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- ----------
Sold 141,778 $1,148,159 1,349
$11,354
Issued as reinvestment of dividends 3,978 31,889 15
114
Redeemed (9,930) (79,791) (17)
(140)
- ---------------------------------------------------------------------------
- ----------
Net increase 135,826 $1,100,257 1,347
$11,328
- ---------------------------------------------------------------------------
- ----------
<FN>
** The Fund commenced selling Class D shares to the public on March 19,
1993.
</TABLE>
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees
and expenses of registering and qualifying its shares for distribution
under
Federal and state securities regulations. All such costs are being
amortized on
the straight-line method over a period of five years from December 28, 1989
(commencement of operations). In the event the initial shares of the Fund
are
redeemed during such amortization period, the Fund will be reimbursed for
any
unamortized organization costs in the same proportion as the number of
shares
redeemed bears to the number of initial shares held at the time of
redemption.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves
special risks and considerations not typically associated with investing in
securities of U.S. companies and the United States government. These risks
include re-evaluation of currencies and future adverse political and
economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more
volatile
than securities of comparable U.S companies and the United States
government.
9. CONCENTRATION OF CREDIT
The Fund invests in securities offering high current income which generally
will
be in the lower rating categories of recognized rating agencies. These
53
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities generally involve more credit risk than securities in higher
rating
categories. In addition the trading market for high yield securities may be
relatively less liquid than the market for higher-rated securities.
10. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of
credit provided by Continental Bank N.A. under an Amended and Restated Line
of
Credit Agreement (the "Agreement") dated April 30, 1992, and renewed
effective
May 31, 1994, primarily for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Fund may borrow up to the lesser of $25
million
or 10% of its net assets. Interest is payable either at the bank's Money
Market
Rate or the London Interbank Offered Rate (LIBOR) plus .375% on an
annualized
basis. Under the terms of the Agreement, the Fund and the other affiliated
entities are charged an aggregate commitment fee of $100,000 which is
allocated
equally among each of the participants. The Agreement requires, among other
provisions, each participating fund to maintain a ratio of net assets (not
including funds borrowed pursuant to the Agreement) to aggregate amount of
indebtedness pursuant to the Agreement of no less than 5 to 1. During the
year
ended July 31, 1994, the Fund had an average outstanding balance of $4,384
with
an interest rate of 3.375%. Interest expense totalled $150 for the year
ended
July 31, 1994. At July 31, 1994, the Fund had no outstanding borrowings
under
the Agreement.
54
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF SMITH BARNEY SHEARSON
DIVERSIFIED
STRATEGIC INCOME FUND OF SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
Smith
Barney Shearson Diversified Strategic Income Fund of Smith Barney Shearson
Income Funds including the schedule of portfolio investments, as of July
31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then
ended, and the financial highlights for each of the four years in the
period
then ended and for the period December 28, 1989 (commencement of
operations) to
July 31, 1990. 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.
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
text basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities owned as of
July
31, 1994 by correspondence with the custodian and brokers. 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 Shearson Diversified Strategic Income Fund of Smith Barney
Shearson
Income Funds as of July 31, 1994, the results of its operations for the
year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the four years
in
the period then ended and for the period from December 28, 1989
(commencement of
operations) to July 31, 1990, in conformity with generally accepted
accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
September 30, 1994
55
<PAGE>
Smith Barney Shearson
Diversified Strategic Income Fund
- ---------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
YEAR ENDED JULY 31, 1994
The capital gains dividend distribution paid to shareholders for fiscal
1994,
whether taken in additional shares or in cash, is as follows:
Long-term capital
gains......................................$19,290,789
56
<PAGE>
DIVERSIFIED
STRATEGIC
INCOME FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
AND INVESTMENT OFFICER
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
John C. Bianchi
VICE PRESIDENT AND
INVESTMENT OFFICER
James E. Conroy
VICE PRESIDENT AND
INVESTMENT OFFICER
Victor S. Filatov
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON DIVERSIFIED STRATEGIC INCOME FUND. IT IS NOT
AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY
AN
EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING
THE
FUND'S INVESTMENT POLICIES, FEES AND EXPENSES AS WELL AS OTHER PERTINENT
INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
[LOGO]
Fund 128, 175, 176, 211
FD0149 I4
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
A BLACK AND WHITE PICTURE OF
SUNDIAL CLOCK WITH A SKY SHOT
OF EARTH IN THE BACKGROUND.
1994 Smith Barney Shearson
ANNUAL PREMIUM
REPORT TOTAL
RETURN
FUND
.......................................
JULY 31, 1994
[LOGO]
<PAGE>
Premium Total Return Fund
DEAR SHAREHOLDER:
Smith Barney Shearson Premium Total Return Fund performed
well
during its fiscal year ended July 31, 1994. The Fund's Class
A
shares returned 8.65% while the Class B and D shares both
returned 8.12%. These figures compare favorably to the 5.15%
total
return produced by Standard & Poor's 500 Stock Index (S&P 500),
an
unmanaged index constructed to represent the overall stock
market.
Class A shares started the year with a net asset value of $15.65,
paid
$1.28 in distributions and closed at $15.69. Both Class B and D
shares
started the year with a net asset value of $15.65, paid $1.20 in
distributions and closed at $15.69.
The majority of the Fund's return was generated during the latter
half
of calendar 1993. The new year, 1994, has ushered in a much more
difficult climate for financial assets world-
wide; relatively high equity valuations combined with rising
interest rates. We continue to be defensively positioned -- holding over
10% of
assets in cash equivalents in addition to employing S&P 500 index call
options.
During the past year, the Fund's solid performance was driven primarily by
good
stock selection. Large positions in consumer durables (e.g., Ford Motor
Company
and Volvo Aktie Bolget -- on average up 24%), as well as other economically
sensitive stocks (e.g., Philips N.V. -- +85%) and a timely reinvestment in
Philip Morris Companies Inc. (+12%) were all important contributors to
performance. Retarding returns were a large position in financial stocks,
up
less than 1%, and a small, but nevertheless detrimental utility position (-
13%).
Going forward, stock selection will continue to be our primary focus. Our
approach has been and will continue to be bottom-up analysis geared toward
identifying stocks with low valuations, good business fundamentals and
favorable
business momentum.
1
<PAGE>
- --------------------------------------------------------------------
D I V I D E N D P O L I C Y
ALTHOUGH NOT EXPLICITLY STATED IN THE PROSPECTUS, THE FUND'S POLICY IS TO
PAY A LEVEL MONTHLY DIVIDEND BASED ON OUR PROJECTIONS FOR THE EQUITY
MARKET
AND THE GENERAL DIRECTION OF INTEREST RATES. THIS POLICY HAS NO
APPRECIABLE
AFFECT ON THE FUND'S INVESTMENT STRATEGIES OR NET ASSET VALUE PER SHARE
SINCE IT IS GUIDED BY MARKET CONDITIONS. WE CONTINUALLY MONITOR BOTH THE
MARKET AND THE FUND'S INCOME STREAM TO SEE THAT OUR DIVIDEND PROJECTIONS
ARE
ON TARGET. THIS MEANS THAT WE DO NOT SACRIFICE THE QUALITY OF THE
PORTFOLIO
BY INVESTING IN LOWER QUALITY SECURITIES THAT MAY UNDERMINE THE FUND'S
NET
ASSET VALUE PER SHARE IN ORDER TO MAINTAIN AN UNREALISTICALLY HIGH
DIVIDEND
POLICY.
We thank you for your continued confidence and encourage you to contact us
or
your Financial Consultant if you have any questions about your investment.
Sincerely,
Heath B. McLendon John Fullerton Harry Rosenbluth
CHAIRMAN OF THE BOARD INVESTMENT INVESTMENT
AND INVESTMENT ADMINISTRATOR ADMINISTRATOR
OFFICER
SEPTEMBER 19, 1994
2
<PAGE>
- --------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JULY 31,
1994
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds -- Premium Total
Return
Fund's investment securities held at July 31, 1994 by industry
classification.
The pie is broken in pieces representing industries in the following
percentages:
<TABLE>
<S> <C>
Corporate Bonds 3.6%
Preferred Stocks 7.1%
Technology 3.0%
Consumer Durables 5.1%
Energy 6.4%
Insurance 9.1%
Other Common Stocks 14.8%
Commercial Paper, Repurchase
Agreements, Call Options
Written and Net Other Assets
and Liabilities 15.7%
Consumer Services 16.8%
Banking & Financial Services 18.4%
</TABLE>
TOP TEN EQUITY HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net
Assets
<S> <C>
------------------------------------------------------------------
PHILIPS NV
2.7%
FORD MOTOR COMPANY
2.3
PHILIP MORRIS COMPANIES INC.
2.3
MORGAN (J.P.) & COMPANY INC.
2.2
LOEWS CORPORATION
2.2
FEDERAL NATIONAL MORTGAGE ASSOCIATION
2.2
REPUBLIC OF NEW YORK CORPORATION
2.2
AETNA LIFE & CASUALTY COMPANY
1.8
GENERAL MOTORS CORPORATION
1.7
AMERICAN EXPRESS COMPANY
1.5
</TABLE>
3
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
11/6/92-
7/31/93 $15.15 $15.65 $0.33 $0.49 $0.20
10.31%
- ---------------------------------------------------------------------------
1994 15.65 15.69 0.21 0.52 0.55
8.65
- ---------------------------------------------------------------------------
Total $0.54 $1.01 $0.75
- ---------------------------------------------------------------------------
Cumulative Total Return - (11/6/92 through 7/31/94)
19.85%
- ---------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value and do not assume deduction of the front-end sales charge
(maximum 5.0%).
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without Sales Charge With Sales
Charge***
<S> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 7/31/94 8.65%
3.22%
- ---------------------------------------------------------------------------
Inception 11/6/92 through 7/31/94 11.01 7.78
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures assume the deduction of the maximum
5.0%
sales charge.
NOTE: On November 6, 1992, the Fund began offering Class A shares. Class A
shares are subject to a maximum 5.0% front-end sales charge and a service
fee of
0.25% of the value of the average daily net assets attributable to that
class.
</TABLE>
4
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Premium
Total Return Fund Class A shares on November 6, 1992 through July 31, 1994
as
compared with the growth of a $10,000 investment in Standard & Poor's 500
Index.
The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 INVESTMENT IN THE
MONTH INVESTED IN CLASS A STANDARD & POOR'S
ENDED SHARES OF THE PORTFOLIO 500 INDEX
<S> <C> <C>
10/30/92 -- $10,000
11/6/92 $ 9,500 --
11/92 $ 9,680 $10,340
12/92 $ 9,834 $10,467
3/93 $10,169 $10,924
6/93 $10,316 $10,976
9/93 $10,810 $11,259
12/93 $10,988 $11,521
3/94 $10,918 $11,085
6/94 $11,129 $11,131
7/94 $11,386 $11,496
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 5.0% sales charge at the time of
investment
and reinvestment of dividends and capital gains at net asset value
through
July 31, 1994.
STANDARD & POOR'S 500 INDEX - The Standard & Poor's 500 Index of 500
Common
Stocks ("S&P 500") is composed of 500 widely held common stocks listed on
the
New York Stock Exchange, American Stock Exchange and over-the-counter
market.
It is useful in depicting the general movement of the stock market, but
because it is unmanaged the S&P 500 is not subject to the same management
and
trading expenses of a mutual fund.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results of Class A shares.
5
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
- -
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
- -
9/16/85-
7/31/86 $13.00 $14.52 -- $0.76 $0.42
21.28%
- ---------------------------------------------------------------------------
- -
1987 14.52 14.47 -- 1.42 0.28
12.07
- ---------------------------------------------------------------------------
- -
1988 14.47 12.90 -- 1.28 0.18
0.21
- ---------------------------------------------------------------------------
- -
1989 12.90 13.98 $0.33 0.26 0.89
21.49
- ---------------------------------------------------------------------------
- -
1990 13.98 13.30 1.06 -- 0.22
4.62
- ---------------------------------------------------------------------------
- -
1991 13.30 14.26 0.96 -- 0.24
17.53
- ---------------------------------------------------------------------------
- -
1992 14.26 15.21 0.98 -- 0.22
15.68
- ---------------------------------------------------------------------------
- -
1993 15.21 15.65 0.44 0.63 0.19
11.68
- ---------------------------------------------------------------------------
- -
1994 15.65 15.69 0.20 0.52 0.49
8.12
- ---------------------------------------------------------------------------
- -
Total $3.97 $4.87 $3.13
- ---------------------------------------------------------------------------
- -
Cumulative Total Return - (9/16/85 through 7/31/94)
184.18%
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value and do not assume deduction of the contingent deferred
sales
charge ("CDSC").
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without CDSC With
CDSC***
<S> <C> <C>
- ---------------------------------------------------------------------------
- -
Year Ended 7/31/94 8.12%
3.12%
- ---------------------------------------------------------------------------
- -
Five Years Ended 7/31/94 11.42
11.29
- ---------------------------------------------------------------------------
- -
Inception 9/16/85 through 7/31/94 12.49
12.49
- ---------------------------------------------------------------------------
- -
<FN>
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
NOTE: The Fund commenced operations on September 16, 1985 and on November
6,
1992 existing shares were designated as Class B shares. Class B shares are
subject to a maximum 5.0% CDSC and service and distribution fees of 0.25%
and
0.50%, respectively, of the value of the average daily net assets
attributable
to that class.
</TABLE>
6
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Premium
Total Return Fund Class B shares on September 16, 1992 through July 31,
1994 as
compared with the growth of a $10,000 investment in Standard & Poor's 500
Index.
The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 INVESTMENT IN THE
MONTH INVESTED IN CLASS B STANDARD & POOR'S
ENDED SHARES OF THE PORTFOLIO 500 INDEX
<S> <C> <C>
9/16/85 $10,000 --
9/85 $10,023 $10,462
12/85 $10,808 $11,720
3/86 $11,683 $13,373
6/86 $12,261 $14,162
9/86 $11,979 $13,174
12/86 $12,466 $13,908
3/87 $13,055 $16,880
6/87 $13,320 $17,725
9/87 $13,830 $18,896
12/87 $11,318 $14,641
3/88 $12,735 $15,472
6/88 $13,557 $16,501
9/88 $14,006 $16,557
12/88 $14,232 $17,066
3/89 $15,230 $18,276
6/89 $15,864 $19,887
9/89 $16,831 $22,013
12/89 $16,703 $22,465
3/90 $16,725 $21,791
6/90 $17,492 $23,159
9/90 $15,248 $19,980
12/90 $17,046 $21,768
3/91 $19,587 $24,924
6/91 $19,650 $24,864
9/91 $20,545 $26,192
12/91 $21,969 $28,386
3/92 $22,786 $27,670
6/92 $23,043 $28,193
9/92 $23,602 $29,084
12/92 $24,737 $30,547
3/93 $25,548 $31,881
6/93 $25,883 $32,033
9/93 $27,091 $32,859
12/93 $27,504 $33,622
3/94 $27,296 $32,352
6/94 $27,789 $32,484
7/94 $28,418 $33,550
</TABLE>
+ Illustration of $10,000 invested in Class B shares on September 16, 1985
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
STANDARD & POOR'S 500 INDEX - The Standard & Poor's 500 Index of 500
Common
Stocks ("S&P 500") is composed of 500 widely held common stocks listed on
the
New York Stock Exchange, American Stock Exchange and over-the-counter
market.
It is useful in depicting the general movement of the stock market, but
because it is unmanaged the S&P 500 is not subject to the same management
and
trading expenses of a mutual fund.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results of Class B shares.
7
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
- -
HISTORICAL PERFORMANCE -- CLASS D SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Return of Capital Gains
Dividends Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
6/1/93-
7/31/93 $15.45 $15.65 $0.07 $0.09 $0.04
2.60%
- ---------------------------------------------------------------------------
- -
1994 15.65 15.69 0.20 0.52 0.49
8.12
- ---------------------------------------------------------------------------
- -
Total $0.27 $0.61 $0.53
- ---------------------------------------------------------------------------
- -
Cumulative Total Return - (6/1/93 through 7/31/94)
10.94%
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value.
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS D SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended 7/31/94
8.12%
<S> <C> <C>
- ---------------------------------------------------------------------------
- -
Inception 6/1/93 through 7/31/94
9.33
- ---------------------------------------------------------------------------
- -
<FN>
**All cumulative total return figures shown reflect reinvestment of
dividends
and capital gains at net asset value.
NOTE: The Fund began offering Class D shares on June 1, 1993 for purchase
by
participants in the Smith Barney 401(k) program.
</TABLE>
8
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Series Fund --
Premium
Total Return Fund Class D shares on June 1, 1993 through July 31, 1994 as
compared with the growth of a $10,000 investment in the Standard & Poor's
500
Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 INVESTMENT IN THE
MONTH INVESTED IN CLASS D STANDARD & POOR'S
ENDED SHARES OF THE PORTFOLIO 500 INDEX
<S> <C> <C>
5/30/93 -- $10,000
6/1/93 $10,000 --
6/93 $10,104 $10,029
9/93 $10,576 $10,287
12/93 $10,737 $10,526
3/94 $10,656 $10,128
6/94 $10,848 $10,170
7/94 $11,094 $10,503
</TABLE>
+ Illustration of $10,000 invested in Class D shares on June 1, 1993
assuming
reinvestment of dividends and capital gains at net asset value through
July
31, 1994.
STANDARD & POOR'S 500 INDEX - The Standard & Poor's 500 Index of 500
Common
Stocks ("S&P 500") is composed of 500 widely held common stocks listed on
the
New York Stock Exchange, American Stock Exchange and over-the-counter
market.
It is useful in depicting the general movement of the stock market, but
because it is unmanaged the S&P 500 is not subject to the same management
and
trading expenses of a mutual fund.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results of Class D shares.
9
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
<C> <S> <C>
--------------------------------------------------------------------------
- ----
COMMON STOCKS -- 73.6%
BANKING & FINANCIAL SERVICES -- 18.4%
979,100 American Express Company $
25,946,150
561,800 American General Corporation
16,081,525
109,312 Bank of Boston Corporation
2,883,104
355,005 Bear Stearns Companies, Inc.
5,724,456
169,800 Chase Manhattan Corporation
6,261,375
583,800 Continental Bank Corporation
22,038,450
16,600 Continental Corporation
257,300
142,900 Federal Home Loan Mortgage Corporation
8,502,550
448,900 Federal National Mortgage Association
38,942,075
373,000 First Chicago Corporation
18,743,250
70,200 Fleet Financial Group, Inc.
2,535,975
113,100 Golden West Financial Corporation
4,509,863
323,800 Great Western Financial Corporation
6,395,050
143,700 JSB Financial, Inc.
3,718,238
630,700 Morgan (J.P.) & Company, Inc.
39,734,100
90,900 Morgan Stanley Group, Inc.
5,510,813
70,200 PHH Corporation
2,623,725
632,000 Pinnacle West Capital Corporation
11,139,000
631,000 PNC Bank Corporation
18,141,250
843,800 Republic of New York Corporation
38,814,800
227,900 SAFECO Corporation
12,619,963
117,700 Salomon Inc.
5,075,813
102,200 Security-Conn Corporation
2,235,625
634,300 Student Loan Marketing Association
22,121,213
109,550 Torchmark Corporation
4,258,756
--------------------------------------------------------------------------
- ----
324,814,419
--------------------------------------------------------------------------
- ----
CONSUMER SERVICES -- 16.8%
210,000 Alberto Culver Company, Class A
4,252,500
202,300 Bob Evans Farm Inc.
4,324,163
87,900 Brown Forman, Class B
2,439,225
111,300 Dean Foods Company
3,325,088
109,100 Deluxe Corporation
2,836,600
243,500 Dillard Department Stores Inc., Class A
8,157,250
200,000 Emerson Electric Company
12,150,000
333,700 Family Dollar Stores Inc.
4,212,963
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ----
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
CONSUMER SERVICES -- (CONTINUED)
138,800 General Electric Company $
6,992,050
356,500 Hormel (Geo A) & Company
7,976,688
315,700 King World Productions Inc.+
11,996,600
74,600 Knight Ridder Inc.
4,028,400
395,900 Limited Inc.
7,819,025
448,200 Loews Corporation
39,553,650
268,312 Luby's Cafeterias Inc.
6,137,637
486,400 May Department Stores Company
19,273,600
100,000 Melville Corporation
3,712,500
202,700 Mercantile Stores Inc.
6,613,088
456,800 Nestle, S.A., Sponsored ADR
19,870,800
18,260 Nestle, S.A., Sponsored ADR, Represents
One Regular Share, 144A**
794,310
88,500 Nike Inc., Class B
5,442,750
150,000 Penney (J.C.) Company, Inc.
7,425,000
1,561,900 Philips NV
48,223,663
169,200 Pitney Bowes Inc.
5,964,300
1,098,500 Rite Aid Corporation
22,244,625
396,100 Sears, Roebuck & Company
18,715,725
230,800 United States Shoe Corporation
4,442,900
26,000 Venture Stores Inc.
481,000
105,200 V.F. Corporation
5,391,500
--------------------------------------------------------------------------
- ----
294,797,600
--------------------------------------------------------------------------
- ----
INSURANCE -- 9.1%
300,900 ACE Ltd.
7,033,538
634,700 Aetna Life & Casualty Company
32,687,050
97,700 Ahmanson (H F) & Company
1,941,788
182,100 Allmerica Property & Casualty Companies
Inc.
2,913,600
108,600 Allstate Corporation
2,715,000
273,200 American International Group Inc.
25,749,100
350,450 Aon Corporation
11,652,463
237,400 CIGNA Corporation
16,261,900
200 Enhance Financial Services Group Inc.
3,875
74,000 Merchants Group Inc.
1,202,500
272,700 Mercury General Corporation
7,908,300
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ----
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
INSURANCE -- (CONTINUED)
117,000 Mid Ocean Ltd.+ $
3,012,750
83,300 MMI Companies Inc.
1,114,138
108,100 Paul Revere Corporation
2,094,438
350,600 Providian Corporation
10,824,775
522,500 St. Paul Companies Inc.
22,336,875
122,600 Transatlantic Holdings, Inc.
6,850,275
85,200 Trenwik Group Inc.
3,333,450
63,200 Western National Corporation
971,700
--------------------------------------------------------------------------
- ----
160,607,515
--------------------------------------------------------------------------
- ----
ENERGY -- 6.4%
117,700 Amoco Corporation
7,047,288
140,500 British Petroleum PLC, ADR
10,678,000
158,200 Chevron Corporation
7,020,125
745,800 CMS Energy Corporation
16,873,725
125,500 Exxon Corporation
7,467,250
213,500 Mobil Corporation
17,907,312
467,800 Pacific Enterprises
9,589,900
531,000 Repsol S.A., Sponsored ADR
16,859,250
137,300 Royal Dutch Petroleum Company of New York
15,514,900
74,900 Tenneco Inc.
3,595,200
--------------------------------------------------------------------------
- ----
112,552,950
--------------------------------------------------------------------------
- ----
CONSUMER DURABLES -- 5.1%
262,800 Clark Automotive Products Corporation+
2,825,100
18,100 Deere & Company
1,269,263
18,500 First Brands Corporation
635,938
594,600 General Motors Corporation
30,547,575
385,000 Genuine Parts Company
13,619,375
44,250 Rayonier Inc.
1,366,218
286,900 Volkswagen AG, Sponsored ADR
18,074,700
218,800 Volvo Aktie Bolget
21,524,450
--------------------------------------------------------------------------
- ----
89,862,619
--------------------------------------------------------------------------
- ----
TECHNOLOGY -- 3.0%
87,100 Honeywell, Inc.
2,743,650
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ----
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
TECHNOLOGY -- (CONTINUED)
324,000 IBM Corporation $
20,007,000
196,800 Martin Marietta Corporation
8,929,800
230,800 National Service Industries Inc.
6,318,150
295,800 Tandy Corporation
11,055,525
50,900 Xerox Corporation
5,204,525
--------------------------------------------------------------------------
- ----
54,258,650
--------------------------------------------------------------------------
- ----
HEALTH CARE -- 2.8%
253,700 Abbott Labs
7,135,312
170,100 Bristol-Myers Squibb Company
8,951,512
483,700 Healthtrust--The Hospital Company+
13,483,138
263,200 SmithKline Beecham PLC, ADR
7,435,400
199,800 Warner-Lambert Company
12,987,000
--------------------------------------------------------------------------
- ----
49,992,362
--------------------------------------------------------------------------
- ----
BASIC INDUSTRIES -- 2.7%
376,000 British Steel PLC, ADR
9,071,000
300,000 Duke Power Company
11,475,000
300,000 Hanson PLC, ADR
5,962,500
618,400 Illinova Corporation
12,909,100
77,400 McGraw-Hill Inc.
5,379,300
35,400 NCH Corporation
2,154,975
39,400 Temple-Inland Inc.
2,014,325
--------------------------------------------------------------------------
- ----
48,966,200
--------------------------------------------------------------------------
- ----
TOBACCO -- 2.4%
722,900 Philip Morris Companies Inc.
39,759,500
522,700 RJR Nabisco Holdings Corporation+
3,201,537
--------------------------------------------------------------------------
- ----
42,961,037
--------------------------------------------------------------------------
- ----
REAL ESTATE -- 1.8%
87,900 Associated Estates Realty Corporation
1,889,850
120,700 Avalon Properties Inc.
2,549,788
141,333 Camden Properties Trust
3,250,666
50,000 Carr Realty Corporation
1,025,000
60,000 Chateau Properties Inc.
1,342,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ----
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
REAL ESTATE -- (CONTINUED)
335,000 Crown American Realty Trust $
4,773,750
175,900 Equity Inns Inc.
2,176,762
242,200 General Growth Properties Inc.
5,449,500
149,600 Liberty Property Trust+
2,935,900
154,800 Smith, Charles E., Residential Realty,
Inc.+
3,889,350
160,000 Summit Properties Inc.
3,120,000
--------------------------------------------------------------------------
- ----
32,403,066
--------------------------------------------------------------------------
- ----
CAPITAL GOODS -- 1.7%
177,000 ITT Corporation
15,177,750
200,000 Raytheon Company
13,125,000
--------------------------------------------------------------------------
- ----
28,302,750
--------------------------------------------------------------------------
- ----
UTILITIES -- 1.3%
535,470 Entergy Corporation
13,654,485
234,800 U.S. West, Inc.
9,450,700
--------------------------------------------------------------------------
- ----
23,105,185
--------------------------------------------------------------------------
- ----
CONSUMER NON-DURABLES -- 1.0%
200,000 American Brands, Inc.
6,825,000
99,084 Avon Products, Inc.
5,610,631
107,900 Gerber Products Company
5,624,287
--------------------------------------------------------------------------
- ----
18,059,918
--------------------------------------------------------------------------
- ----
TRANSPORTATION -- 0.9%
379,700 KLM Royal Dutch Airlines+
11,770,700
356,000 Motor Coach Industries International Inc.
4,450,000
--------------------------------------------------------------------------
- ----
16,220,700
--------------------------------------------------------------------------
- ----
SHIPPING -- 0.2%
170,000 Alexander & Baldwin Inc.
4,335,000
--------------------------------------------------------------------------
- ----
TOTAL COMMON STOCKS
(Cost $1,166,024,440)
1,301,239,971
--------------------------------------------------------------------------
- ----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ----
<C> <S> <C>
PREFERRED STOCKS -- 7.1%
40,000 Bowater Inc., Depositary Shares, Pfd.
Conv., Series B Exch. 7.000% $
1,000,000
400,000 Citicorp, Depositary Shares, Represents
1/12 Share Pfd. Exch. 15.000%
7,850,000
5,500 Dime Savings Bank NY, Pfd., Exch. 10.50%
5,527,500
200,000 First Washington Realty Inc., Conv. Pfd.,
Series A, 144A**
5,000,000
390,400 Ford Motor Company, Depositary Shares,
Represents 1/1000 Share Pfd., Series A,
Exch. $54.20
40,601,600
760,000 Glendale Federal Bank, Federal Savings
Bank of California, Conv. Pfd., Series
E
24,890,000
87,500 Kaiser Aluminum Corporation, Conv. Pfd.,
Exch. 8.255%
962,500
200,000 Prime Retail Inc., Series A, Exch.
10.500%
4,750,000
76,700 Property Trust American, Pfd., Series A
1,907,912
71,800 Reynolds Metals Company, Pfd., Increased
Dividend Equity Securities, Conv. Pfd.,
Exch. 7.00%
3,697,700
304,767 Riggs National Corporation, Washington
DC, Pfd., Series B, Exch. 10.75%
7,466,791
984,600 RJR Nabisco Holdings Corporation,
Depositary Shares, Represents 1/4 Share
Pfd., Exch. $0.835
6,153,750
900,000 RJR Nabisco Holdings Corporation,
Depositary Shares, Represents 1/10
Share Pfd., Exch. 9.250%
6,075,000
66,500 Sears Roebuck & Company, Depositary
Shares, Represents 1/4 Share Pfd.,
Series A
3,682,437
196,400 Tandy Corporation, Depositary Shares,
Represents 1/100 Share Pfd., Series C,
Exch. $30.87
6,775,800
--------------------------------------------------------------------------
- ----
TOTAL PREFERRED STOCKS
(Cost $111,858,325)
126,340,990
--------------------------------------------------------------------------
- ----
FACE
VALUE
--------------------------------------------------------------------------
- ----
CORPORATE BONDS -- 3.6%
$ 7,000,000 Chevy Chase Savings Bank, Sub. Cap. Note,
9.250% due 12/1/05
6,518,750
Columbia Gas Systems Inc., Deb.:
3,750,000 9.000% due 8/1/93 (in bankruptcy)
4,425,000
2,039,000 10.150% due 11/1/13 (in bankruptcy)
2,403,471
7,000,000 Crossland Federal Savings Bank, Sub.
Deb.,
9.000% due 9/1/03
6,790,000
Gentra Inc., Sub. Deb.:
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE MARKET
VALUE
VALUE (NOTE
1)
--------------------------------------------------------------------------
- ----
<C> <S> <C>
CORPORATE BONDS -- (CONTINUED)
$10,500,000 11.300% due 5/29/98 $
6,945,598
8,500,000 11.800% due 5/29/98
5,684,075
13,225,000 MDC Holdings Insurance, Sr. Note, 11.125%
due 12/15/03
12,563,750
6,000,000 Pacific Concord Financial, Conv.,
4.750% due 12/10/98 144A**
4,995,000
7,500,000 Saul, B.F. Real Estate Investment Trust,
11.625% due 4/1/02
7,125,000
6,000,000 WSFS Financial Corporation Inc., Sr.
Note, Series B,
11.000% due 12/31/05
5,730,000
--------------------------------------------------------------------------
- ----
TOTAL CORPORATE BONDS
(Cost $66,338,602)
63,180,644
--------------------------------------------------------------------------
- ----
COMMERCIAL PAPER -- 6.7%
89,096,000 Ford Motor Credit, 4.200% due 8/1/94
89,096,000
29,096,000 General Electric Capital Corporation,
4.200% due 8/1/94
29,096,000
--------------------------------------------------------------------------
- ----
TOTAL COMMERCIAL PAPER
(Cost $118,192,000)
118,192,000
--------------------------------------------------------------------------
- ----
REPURCHASE AGREEMENTS -- 8.3%
13,991,000 Agreement with Morgan Stanley & Company,
4.100% dated 7/29/94, to be repurchased
at $13,995,780 on 8/1/94,
collateralized by: $13,340,000 U.S.
Treasury Note, 7.750% due 2/15/01
13,991,000
66,091,000 Agreement with Salomon Brothers Inc.,
4.100% dated 7/29/94, to be repurchased
at $66,113,581 on 8/1/94,
collateralized by: $50,000,000 U.S.
Treasury Note, 8.125% due 8/15/19,
$9,208,000 U.S. Treasury Note, 10.750%
due 8/15/05
66,091,000
66,091,000 Agreement with Union Bank of Switzerland,
4.100% dated 7/29/94, to be repurchased
at $66,113,581 on 8/1/94,
collateralized by: $50,000,000 U.S.
Treasury Bill, 4.600% due 12/29/94,
$18,755,000 U.S. Treasury Bill, 4.600%
due 12/29/94
66,091,000
--------------------------------------------------------------------------
- ----
TOTAL REPURCHASE AGREEMENTS
(Cost $146,173,000)
146,173,000
--------------------------------------------------------------------------
- ----
TOTAL INVESTMENTS (Cost $1,608,586,367*) 99.3%
1,755,126,605
--------------------------------------------------------------------------
- ----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
NUMBER
OF
EXPIRATION STRIKE MARKET VALUE
CONTRACTS
MONTH/YEAR PRICE (NOTE 1)
<C> <S> <C>
<C> <C>
--------------------------------------------------------------------------
- -----------
CALL OPTIONS WRITTEN -- (0.9)%
6,000 S & P 500 Index
September 1994 $470.00 $ (1,125,000)
3,000 S & P 500 Index
December 1994 $450.00 (6,243,750)
4,000 S & P 500 Index
December 1994 $460.00 (5,500,000)
3,000 S & P 500 Index
December 1994 $465.00 (3,525,000)
--------------------------------------------------------------------------
- -----------
TOTAL CALL OPTIONS WRITTEN (Premiums received $31,985,942)
(0.9)% (16,393,750)
OTHER ASSETS AND LIABILITIES (NET)
1.6 28,237,571
--------------------------------------------------------------------------
- -----------
NET ASSETS
100.0% $1,766,970,426
--------------------------------------------------------------------------
- -----------
<FN>
* Aggregate cost for Federal tax purposes.
** Security exempt from registration under Rule 144A of the Securities
Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Non-income producing security.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JULY 31,
1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$1,608,586,367) (Note 1)
See accompanying schedule
$1,755,126,605
Cash
151,689
Receivable for investment securities
sold
23,957,548
Receivable for Fund shares sold
8,072,367
Dividends and interest receivable
5,458,688
- ---------------------------------------------------------------------------
- ---
TOTAL ASSETS
1,792,766,897
- ---------------------------------------------------------------------------
- ---
LIABILITIES:
Options written, at value (Premiums
received $31,985,942)
(Note 1) See accompanying schedule $16,393,750
Payable for investment securities
purchased 3,685,753
Dividends payable 2,658,469
Investment advisory fee payable (Note
2) 810,699
Distribution fee payable (Note 3) 713,590
Payable for Fund shares redeemed 434,752
Service fee payable (Note 3) 370,856
Administration fee payable (Note 2) 294,800
Transfer agent fees payable (Note 2) 184,070
Custodian fees payable (Note 2) 53,000
Accrued Trustees' fees and expenses
(Note 2) 1,500
Accrued expenses and other payables 195,232
- ---------------------------------------------------------------------------
- ---
TOTAL LIABILITIES
25,796,471
- ---------------------------------------------------------------------------
- ---
NET ASSETS
$1,766,970,426
- ---------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) JULY 31,
1994
<TABLE>
<S> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income $ (2,338,819)
Accumulated net realized loss on
securities and written options (15,592,192)
Net unrealized appreciation of
securities, written option
transactions and foreign currency
transactions 162,131,787
Par value 112,610
Paid-in capital in excess of par
value 1,622,657,040
- -------------------------------------------------------------
TOTAL NET ASSETS $1,766,970,426
- -------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price
per share
($67,698,765 DIVIDED BY 4,314,437
shares of beneficial interest
outstanding) $15.69
- -------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
($15.69 DIVIDED BY 0.95)
(based on sales charge of 5% of the
offering price on July 31, 1994) $16.52
- -------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per
share+
($1,697,393,964 DIVIDED BY
108,175,921 shares of beneficial
interest outstanding) $15.69
- -------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and
redemption price per share
($1,877,697 DIVIDED BY 119,667 shares
of beneficial interest outstanding) $15.69
- -------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any
applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31,
1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$392,329) $
38,906,024
Interest (net of foreign withholding taxes of
$143,533)
11,306,224
- ---------------------------------------------------------------------------
- ---------
TOTAL INVESTMENT INCOME
50,212,248
- ---------------------------------------------------------------------------
- ---------
EXPENSES:
Investment advisory fee (Note 2) $8,506,930
Distribution fee (Note 3) 7,456,147
Service fee (Note 3) 3,866,787
Administration fee (Note 2) 3,093,429
Transfer agent fees (Notes 2 and 4) 1,710,498
Custodian fees (Note 2) 187,691
Legal and audit fees 60,068
Trustees' fees and expenses (Note 2) 15,495
Other 557,427
- ---------------------------------------------------------------------------
- ---------
TOTAL EXPENSES
25,454,472
- ---------------------------------------------------------------------------
- ---------
NET INVESTMENT INCOME
24,757,776
- ---------------------------------------------------------------------------
- ---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain on:
Securities
53,343,406
Written options
7,785,940
- ---------------------------------------------------------------------------
- ---------
Net realized gain on investments during the year
61,129,346
- ---------------------------------------------------------------------------
- ---------
Net change in unrealized
appreciation/(depreciation) of:
Securities
18,195,383
Written options
11,584,761
Currencies and other net assets
(643)
- ---------------------------------------------------------------------------
- ---------
Net unrealized appreciation of investments during the year
29,779,501
- ---------------------------------------------------------------------------
- ---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
90,908,847
- ---------------------------------------------------------------------------
- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$115,666,623
- ---------------------------------------------------------------------------
- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C>
<C>
Net investment income $ 24,757,776
$ 10,154,816
Net realized gain on securities, written options and
foreign currency transactions during the year 61,129,346
28,852,056
Net unrealized appreciation of securities, forward
foreign exchange contracts, written options and net
other assets during the year 29,779,501
62,458,035
- ---------------------------------------------------------------------------
- ----------
Net increase in net assets resulting from operations 115,666,623
101,464,907
Distributions to shareholders from net investment
income:
Class A (930,452)
(205,012)
Class B (22,018,429)
(9,085,716)
Class D (6,325)
(583)
Distributions to shareholders in excess of net
investment income:
Class A (845,336)
(39,774)
Class B (21,078,335)
(1,762,720)
Class D (15,467)
(113)
Distributions to shareholders from net realized gain on
investments:
Class A (2,004,047)
(474,748)
Class B (51,798,627)
(31,580,436)
Class D (46,183)
(1,858)
Distributions to shareholders in excess of net realized
gains:
Class A --
(56,783)
Class B --
(3,535,004)
Class D --
(228)
Distributions from capital (tax basis):
Class A (743,880)
(402,591)
Class B (18,548,545)
(25,063,193)
Class D (13,610)
(1,617)
Net increase in net assets from Fund share transactions
(Note 6):
Class A 28,296,387
39,273,754
Class B 468,756,798
616,840,264
Class D 1,529,301
352,737
- ---------------------------------------------------------------------------
- ----------
Net increase in net assets 496,199,873
685,721,286
NET ASSETS:
Beginning of year 1,270,770,553
585,049,267
- ---------------------------------------------------------------------------
- ----------
End of year (including distributions in excess of net
investment income of $2,338,819 and $1,802,567,
respectively) $1,766,970,426
$1,270,770,553
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
- -
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94#+++
7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $ 15.65 $
15.15
- ---------------------------------------------------------------------------
- --------
Income from investment operations:
Net investment income 0.33
0.19
Net realized and unrealized gain on investments 0.99
1.33
- ---------------------------------------------------------------------------
- --------
Total from investment operations 1.32
1.52
Less distributions:
Distributions from net investment income (0.31)
(0.17)
Distributions in excess of net investment income (0.24)
(0.03)
Distributions from net realized gains (0.52)
(0.44)
Distributions in excess of net realized gains --
(0.05)
Distributions from capital++ (0.21)
(0.33)
- ---------------------------------------------------------------------------
- --------
Total distributions (1.28)
(1.02)
- ---------------------------------------------------------------------------
- --------
Net Asset Value, end of period $ 15.69 $
15.65
- ---------------------------------------------------------------------------
- --------
Total return+ 8.65%
10.31%
- ---------------------------------------------------------------------------
- --------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $67,699
$39,677
Ratio of operating expenses to average net assets 1.19%
1.20%**
Ratio of net investment income to average net assets 2.05%
1.64%**
Portfolio turnover rate 34%
55%
- ---------------------------------------------------------------------------
- --------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since use of the undistributed method does not accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment adviser from The
Boston
Company Advisors, Inc. to its current investment adviser, Smith Barney
Strategy Advisers, Inc. The Boston Company Advisors, Inc. is currently
the
sub-investment adviser to the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
- -
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR
YEAR YEAR
ENDED ENDED
ENDED ENDED
7/31/94#+++ 7/31/93+++
7/31/92 7/31/91
<S> <C> <C>
<C> <C>
Net Asset Value, beginning of year $ 15.65 $ 15.21
$ 14.26 $ 13.30
- ---------------------------------------------------------------------------
- -----------
Income from investment operations:
Net investment income 0.25 0.23
0.22 0.24
Net realized and unrealized gain on
investments 1.00 1.47
1.93 1.92
- ---------------------------------------------------------------------------
- -----------
Total from investment operations 1.25 1.70
2.15 2.16
Less distributions:
Distributions from net investment income (0.27) (0.16)
(0.22) (0.24)
Distributions in excess of net investment
income (0.22) (0.03)
- -- --
Distributions from net realized gains (0.52) (0.57)
- -- --
Distributions in excess of net realized gains -- (0.06)
- -- --
Distributions from capital++ (book basis) -- --
(0.98) (0.96)
Distributions from capital++ (tax basis) (0.20) (0.44)
- -- --
- ---------------------------------------------------------------------------
- -----------
Total distributions (1.21) (1.26)
(1.20) (1.20)
- ---------------------------------------------------------------------------
- -----------
Net Asset Value, end of year $ 15.69 $ 15.65
$ 15.21 $ 14.26
- ---------------------------------------------------------------------------
- -----------
Total return+ 8.12% 11.68%
15.68% 17.53%
- ---------------------------------------------------------------------------
- -----------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $1,697,394 $1,230,737
$585,049 $470,381
Ratio of operating expenses to average net
assets 1.66% 1.69%
1.69% 1.75%
Ratio of net investment income to average net
assets 1.58% 1.16%
1.53% 1.84%
Portfolio turnover rate 34% 55%
57% 43%
- ---------------------------------------------------------------------------
- -----------
<FN>
+ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since use of the undistributed method does not accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment adviser from The
Boston
Company Advisors, Inc. to its current investment adviser, Smith Barney
Strategy Advisers, Inc. The Boston Company Advisors, Inc. is currently
the
sub-investment adviser to the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
- -
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR
YEAR YEAR PERIOD
ENDED ENDED
ENDED ENDED ENDED
7/31/90+++ 7/31/89
7/31/88 7/31/87 7/31/86*
<S> <C> <C> <C>
<C> <C>
Net Asset Value, beginning of year $ 13.98 $ 12.90 $
14.47 $ 14.52 $ 13.00
- ---------------------------------------------------------------------------
- -----------
Income from investment operations:
Net investment income 0.22 0.56
0.51 0.28 0.43
Net realized and unrealized gain/(loss) on
investments 0.38 2.00
(0.62) 1.37 2.27
- ---------------------------------------------------------------------------
- -----------
Total from investment operations 0.60 2.56
(0.11) 1.65 2.70
Less distributions:
Distributions from net investment income (0.22) (0.89)
(0.18) (0.28) (0.42)
Distributions in excess of net investment
income -- --
- -- -- --
Distributions from net realized gains -- (0.26)
(1.28) (1.42) (0.76)
Distributions in excess of net realized gains -- --
- -- -- --
Distributions from capital++ (book basis) (1.06) (0.33)
- -- -- --
Distributions from capital++ (tax basis) -- --
- -- -- --
- ---------------------------------------------------------------------------
- -----------
Total distributions (1.28) (1.48)
(1.46) (1.70) (1.18)
- ---------------------------------------------------------------------------
- -----------
Net Asset Value, end of year $ 13.30 $ 13.98 $
12.90 $ 14.47 $ 14.52
- ---------------------------------------------------------------------------
- -----------
Total return+ 4.62% 21.49%
0.21% 12.07% 21.28%
- ---------------------------------------------------------------------------
- -----------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $507,762 $599,849
$585,634 $960,898 $533,487
Ratio of operating expenses to average net
assets 1.78% 1.75%
1.70% 1.74% 1.87%**
Ratio of net investment income to average net
assets 1.66% 4.17%
3.58% 1.97% 2.99%**
Portfolio turnover rate 47% 41%
56% 294% 212%
- ---------------------------------------------------------------------------
- -----------
<FN>
* The Fund commenced operations on September 16, 1985. On November 6,
1992 the
Fund commenced selling Class A shares. Those shares in existence prior
to
November 6, 1992 were designated Class B shares.
** Annualized.
+ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since use of the undistributed method does not accord with results of
operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
- -
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94#+++
7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $15.65
$15.45
- ---------------------------------------------------------------------------
- -------
Income from investment operations:
Net investment income 0.23
0.05
Net realized and unrealized gain on investments 1.02
0.35
- ---------------------------------------------------------------------------
- -------
Total from investment operations 1.25
0.40
Less distributions:
Distributions from net investment income (0.27)
(0.03)
Distributions in excess of net investment income (0.22)
(0.01)
Distributions from net realized gains (0.52)
(0.08)
Distributions in excess of net realized gains --
(0.01)
Distributions from capital++ (0.20)
(0.07)
- ---------------------------------------------------------------------------
- -------
Total distributions (1.21)
(0.20)
- ---------------------------------------------------------------------------
- -------
Net Asset Value, end of period $15.69
$15.65
- ---------------------------------------------------------------------------
- -------
Total return+ 8.12%
2.60%
- ---------------------------------------------------------------------------
- -------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $1,878 $
357
Ratio of operating expenses to average net assets 1.60%
1.31%**
Ratio of net investment income to average net assets 1.65%
1.54%**
Portfolio turnover rate 34%
55%
- ---------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced selling Class D shares on June 1, 1993.
** Annualized.
+ Total return represents aggregate total return for the period
indicated.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since use of the undistributed method does not accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment adviser from The
Boston
Company Advisors, Inc. to its current investment adviser, Smith Barney
Strategy Advisers, Inc. The Boston Company Advisors, Inc. is currently
the
sub-investment adviser to the Fund.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a
"Massachusetts business trust" under the laws of the Commonwealth of
Massachusetts on March 12, 1985. The Trust is registered with the
Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the
"1940 Act"), as an open-end management investment company. As of the date
of
this report, the Trust offered eight managed investment funds: Smith Barney
Shearson Premium Total Return Fund (the "Fund"), Smith Barney Shearson
Convertible Fund, Smith Barney Shearson Global Bond Fund, Smith Barney
Shearson
High Income Fund, Smith Barney Shearson Tax-Exempt Income Fund, Smith
Barney
Shearson Money Market Fund, Smith Barney Shearson Diversified Strategic
Income
Fund and Smith Barney Shearson Utilities Fund. As of November 6, 1992, the
Fund
offered two classes of shares: Class A shares and Class B shares. As of
January
29, 1993, the Fund offered a third class of shares, Class D shares, to
investors
eligible to participate in Smith Barney 401(k) Program. Class A shares are
sold
with a front-end sales charge. Class B shares may be subject to a
contingent
deferred sales charge ("CDSC"). Class B shares will convert automatically
to
Class A shares eight years after the date of original purchase. Class D
shares
are offered without a front-end sales charge or CDSC. Each class of shares
has
identical rights and privileges except with respect to the effect of the
respective sales charges, the distribution and/or service fees borne by
each
class, expenses allocable exclusively to each class, voting rights on
matters
affecting a single class, the exchange privilege of each class and the
conversion feature of Class B shares. The following is a summary of
significant
accounting policies consistently followed by the Fund in the preparation of
its
financial statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Trust's
Board of Trustees. Portfolio securities that are traded primarily on a
domestic
or foreign exchange are valued at the last sale price on that exchange or,
if
there were no sales during the day, at the current quoted bid price.
Over-the-counter securities are valued on the basis of the bid price at the
close of business each day. An option generally is valued at the last sale
price
or, in the absence of the last sale price, the last offer price.
Investments
26
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in U.S. government securities (other than short-term securities) are valued
at
the average of the quoted bid and asked price in the over-the-counter
market.
Short-term investments that mature in 60 days or less are valued at
amortized
cost.
OPTION ACCOUNTING PRINCIPLES: Upon the purchase of a put option or a call
option
by the Fund, the premium paid is recorded as an investment, the value of
which
is marked-to-market daily. When a purchased option expires, the Fund will
realize a loss in the amount of the cost of the option. When the Fund
enters
into a closing sale transaction, the Fund will realize a gain or loss
depending
on whether the sales proceeds from the closing sale transaction are greater
or
less than the cost of the option. When the Fund exercises a put option, it
will
realize a gain or loss from the sale of the underlying security and the
proceeds
from such sale will be decreased by the premium originally paid. When the
Fund
exercises a call option, the cost of the security which the Fund purchases
upon
exercise will be increased by the premium originally paid.
When the Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which
is
marked-to-market daily. When a written option expires, the Fund realizes a
gain
equal to the amount of the premium received. When the Fund enters into a
closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option
was
sold) without regard to any unrealized gain or loss on the underlying
security,
and the liability related to such option is eliminated. When a call option
is
exercised, the Fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium
originally
received. When a put option is exercised, the amount of the premium
originally
received will reduce the cost of the security that the Fund purchased upon
exercise.
The risk associated with purchasing options is limited to the premium
originally
paid. The risk in writing a call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security or
index
increases and the option is exercised. The risk in writing a put option is
that
the Fund may incur a loss if the market price of the underlying
27
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
security or index decreases and the option is exercised. In addition, there
is
the risk that the Fund may not be able to enter into a closing transaction
because of an illiquid secondary market.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes
possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price
and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right
to use the collateral to offset losses incurred. There is potential loss to
the
Fund in the event that the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a
possible
decline in the value of the underlying securities during the period while
the
Fund seeks to assert its rights. The Fund's investment adviser, sub-
investment
adviser, administrator and/or sub-administrator acting under the
supervision of
the Trust's Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks.
FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities
are
translated into U.S. dollars at the exchange rates prevailing at the end of
the
period, and purchases and sales of investment securities, income and
expenses
are translated on the respective dates of such transactions. Unrealized
gains
and losses which result from changes in foreign currency exchange rates
have
been included in the unrealized appreciation/ (depreciation) of currencies
and
net other assets. Net realized foreign currency gains and losses resulting
from
changes in exchange rates include foreign currency gains and losses between
trade date and settlement date on investment securities transactions,
foreign
currency transactions and the difference between the amounts of interest
and
dividends recorded on the books of the Fund and the amount actually
received.
The portion of foreign currency
28
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
gains and losses related to fluctuation in the exchange rates between the
initial purchase trade date and subsequent sale trade date is included in
realized gains and losses on investment securities sold.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-
issued or
delayed-delivery basis may be settled a month or more after the trade date.
Realized gains and losses from securities sold are recorded on the
identified
cost basis. Dividend income and distributions to shareholders are recorded
on
the ex-dividend date. Interest income is recorded on the accrual basis.
Investment income and realized and unrealized gains and losses are
allocated
based upon the relative net assets of each class of shares.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level, declared monthly and are
paid
on the last day of the Smith Barney Inc. ("Smith Barney") statement month.
The
Fund's final distribution for each calendar year will include any remaining
net
investment income and net realized short-term capital gains deemed
undistributed
during the year for Federal income tax purposes, as well as all net long-
term
capital gains realized during the year. Additional distributions of net
investment income and capital gains from the Fund may be made at the
discretion
of the Trust's Board of Trustees in order to avoid the application of a 4%
nondeductible excise tax on certain amounts of undistributed ordinary
income and
capital gains. For the purposes of the Statement of Changes in Net Assets,
income distributions and capital gain distributions on a Fund level are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily
due to
differing treatments of income and gains on various investment securities
held
by the Fund, timing differences and differing characterization of
distributions
made by the Fund as a whole. Permanent differences incurred during the year
ended July 31, 1994 resulting from short-term gains offset by ordinary
distributions have been reclassified from income to gains at year end.
FEDERAL INCOME TAXES: The Trust intends that the Fund qualify as a
regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue
29
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Code of 1986, as amended, applicable to regulated investment companies and
by
distributing substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION
FEE AND OTHER PARTY TRANSACTIONS
Prior to the close of business on July 15, 1994, the Fund had entered into
an
investment advisory agreement with The Boston Company Advisors, Inc.
("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under this agreement, the Fund paid a monthly fee at an annual
rate
of 0.55% of the value of its average daily net assets.
As of the close of business on July 15, 1994, Smith Barney Strategy
Advisers,
Inc. ("SBSA"), an affiliate of Smith Barney, succeeded Boston Advisors as
the
Fund's investment adviser. The new investment advisory agreement contains
the
same terms and conditions and fees as the predecessor agreement.
As of the close of business on July 15, 1994, Boston Advisors was appointed
as
the Fund's sub-investment adviser pursuant to a written agreement (the
"Sub-Advisory Agreement"). Under the terms of the Sub-Advisory Agreement,
SBSA
pays Boston Advisors a monthly fee at an annual rate of .275% of the value
of
the Fund's average daily net assets.
Prior to May 4, 1994, the Fund was a party to an administration agreement
with
Boston Advisors. Under the agreement, the Fund paid a monthly fee at the
annual
rate of 0.20% of the value of its average daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Smith Barney Holdings Inc., succeeded
Boston
Advisors as the Fund's administrator. The new administration agreement
contains
substantially the same terms and conditions, including the level of fees,
as the
predecessor agreement.
30
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston
Advisors. Under the Sub-Administration Agreement, SBA pays Boston Advisors
a
portion of its fee at a rate agreed upon from time to time between SBA and
Boston Advisors.
For the year ended July 31, 1994, the Fund incurred total brokerage
commissions
of $1,767,577, of which $280,686 was paid to Smith Barney.
For the year ended July 31, 1994, Smith Barney received $546,635 from
investors
representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption
of Class B shares within five years (eight years in the case of purchases
by
certain 401(k) plans) after the date of purchase. In circumstances in which
the
CDSC is imposed, the amount of the charge ranges between 5% and 1% of net
asset
value depending on the number of years since the date of purchases (except
in
the case of purchases by certain 401(k) plans in which case a 3% CDSC is
imposed
for the eight year period after the date of purchase). For the year ended
July
31, 1994, Smith Barney received from shareholders $2,133,023 in CDSC fees
on the
redemption of Class B shares.
No officer, director or employee of Smith Barney or any parent or
subsidiary of
Smith Barney receives any compensation from the Trust for serving as a
Trustee
or officer of the Trust. The Trust pays each Trustee who is not an officer,
director or employee of Smith Barney or any of its affiliates $10,000 per
annum
plus $1,500 per meeting attended and reimburses each such Trustee for
travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of
Mellon, serves as the Trust's custodian. The Shareholder Services Group,
Inc., a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
31
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Trust's shares pursuant to a
distribution agreement with the Trust, and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services
and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class D
shareholders and covers expenses incurred in distributing Class B and Class
D
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the annual rate of 0.25% of the
value
of the average daily net assets of each respective class of shares. Smith
Barney
is also paid an annual distribution fee with respect to Class B and Class D
shares at the annual rate of 0.50% of the value of the average daily net
assets
of each respective class of shares. For the year ended July 31, 1994, the
service fee for Class A, Class B and Class D shares was $138,713,
$3,725,474 and
$2,600, respectively. For year ended July 31, 1994, the distribution fee
for
Class B and Class D shares was $7,450,948 and $5,199, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of
shares are prorated among the classes based upon the relative net assets of
each
class. Operating expenses directly attributable to a class of shares are
charged
to that class' operations. In addition to the above service and
distribution
fees, class specific operating expenses for the year ended July 31, 1994
include
the transfer agent fees. For the year ended July 31, 1994, transfer agent
fees
for Class A, Class B and Class D shares were $76,955, $1,633,080 and $463,
respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term
investments and U.S. government securities, aggregated $779,084,845 and
$446,365,058, respectively, for the year ended July 31, 1994.
32
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Option activity for the year ended July 31, 1994 was as follows:
<TABLE>
<CAPTION>
Number of
Premiums
Contracts
<S> <C>
<C>
- ---------------------------------------------------------------------------
- ---------
Options outstanding at July 31, 1993 $ 18,826,181
14,500
Options written 51,918,595
32,500
Options cancelled in closing purchase transactions (38,758,834)
(31,000)
- ---------------------------------------------------------------------------
- ---------
Options outstanding at January 31, 1994 $ 31,985,942
16,000
- ---------------------------------------------------------------------------
- ---------
</TABLE>
At July 31, 1994, the aggregate gross unrealized appreciation for all
securities
in which there is an excess of value over tax cost was $191,826,524 and the
aggregate gross unrealized depreciation for all securities in which there
is an
excess of tax cost over value was $45,286,286.
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
each
class in each separate series with a $.001 par value. Changes in shares of
beneficial interest of the Fund which are divided into three classes (Class
A,
Class B and Class D) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93*
CLASS A SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 2,416,033 $ 38,376,582
2,714,964 $ 42,071,154
Issued as reinvestment of dividends 237,495 3,757,532
63,945 988,218
Redeemed (873,722) (13,837,727)
(244,278) (3,785,618)
- ---------------------------------------------------------------------------
- ----------
Net increase 1,779,806 $ 28,296,387
2,534,631 $ 39,273,754
- ---------------------------------------------------------------------------
- ----------
<CAPTION>
YEAR ENDED
YEAR ENDED
7/31/94
7/31/93*
CLASS B SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 34,622,952 $ 549,526,346
42,591,133 $654,124,021
Issued as reinvestment of dividends 5,522,273 87,393,944
3,572,456 54,752,129
Redeemed (10,605,754) (168,163,492)
(5,985,843) (92,035,886)
- ---------------------------------------------------------------------------
- ----------
Net increase 29,539,471 $ 468,756,798
40,177,746 $616,840,264
- ---------------------------------------------------------------------------
- ----------
</TABLE>
33
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93**
CLASS D SHARES: Shares Amount
Shares Amount
- ---------------------------------------------------------------------------
- ----------
<S> <C> <C>
<C> <C>
Sold 101,169 $ 1,602,910
23,082 $ 356,761
Issued as reinvestment of dividends 5,174 81,621
284 4,400
Redeemed (9,504) (155,230)
(538) (8,424)
- ---------------------------------------------------------------------------
- ----------
Net increase 96,839 $ 1,529,301
22,828 $ 352,737
- ---------------------------------------------------------------------------
- ----------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992. Any
shares
outstanding prior to November 6, 1992 were designated Class B shares.
** The Fund commenced selling Class D shares to the public on June 1,
1993.
</TABLE>
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of
credit provided by Continental Bank N.A. under an Amended and Restated Line
of
Credit Agreement (the "Agreement") dated April 30, 1992, and renewed
effective
May 31, 1994, primarily for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Fund may borrow up to the lesser of $25
million
or 10% of its net assets. Interest is payable either at the bank's Money
Market
Rate or the London Interbank Offered Rate (LIBOR) plus .375% on an
annualized
basis. Under the terms of the Agreement, the Fund and the other affiliated
entities are charged an aggregate commitment fee of $100,000 which is
allocated
equally among each of the participants. The Agreement requires, among other
provisions, each participating fund to maintain a ratio of net assets (not
including funds borrowed pursuant to the Agreement) to aggregate amount of
indebtedness pursuant to the Agreement of no less than 5 to 1. During the
year
ended July 31, 1994, the Fund did not borrow under the Agreement.
34
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF SMITH BARNEY SHEARSON PREMIUM
TOTAL
RETURN FUND OF SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
Smith
Barney Shearson Premium Total Return Fund (formerly Option Income Fund) of
Smith
Barney Shearson Income Funds, including the schedule of portfolio
investments,
as of July 31, 1994, and the related statement of operations for the year
then
ended, the statement of changes in net assets for each of the two years in
the
period then ended, and the financial highlights for each of the eight years
in
the period then ended and for the period September 16, 1985 (commencement
of
operations) to July 31, 1986. 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.
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
July
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
Smith
Barney Shearson Premium Total Return Fund of Smith Barney Shearson Income
Funds
as of July 31, 1994, the results of its operations for the year then ended,
the
changes in its net assets for each of the two years in the period then
ended,
and the financial highlights for each of the eight years in the period then
ended and for the period September 16, 1985 (commencement of operations) to
July
31, 1986, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
September 23, 1994
35
<PAGE>
Smith Barney Shearson
Premium Total Return Fund
- ---------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
YEAR ENDED JULY 31, 1994
The following tax information represents fiscal year end disclosures of
various
tax benefits passed through to shareholders at calendar year end.
During the fiscal year ended July 31, 1994, the Fund paid $52,731,989 of
Long-Term Capital Gains to its shareholders.
Of the distribution from ordinary income made by the Fund during the fiscal
year
ended July 31, 1994, 79.31% represents the amount of each distribution
which
will qualify for the dividend received deduction available to corporate
shareholders.
The above figures may differ from those cited elsewhere in this report due
to
differences in the calculations of income and capital gains for Securities
and
Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
36
<PAGE>
PREMIUM TOTAL
RETURN FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
AND INVESTMENT OFFICER
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Harry Rosenbluth
INVESTMENT ADMINISTRATOR
John Fullerton
INVESTMENT ADMINISTRATOR
Patricia Zuch
INVESTMENT OFFICER
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON PREMIUM TOTAL RETURN FUND. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY AN
EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING
THE
FUND'S INVESTMENT POLICIES, FEES AND EXPENSES AS WELL AS OTHER PERTINENT
INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
[LOGO]
Fund 17,178,247
FD0420 I4
<PAGE>
Small box above fund name showing a black and white
picture of a touch-tone phone, a light bulb and a
candle.
SMITH BARNEY SHEARSON
UTILITIES
FUND
1994
ANNUAL
........................................................
REPORT JULY 31, 1994
SMITH BARNEY
------------
<PAGE>
DEAR SHAREHOLDER:
The past fiscal year has been a difficult one for utility
U investors as the financial markets reacted to both increasing
T interest rates and concerns about the fundamental changes that
I have begun within the utility industry. After reaching all time
L highs in mid-September 1993, several of the leading utility market
I indices have declined about 27% on a price basis. After six
T previous years of positive total returns since its inception in
I 1988, the Utilities Fund experienced its first year of negative
E returns. Class A shares had a negative total return of 8.99% and
S Class B shares had a negative total return of 9.52%. Although this
short-term performance is a disappointment, the Fund's longer-term
F track record remains much more satisfactory. Between 1988 and the
U end of its fiscal year on July 31, 1994, the Fund's average annual
N return to investors in Class B shares (the Fund's oldest
D investment class) was a positive 9.36%.
The major factor impacting the utility industry was the increase in
long-
term (30-year) U.S. Treasury bond yields from 5.77% to approximately 7.40%
by
the end of July. Investor concerns about lower allowed returns on equity by
utility regulators and an increasingly competitive industry environment
have
contributed to a shift out of utilities into the more cyclical sectors of
the
equity market as the economy continues to show renewed growth. This unusual
volatility has become a major concern for traditionally conservative
investors
who have relied on utilities for a combination of current income and long-
term
growth and have received competitive total returns with relatively low
price
volatility. As our earlier comparison between the Fund's short-term
performance
during the past fiscal year and its performance since 1988 illustrates, it
is
important to focus on the longer-term performance of utilities over a full
market cycle. We continue to recommend utility ownership as part of a well-
balanced diversified investment portfolio, but stress a combination of a
careful stock selection and diversification to reduce the risks from the
fundamental and regulatory changes we envision over the next three to five
years.
INDUSTRY OVERVIEW
The most important investment issue for utility investors over the next few
years will be to understand and analyze the impact of an increasingly
competitive electricity marketplace. The industry is clearly moving from a
strongly regulated structure to one of increased competition to supply
electricity, first to large industrial customers and eventually to the
smaller
user. We are in the initial stages of this transition and the final rules
and
ultimate structure of the utility industry have yet to be determined. The
pace
of this trend toward deregulation of the electric utility industry has been
accelerating since the passage of the National Energy Policy Act of 1992
which
focused on transmission access. A freer transmission system will provide
more
supply options and greater pricing flexibility to utility customers. This
1
<PAGE>
movement toward an alternative choice of supplier will force utility
companies
to lower prices in an attempt to compete with other suppliers. The
reduction in
regulatory protection will increase the business risk for some companies as
the
trend toward market-driven pricing evolves over the next few years.
These fundamental changes within the utility industry and the degree to
which
vulnerable utilities succeed or face continued competitive pressures will
test
the ability of management to aggressively respond as the rules become
clearer.
Several companies have begun major cost control strategies and others have
undergone corporate restructurings to provide maximum competitive
flexibility.
The initial strategies to remain competitive in this new regulatory and
transmission structure will most likely be reflected in the pricing of
electricity. Larger customers will be offered greater rate flexibility in
an
attempt to secure a long-term contract to supply electricity. This benefits
both
the utility companies by establishing an industrial revenue base and the
industrial user by providing a steady reliable supply of electricity. The
smaller rate payer also benefits by not having to bear as large a burden of
additional rate increases. This reduction in rates will reduce profit
margins
and slow dividend growth, and may ultimately force many companies to reduce
their dividends. The competitive evolution within the utility industry will
force the marketplace toward a revaluation of stock and bond price levels
based
on a combination of growth and risk prospects. Fundamental analysis and
stock
selection will become critical as there will clearly be winners and losers.
This
presents investment opportunities for investors with the ability and skill
to
follow the industry.
PORTFOLIO STRATEGY
The utility marketplace has intensified its awareness of the risks raised
by
competition and this is reflected in the increasingly divergent performance
among the individual electric utilities. In our opinion, several distinct
sectors will likely emerge as the financial risks become clearer. One
sector
will be composed of those electric utility companies with high dividend
payout
ratios and limited growth prospects due to high cost electricity, limited
service territory growth or competitive risks from neighboring utilities.
These
stocks will most likely be priced with current yields equal to or above the
yield on the long-term Treasury bond. Historically, utility stock yields
equal
to long-term Treasury bond yields have signaled an attractive investment
opportunity. The prospects for dividend growth were sufficient incentive
for
investors to take the additional risks of equity ownership. The concern
over
utility industry fundamentals and dividend coverage will limit any premium
based
solely on current yield. These stocks will reflect changing long-term
interest
rate levels and be suitable for risk tolerant investors seeking only
current
income.
A second sector of utility stocks will consist of those companies with
lower
cost of production, growing service territories and lower dividend yields
to
shareholders. These stocks will trade with current yields below that of the
long-term Treasury bond, reflecting the benefits of compound dividend
growth.
This group of income and growth utilities will be less sensitive to
interest
rate changes and therefore less
2
<PAGE>
volatile than the income-only sector. These stocks are suitable for the
long-term investor seeking a combination of income and growth with less
volatility than the overall equity market.
A third sector of utility stocks includes special situation companies that
are
either recovering from financial or regulatory problems or those companies
facing these hurdles that may be forced to cut or eliminate their
dividends.
This group provides the greatest potential reward or risk if their prices
do not
adequately reflect these problems.
Our investment strategy for the Smith Barney Shearson Utilities Fund is to
provide shareholders with a combination of current income and long-term
growth.
Our current portfolio mix is 60% equity (45% electric and gas utilities,
14%
telecommunication and 1% energy) and 40% fixed income. The equity portion
of the
portfolio consists primarily of those companies in the first two sectors
described in the previous paragraphs. We have used the recent correction in
the
utility sector to rebalance our mix of income and growth utilities. Several
potentially problematic issues have been eliminated and we have increased
our
weightings of those growth-oriented utilities with the potential to
outperform
the rest of the group. We have also increased our weighting in the
telecommunication and natural gas sectors. This trend should continue over
the
next several months as market opportunities arise, providing the potential
for
attractive long-term investment returns.
During the past year, we have sold our equity holdings of Baltimore Gas &
Electric, Houston Industries, Montana Power, Niagara Mohawk Power,
Rochester Gas
& Electric and BCE Inc. We have established or added to our holdings of
Commonwealth Edison Company, FPL Group, General Public Utilities, Peco
Energy
Company, AT&T, US West, Ameritech Corporation, Panhandle Eastern
Corporation,
West Coast Energy, and Williams Company as we believe that these companies
offer
better relative valuations and long-term growth prospects.
During this transition to a more competitive utility industry, our electric
utility investment focus will emphasize stocks with defensive
characteristics
and financial turnaround opportunities either among the inevitable victims
of
competition or from an improving regulatory environment. Defensive
characteristics include low production costs of electricity, lower dividend
payout ratios, growing service territories and a well-defined management
strategy. Investors should be aware that not all electric utility stocks
will be
negatively affected by competitive threats. This should provide an
opportunity
for careful stock selection in an attempt to outperform the group averages.
We
believe that the spread between the quality, growth utilities and higher-
cost
utilities will continue to widen. It is important to note that the long-
term
interest rate environment will continue to have a major influence on the
performance of the electric utility sector. In our opinion, long-term
interest
rates, currently at approximately 7.6%, are close to the top of their
trading
range. It is possible, based on the release of economic data showing
continued
strength in the economy that long-term rates could move to the 7 3/4% to 8%
level before declining later in the year. The Federal Reserve has been more
aggressive in its attempt to
3
<PAGE>
control inflation and slow the rate of economic growth. We expect another
increase in the Federal funds rate during the autumn as these actions are
beginning to have their desired effort on the economy. Inflation appears to
be
under control and the determination of the Federal Reserve to achieve a
lower,
more sustainable growth rate support our belief that the majority of the
long-term interest rate rise has been completed. A stable-to-gradually
declining
long-term interest rate environment would be positive for electric utility
stocks and bonds. The fixed income sector of the Fund focuses on investment
grade utility bonds of companies with stable credit ratings. This portion
of the
portfolio will also require increased analysis as those utilities with high
embedded cost structures face continuing competitive pressures and possible
downgrades of their credit rating. The volume of utility new bond issuance
has
slowed in recent months, reflecting both the increases in long-term
interest
rates and the corresponding reduction in refunding activity. Our fixed
income
investments enable the Fund to achieve a high current yield and provide
more
flexibility in the selection of equity holdings to provide additional
income and
long-term growth.
- ---------------------------------------------------------------------------
- -----
D I V I D E N D P O L I C Y
- ---------------------------------------------------------------------------
- -----
As this letter describes, the electric utilities sector is in a state of
transition. The ongoing changes in this sector have caused us to adopt
what we believe to be the more prudent course of investing in
higher-quality companies that currently have a lower dividend payout but
are likely to be faster growing and therefore more likely to experience
dividend growth. In addition, we have further diversified the portfolio
by allocating a greater percentage of the Fund's holdings to the
telecommunication and natural gas sectors. Although these sectors tend to
be lower yielding and provide less immediate current income, they offer
good long-term growth potential. Market events and our subsequent
repositioning of the portfolio have reduced the income to the Fund and
make it necessary to reduce the Fund's distributions to its shareholders.
Effective with its October distribution, the Fund will pay a new dividend
rate of $.069 on Class A shares and $.064 on Class B shares. Based on a
net asset value of $13.28 per share on July 31, 1994, this equates to a
yield of 6.23% on Class A shares and a yield of 5.78% on Class B shares.
Although not explicitly stated in the prospectus, the Fund's policy is to
pay a level monthly dividend based on our projections for the utilities
market and the general direction of interest rates. We will continue to
monitor both the market and the Fund's income stream to ensure that our
dividend projections are realistic.
4
<PAGE>
SOME FINAL THOUGHTS
The growing disparity within the utility sector caused by a combination of
fundamental factors and the uncertain outcomes of an increasingly
competitive
environment have caused many investors to question their continued
investment
holdings. We believe utilities are still appropriate investments for
conservative investors seeking income with long-term growth as part of a
well-balanced investment portfolio. The changes occurring within the
utility
industry are not unique as evidenced by recent structural changes in both
the
natural gas and telecommunication industries. The uncertainty created by
the
proposed changes require more extensive individual company analysis. This
strongly supports the need for professional management and diversification.
We
view change as an opportunity and challenge to select those companies
capable of
outperforming the industry sector. We emphasize the importance of long-term
investing and of well-defined investment objectives that are not influenced
by
short term cycles. The success of the Fund is based on a disciplined
strategy to
achieve competitive total returns. We will continue this mission in an
effort to
assist in achieving your investment goals.
<TABLE>
<S> <C>
Heath B. McLendon Jack S. Levande
Chairman of the Board Vice President and Investment
Officer
September 7, 1994
</TABLE>
5
<PAGE>
<TABLE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----
<CAPTION>
Year Ended Net Asset Value Capital Dividends
Total
July 31 Beginning Ending Gains Paid Paid
Return*
- ---------------------------------------------------------------------------
- -----
<S> <C> <C> <C> <C> <C>
11/6/92-
7/31/93 $ 14.36 $15.97 $0.13 $0.64
17.01 %
- ---------------------------------------------------------------------------
- ----
1994 $ 15.97 $13.28 $0.50 $0.83
(8.99)%
- ---------------------------------------------------------------------------
- ----
Total $0.63 $1.47
- ---------------------------------------------------------------------------
- ----
Cumulative Total Return -- (11/6/92 through 7/31/94)
6.48 %
- ---------------------------------------------------------------------------
- ----
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the
front-end sales charge (maximum 5%).
</TABLE>
<TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- ---------------------------------------------------------------------------
- -----
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----
<CAPTION>
Without Sales Charge With Sales
Charge***
- ---------------------------------------------------------------------------
- ----
<S> <C> <C>
Year Ended 7/31/94 (8.99)% (13.54)%
- ---------------------------------------------------------------------------
- ----
Inception 11/6/92 through 7/31/94 3.69 % 0.67 %
- ---------------------------------------------------------------------------
- ----
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
*** Average annual total return figures shown assume the deduction of the
maximum 5% front-end sales charge.
</TABLE>
NOTE: The Fund began offering Class A shares on November 6, 1992. Class A
shares are subject to a maximum 5% front-end sales charge and service and
distribution fees of 0.25% and 0.50%, respectively, of the value of the
average
daily net assets attributable to that class.
6
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
UTILITIES FUND + VS. UNMANAGED INDICES
- ---------------------------------------------------------------------------
- -----
November 6, 1992 - July 31, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS A)
A line depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Income Funds -
Utilities Fund's Class A shares on November 6, 1992 through July 31, 1994
as
compared with the growth of a $10,000 investment in Standard & Poor's 500
Index
and the Lipper Utilities Average Index. The plot points used to draw the
line
graph were as follows:
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000 GROWTH OF
$10,000
INVESTED IN CLASS A INVESTMENT IN THE INVESTMENT
IN THE
MONTH SHARES OF THE STANDARD & POOR'S LIPPER
UTILITES
ENDED FUND 500 INDEX AVERAGE
INDEX
<S> <C> <C> <C>
10/92 - $10,000
$10,000
11/06/92 $ 9,500 -
- -
11/92 $ 9,622 $10,340
$10,059
12/92 $ 9,882 $10,467
$10,309
3/93 $10,613 $10,924
$10,134
6/93 $10,924 $10,976
$11,433
9/93 $11,416 $11,259
$11,987
12/93 $11,064 $11,521
$11,692
03/94 $10,263 $11,085
$10,891
06/94 $ 9,792 $11,131
$10,550
07/94 $10,116 $11,496
$10,904
<FN>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 5% front-end sales charge at the time
of investment and reinvestment of dividends and capital gains at net
asset value through July 31, 1994.
S&P 500 -- The Standard & Poor's Composite Index of 500 common stocks
("S&P 500") is an unmanaged index used to portray the pattern of common
stock price movement.
LIPPER UTILITIES AVERAGE -- The Lipper Analytical Services, Inc.
Utilities Fund Average ("Lipper Utilities Average") is composed of the
Fund's peer group of mutual funds (81 funds as of July 31, 1994)
investing in utilities securities.
Index information is available at month-end only; therefore the closest
month-end to inception date of the class has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class A shares and do not guarantee future results.
7
<PAGE>
</TABLE>
<TABLE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -------------------------
<CAPTION>
Net Asset Value Return of Capital
Dividends Total
Year Ended Beginning Ending Capital Gains Paid
Paid Return*
- ---------------------------------------------------------------------------
- -------------------------
<S> <C> <C> <C> <C>
<C> <C>
3/28/88-2/28/89 $ 12.00 $12.09 -- $0.15
$0.57 6.80 %
- ---------------------------------------------------------------------------
- -------------------------
3/01/89-2/28/90 $ 12.09 $12.93 -- $0.21
$0.90 16.34 %
- ---------------------------------------------------------------------------
- -------------------------
3/01/90-2/28/91 $ 12.93 $13.21 -- $0.10
$0.90 10.46 %
- ---------------------------------------------------------------------------
- -------------------------
3/01/91-2/29/92 $ 13.21 $13.95 $0.03 $0.15
$0.84 13.63 %
- ---------------------------------------------------------------------------
- -------------------------
3/01/92-7/31/92 $ 13.95 $14.83 $0.01 --
$0.35 8.98 %
- ---------------------------------------------------------------------------
- -------------------------
8/01/92-7/31/93 $ 14.83 $15.97 -- $0.15
$0.80 14.69 %
- ---------------------------------------------------------------------------
- -------------------------
8/01/93-7/31/94 $ 15.97 $13.28 -- $0.50
$0.75 (9.52)%
- ---------------------------------------------------------------------------
- -------------------------
Total $0.04 $1.26
$5.11
- ---------------------------------------------------------------------------
- -------------------------
Cumulative Total Return -- (3/28/88 through 7/31/94)
76.38 %
- ---------------------------------------------------------------------------
- -------------------------
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the
contingent deferred sales charge ("CDSC").
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------
- -----
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----
<CAPTION>
With Sales
Without Sales Charge Charge***
- ---------------------------------------------------------------------------
- -----
<S> <C> <C>
Year Ended 7/31/94 (9.52)%
(13.68)%
- ---------------------------------------------------------------------------
- -----
Five Years Ended 7/31/94 7.63% 7.49%
- ---------------------------------------------------------------------------
- -----
Inception 3/28/88 through 7/31/94 9.36% 9.36%
- ---------------------------------------------------------------------------
- -----
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net
asset value. The Fund commenced operations March 28, 1988.
*** Average annual total return figures assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
NOTE: On November 6, 1992, existing shares of the Fund were designated
Class B
shares. Class B shares are subject to a maximum 5% CDSC and service and
distribution fees of 0.25% and 0.50%, respectively, of the value of the
average
daily net assets attributable to that class.
</TABLE>
8
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
UTILITIES FUND + VS. UNMANAGED INDICES
- ---------------------------------------------------------------------------
- -----
March 28, 1988 - July 31, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS B)
A line graph depicting the total growth (including reinvestment of
dividends and capital
gains) of a hypothetical investment of $10,000 in Income Funds - Utilities
Fund's Class B
shares on March 28, 1988 through July 31, 1994 as compared with the growth
of a $10,000
investment in Standard & Poor's 500 Index and the Lipper Utilities Average
Index. The
plot points used to draw the line graph were as follows:
GROWTH OF $10,000 GROWTH OF $10,000 GROWTH OF
$10,000
INVESTED IN CLASS B INVESTMENT IN THE INVESTMENT
IN THE
MONTH SHARES OF THE STANDARD & POOR'S LIPPER
UTILITES
ENDED FUND 500 INDEX AVERAGE
INDEX
<S> <C> <C> <C>
03/28/88 $10,000 -
- -
3/88 $10,000 $10,000
$10,000
4/88 $ 9,975 $10,111
$10,001
6/88 $10,312 $10,664
$10,522
9/88 $10,496 $10,701
$10,726
12/88 $10,698 $11,030
$10,967
3/89 $10,702 $11,812
$11,264
6/89 $11,834 $12,853
$12,498
9/89 $12,183 $14,227
$13,249
12/89 $12,901 $14,519
$14,116
3/90 $12,488 $14,083
$13,452
6/90 $12,671 $14,968
$13,632
9/90 $12,311 $12,913
$12,890
12/90 $13,322 $14,069
$13,920
3/91 $13,948 $16,108
$14,646
6/91 $13,995 $16,070
$14,514
9/91 $15,177 $16,928
$15,752
12/91 $16,189 $18,346
$16,834
3/92 $15,527 $17,883
$16,198
6/92 $16,252 $18,222
$17,036
9/92 $17,080 $18,797
$17,867
12/92 $17,379 $19,742
$18,361
3/93 $18,641 $20,605
$19,831
6/93 $19,165 $20,703
$20,364
9/93 $20,002 $21,237
$21,350
12/93 $19,361 $21,730
$20,824
3/94 $17,931 $20,909
$19,397
6/94 $17,082 $20,995
$18,790
7/94 $17,638 $21,683
$19,421
<FN>
+ Illustration of $10,000 invested in Class B shares on March 28, 1988
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
S&P 500 -- The Standard & Poor's Composite Index of 500 common stocks ("S&P
500") is an unmanaged index used to portray the pattern of common stock
price
movement.
LIPPER UTILITIES AVERAGE -- The Lipper Analytical Services, Inc. Utilities
Fund
Average ("Lipper Utilities Average") is composed of the Fund's peer group
of
mutual funds (81 funds as of July 31, 1994) investing in utilities
securities.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
</TABLE>
9
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -----
HISTORICAL PERFORMANCE -- CLASS C SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends
Total
July 31 Beginning Ending Paid Paid
Return*
- ---------------------------------------------------------------------------
- -----
<S> <C> <C> <C> <C>
<C>
11/6/92-
7/31/93 $ 14.36 $15.97 $0.14 $0.66
17.21%
- ---------------------------------------------------------------------------
- -----
1994 $ 15.97 $13.28 $0.50 $0.87
(8.78)%
- ---------------------------------------------------------------------------
- -----
Total $0.64 $1.53
- ---------------------------------------------------------------------------
- -----
Cumulative Total Return -- (11/6/92 through 7/31/94)
6.91%
- ---------------------------------------------------------------------------
- -----
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions
at net asset value.
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------
- -----
AVERAGE ANNUAL TOTAL RETURN** -- CLASS C SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----
<S>
<C>
Year Ended 7/31/94
(8.78)%
- ---------------------------------------------------------------------------
- -----
Inception 11/6/92 through 7/31/94
3.93%
- ---------------------------------------------------------------------------
- -----
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value. The Fund commenced
selling Class C shares on November 6, 1992. Class C shares are not
subject to a sales charge.
</TABLE>
10
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS C SHARES OF
UTILITIES FUND + VS. UNMANAGED INDICES
- ---------------------------------------------------------------------------
- -----
November 6, 1992 - July 31, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS C)
A line graph depicting the total growth (including reinvestment of
dividends and capital gains)
of a hypothetical investment of $10,000 in Income Funds - Utilities Fund's
Class C shares on
November 6, 1992 through July 31, 1994 as compared with the growth of a
$10,000 investment in
Standard & Poor's 500 Index and the Lipper Utilities Average Index. The
plot points used to
draw the line graph were as follows:
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000 GROWTH OF
$10,000
INVESTED IN CLASS C INVESTMENT IN THE INVESTMENT
IN THE
MONTH SHARES OF THE STANDARD & POOR'S LIPPER
UTILITES
ENDED FUND 500 INDEX AVERAGE
INDEX
<S> <C> <C> <C>
10/92 - $10,000 $10,000
11/6/92 $10,000 - -
11/92 $10,130 $10,340 10,059
12/92 $10,406 $10,467 $10,309
3/93 $11,182 $10,924 $11,134
6/93 $11,517 $10,976 $11,433
9/93 $12,042 $11,259 $11,987
12/93 $11,677 $11,521 $11,692
3/94 $10,838 $11,085 $10,891
6/94 $10,347 $11,131 $10,550
7/94 $10,691 $11,496 $10,904
<FN>
+ Illustration of $10,000 invested in Class C shares on November 6, 1992
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
S&P 500 -- The Standard & Poor's Composite Index of 500 common stocks
("S&P 500") is an unmanaged index used to portray the pattern of common
stock price movement.
LIPPER UTILITIES AVERAGE -- The Lipper Analytical Services, Inc.
Utilities Fund Average ("Lipper Utilities Average") is composed of the
Fund's peer group of mutual funds (81 funds as of July 31, 1994)
investing in utilities securities.
Index information is available at month-end only; therefore the closest
month-end to inception date of the class has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class C shares and do not guarantee future results.
</TABLE>
11
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -----------
HISTORICAL PERFORMANCE -- CLASS D SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----------
<CAPTION>
Year Ended Net Asset Value Capital Dividends
Total
July 31 Beginning Ending Gains Paid Paid
Return*
- ---------------------------------------------------------------------------
- -----------
<S> <C> <C> <C> <C>
<C>
2/4/93-7/31/93 $ 15.17 $15.97 $0.02 $0.39
8.08 %
- ---------------------------------------------------------------------------
- -----------
1994 $ 15.97 $13.28 $0.50 $0.75
(9.52)%
- ---------------------------------------------------------------------------
- -----------
Total $0.52 $1.14
- ---------------------------------------------------------------------------
- -----------
Cumulative Total Return -- (2/4/93 through 7/31/94)
(2.21)%
- ---------------------------------------------------------------------------
- -----------
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net
asset value.
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------
- -----------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS D SHARES (UNAUDITED)
- ---------------------------------------------------------------------------
- -----------
- ---------------------------------------------------------------------------
- -----------
<S>
<C>
Year Ended 7/31/94
(9.52)%
- ---------------------------------------------------------------------------
- -----------
Inception 2/4/93 through 7/31/93
(1.49)%
- ---------------------------------------------------------------------------
- -----------
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and
capital gains at net asset value.
NOTE: The Fund began offering Class D shares on February 4, 1993.
Class D shares
are subject to a service and distribution fees of 0.25% and 0.50%,
respectively, of
the value of the average daily net assets attributable to that class.
</TABLE>
12
<PAGE>
GROWTH OF $10,000 INVESTED IN CLASS D SHARES OF
UTILITIES FUND + VS. UNMANAGED INDICES
- ---------------------------------------------------------------------------
- -----
February 4, 1993 - July 31, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS D)
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in Income Funds -
Utilities
Fund's Class D shares on February 4, 1993 through July 31, 1994 as compared
with
the growth of a $10,000 investment in Standard & Poor's 500 Index and the
Lipper
Utilities Average Index. The plot points used to draw the line graph were
as
follows:
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000 GROWTH OF
$10,000
INVESTED IN CLASS D INVESTMENT IN THE INVESTMENT
IN THE
MONTH SHARES OF THE STANDARD & POOR'S LIPPER
UTILITES
ENDED FUND 500 INDEX AVERAGE
INDEX
<S> <C> <C> <C>
1/93 - $10,000
$10,000
2/04/93 $10,000 -
- -
2/93 $10,291 $10,136
$10,435
3/93 $10,335 $10,349
$10,630
6/93 $10,625 $10,399
$10,915
9/93 $11,089 $10,667
$11,444
12/93 $10,734 $10,915
$11,162
3/94 $ 9,941 $10,502
$10,397
6/94 $ 9,470 $10,545
$10,072
7/94 $ 9,779 $10,891
$10,410
<FN>
+ Illustration of $10,000 invested in Class D shares on February 4, 1993
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
S&P 500 -- The Standard & Poor's Composite Index of 500 common stocks
("S&P 500") is an unmanaged index used to portray the pattern of common
stock price movement.
LIPPER UTILITIES AVERAGE -- The Lipper Analytical Services, Inc.
Utilities Fund Average ("Lipper Utilities Average") is composed of the
Fund's peer group of mutual funds (81 funds as of July 31, 1994)
investing in utilities securities.
Index information is available at month-end only; therefore, the
closest
month-end to inception date of the class has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class D shares and do not guarantee future results.
</TABLE>
13
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
PORTFOLIO HIGHLIGHTS (UNAUDITED) JULY 31,
1994
- ---------------------------------------------------------------------------
- -----
<TABLE>
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds - Utilities Fund's
investment
securities held at July 31, 1994 by industry. The pie is broken in pieces
representing
security types in the following percentages:
<CAPTION>
INDUSTRY TYPE PERCENTAGE
<S> <C>
Corporate Bond and Notes 38.6%
Repurchase Agreement and Net Other
Assets and Liabilities 2.2%
Common Stocks 59.2%
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
- ----------------------------------------------------------------------
<S> <C>
TOP FIVE EQUITY HOLDINGS
TEXAS UTILITIES COMPANY 3.3%
SOUTHERN COMPANY 3.1
ENTERGY CORPORATION 2.4
COMMONWEALTH EDISON COMPANY 2.3
PUBLIC SERVICE ENTERPRISE GROUP 2.2
......................................................................
</TABLE>
<TABLE>
TOP FIVE BOND HOLDINGS
- ----------------------------------------------------------------------
<S> <C>
PACIFIC GAS & ELECTRIC COMPANY 2.7%
COMMONWEALTH EDISON COMPANY 1.9
UTILCORP UNITED INC. 1.9
TEXAS UTILITIES ELECTRIC COMPANY 1.5
PENNSYLVANIA POWER & LIGHT COMPANY 1.5
</TABLE>
14
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS
JULY 31, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- ------------
<C> <S>
<C>
COMMON STOCKS - 59.2%
ELECTRIC & GAS - 44.3%
700,000 Allegheny Power Systems, Inc. $
15,137,500
1,000,000 American Electric Power Company, Inc.
30,500,000
500,000 Boston Edison Company
13,375,000
1,000,000 Central & SouthWest Corporation
22,625,000
1,300,000 Cincinnati Gas & Electric Company
29,087,500
1,800,000 Commonwealth Edison Company
42,750,000
1,000,000 Consolidated Edison Company of New York, Inc.
28,750,000
1,000,000 Detroit Edison Company
26,375,000
1,000,000 Dominion Resources, Inc.
36,375,000
1,000,000 DPL, Inc.
20,375,000
1,800,000 Entergy Corporation
45,900,000
225,000 Florida Progress Corporation
6,300,000
1,200,000 FPL, Group Inc.
37,950,000
1,200,000 General Public Utilities Corporation
30,900,000
1,000,000 Long Island Lighting Company
18,500,000
700,000 New England Electric Systems
22,925,000
750,000 New York State Electric & Gas Corporation
18,656,250
1,000,000 NIPSCO Industry Inc.
29,250,000
260,000 Northeast Utilities Company
6,077,500
1,000,000 Pacific Gas & Electric Company
24,125,000
1,400,000 PacifiCorp
24,850,000
600,000 Panhandle Eastern Corporation
12,300,000
1,480,000 Peco Energy Company
38,665,000
725,000 Public Service Company of Colorado
19,575,000
1,500,000 Public Service Enterprise Group
41,625,000
500,000 San Diego Gas & Electric Company
10,125,000
500,000 SCANA Corporation
22,250,000
750,000 SCE Corporation
10,125,000
3,000,000 Southern Company
58,500,000
1,900,000 Texas Utilities Company
62,462,500
600,000 Western Resources Inc.
16,875,000
225,000 Williams Companies Inc.
7,340,625
-------------------------------------------------------------------------
- ------------
830,626,875
-------------------------------------------------------------------------
- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued)
JULY 31, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET VALUE
SHARES
(NOTE 1)
- ---------------------------------------------------------------------------
- ------------
<C> <S>
<C>
COMMON STOCKS (CONTINUED)
COMMUNICATIONS - 13.6%
650,000 American Telephone & Telegraph Company $
35,506,250
500,000 Ameritech Corporation, New
20,500,000
700,000 Bell Atlantic Corporation
39,637,500
575,000 BellSouth Corporation
35,937,500
800,000 GTE Corporation
25,400,000
900,000 NYNEX Corporation
34,650,000
400,000 Pacific Telesis Group
13,100,000
550,000 Southwestern Bell Corporation
23,100,000
700,000 U.S. West, Inc.
28,175,000
- ---------------------------------------------------------------------------
- ------------
256,006,250
- ---------------------------------------------------------------------------
- ------------
ENERGY - 1.3%
300,000 MCN Corporation
11,962,500
800,000 Westcoast Energy Inc.
13,000,000
- ---------------------------------------------------------------------------
- ------------
24,962,500
- ---------------------------------------------------------------------------
- ------------
TOTAL COMMON STOCKS (Cost $1,172,887,564)
1,111,595,625
===========================================================================
============
</TABLE>
<TABLE>
<CAPTION>
FACE VALUE
==========
<C> <S>
<C>
CORPORATE BONDS AND NOTES - 38.6%
ELECTRIC & GAS - 37.9%
$3,000,000 Arizona Public Service Company, First Mortgage,
7.250% due 8/1/23
2,553,750
5,000,000 Arkansas Power & Light Company, First Mortgage,
8.700% due 11/1/22
5,587,500
Atlantic City Electric Company, First Mortgage:
16,000,000 7.000% due 9/1/23
13,860,000
15,000,000 7.000% due 8/1/28
12,843,750
5,000,000 Boston Edison Company, Debenture,
9.875% due 6/1/20
5,568,750
Carolina Power & Light Company, First Mortgage:
7,200,000 8.625% due 9/15/21
7,605,000
10,000,000 8.200% due 7/1/22
9,937,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued)
JULY 31, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
===========================================================================
============
<C> <S>
<C>
CORPORATE BONDS AND NOTES - (CONTINUED)
ELECTRIC & GAS - (CONTINUED)
$2,000,000 Central Illinois Light Company, First Mortgage,
8.200% due 1/15/22 $
1,987,500
10,700,000 Central Illinois Public Service Company,
8.500% due 5/15/22
11,943,875
4,000,000 Central Power & Light Company, Debenture,
7.500% due 4/1/23
3,685,000
2,800,000 Cincinnati Gas & Electric Company, First Mortgage,
8.500% due 9/1/22
2,982,000
3,000,000 Cleveland Electric Illuminating Company, First Mortgage,
9.000% due 7/1/23
2,718,750
Commonwealth Edison Company, First Mortgage:
5,100,000 7.625% due 04/15/13
4,500,750
7,000,000 9.875% due 06/15/20
7,630,000
14,250,000 8.375% due 09/15/22
13,305,938
11,000,000 8.000% due 04/15/23
9,900,000
5,000,000 Dayton Power & Light Company, First Mortgage,
7.875% due 2/15/24
4,781,250
Duquesne Light Company,
12,000,000 7.550% due 6/15/25
10,995,000
First Mortgage:
2,500,000 8.750% due 5/15/22
2,784,375
3,000,000 7.625% due 4/15/23
2,763,750
5,500,000 8.375% due 5/15/24
6,015,625
10,000,000 Florida Power Corporation, First Mortgage,
8.625% due 11/1/21
10,387,500
15,100,000 Houston Lighting & Power Company, First Mortgage,
9.150% due 3/15/21
16,704,375
Hydro-Quebec, Debenture,
20,000,000 8.250% due 1/15/27
19,375,000
5,000,000 8.625% due 06/15/29
5,037,500
11,800,000 Idaho Power Company, First Mortgage,
8.750% due 3/15/27
12,419,500
Illinois Power Company:
8,000,000 7.500% due 7/15/25
7,190,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued)
JULY 31, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
===========================================================================
============
<C> <S>
<C>
CORPORATE BONDS AND NOTES - (CONTINUED)
ELECTRIC & GAS - (CONTINUED)
Illinois Power Company: (continued)
$10,200,000 First Mortgage,
8.750% due 7/1/21 $
11,334,750
10,500,000 Interstate Power Company, First Mortgage,
8.625% due 9/15/21
10,710,000
12,400,000 Iowa Electric Light & Power Company, Collateral Trust
Bonds,
7.000% due 10/1/23
10,726,000
Iowa Illinois Gas & Electric Company, First Mortgage:
3,500,000 7.450% due 3/15/23
3,241,875
8,500,000 6.950% due 10/15/25
7,384,375
20,000,000 Jersey Central Power & Light Company, First Mortgage,
6.750% due 11/1/23
16,625,000
15,500,000 Kentucky Utilities Company, First Mortgage,
8.550% due 5/15/27
15,829,375
Long Island Lighting Company:
11,000,000 Debenture,
9.000% due 11/1/22
9,570,000
8,000,000 General & Refundable Mortgage,
9.625% due 7/1/24
7,760,000
10,000,000 Madison Gas & Electric Company, First Mortgage,
7.700% due 2/15/28
9,337,500
2,000,000 Midwest Power System Inc., First Mortgage,
8.000% due 2/15/22
1,930,000
13,000,000 Mississippi Power & Light Company, First Refundable
Mortgage,
8.650% due 1/15/23
12,902,500
5,500,000 Monongahela Power Company, First Mortgage,
8.625% due 11/1/21
5,747,500
3,000,000 Montana Power Company, First Mortgage,
8.950% due 2/1/22
3,135,000
2,000,000 Narragansett Electric Company, First Mortgage,
9.125% due 5/1/21
2,160,000
3,000,000 Nevada Power & Light Company, First Mortgage,
8.500% due 1/1/23
2,928,750
18,450,000 New Orleans Public Service Inc., First Mortgage,
8.000% due 3/1/23
17,250,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued)
JULY 31, 1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
===========================================================================
============
<C> <S>
<C>
CORPORATE BONDS AND NOTES - (CONTINUED)
ELECTRIC & GAS - (CONTINUED)
New York State Electric & Gas Corporation, First Mortgage:
$11,750,000 8.300% due 12/15/22
$ 11,456,250
2,250,000 7.450% due 7/15/23
2,055,937
1,940,000 Northern States Power Company, Wisconsin, First Mortgage,
9.125% due 4/1/21
2,126,725
14,000,000 Oklahoma Gas & Electric Company, First Mortgage,
8.875% due 12/1/20
15,120,000
10,000,000 Old Dominion Electric Company, First Mortgage,
7.780% due 12/1/23
9,462,500
Pacific Gas & Electric Company, First and Refundable
Mortgage:
14,250,000 6.750% due 10/1/23
11,934,375
13,500,000 7.050% due 3/1/24
11,863,125
4,000,000 8.800% due 5/1/24
4,280,000
19,000,000 7.250% due 3/1/26
16,838,750
Pennsylvania Power & Light Company, First Mortgage:
14,000,000 9.375% due 7/1/21
15,347,500
7,500,000 8.500% due 5/1/22
7,650,000
5,000,000 7.875% due 2/1/23
4,818,750
10,000,000 Philadelphia Electric Company, First & Refundable
Mortgage,
7.750% due 5/1/23
9,125,000
6,000,000 Portland General Electric Company, First Mortgage,
7.750% due 4/15/23
5,595,000
Potomac Edison Company, First Mortgage:
5,000,000 7.750% due 2/1/23
4,775,000
5,000,000 8.500% due 5/15/27
5,106,250
17,000,000 Public Service Company of Colorado, First Mortgage,
8.750% due 3/1/22
17,680,000
6,700,000 Public Service Company of Oklahoma, First Mortgage,
7.375% due 4/1/23
6,088,625
Public Service Electric & Gas Company:
10,692,000 First & Refundable Mortgage,
8.750% due 2/1/22
11,199,870
7,000,000 Series C,
9.250% due 6/1/21
7,822,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
PORTFOLIO OF INVESTMENTS (continued) JULY 31,
1994
- ---------------------------------------------------------------------------
- ------------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
===========================================================================
============
<C> <S>
<C>
CORPORATE BONDS AND NOTES - (CONTINUED)
ELECTRIC & GAS - (CONTINUED)
$8,000,000 Rochester Gas & Electric Company, First Mortgage, Series
P,
9.375% due 4/1/21 $
8,440,000
12,500,000 San Diego Gas & Electric Company, First Mortgage,
8.500% due 4/1/22
12,750,000
9,000,000 South Carolina Electric & Gas Company, First Mortgage,
7.625% due 6/1/23
8,358,750
15,000,000 Southwestern Electric Power Company, First Mortgage,
6.875% due 10/1/25
12,825,000
22,500,000 Tampa Electric Company, First Mortgage,
7.750% due 11/1/22
21,571,875
Texas Utilities Electric Company, First Mortgage:
12,000,000 9.750% due 5/1/21
13,020,000
12,000,000 7.875% due 3/1/23
11,250,000
5,000,000 7.875% due 4/1/24
4,681,250
Utilcorp United Inc., Sr. Notes:
23,000,000 9.000% due 11/15/21
23,661,250
13,000,000 8.000% due 3/1/23
12,155,000
5,000,000 Virginia Electric & Power Company, First & Refundable
Mortgage,
Series A,
8.750% due 4/1/21
5,287,500
14,000,000 Western Pennsylvania Power Company, First Mortgage, Series
EE, 7.875% due 9/1/22
13,405,000
4,500,000 Western Resources, First Mortgage,
8.500% due 7/1/22
4,595,625
5,000,000 Wisconsin Electric Power, First Mortgage,
7.700% due 12/15/27
4,762,500
3,700,000 Wisconsin Power & Light Company, First Mortgage,
8.600% due 3/15/27
3,908,125
6,900,000 Wisconsin Public Service Corporation, First Mortgage,
8.800% due 9/1/21
7,417,500
-------------------------------------------------------------------------
- ------------
712,072,845
-------------------------------------------------------------------------
- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -------------
PORTFOLIO OF INVESTMENTS (continued) JULY 31,
1994
- ---------------------------------------------------------------------------
- -------------
<CAPTION>
MARKET
VALUE
FACE VALUE
(NOTE 1)
- ---------------------------------------------------------------------------
- -------------
<C> <S>
<C>
CORPORATE BONDS AND NOTES - (CONTINUED)
COMMUNICATIONS - 0.5%
GTE Corporation, Debenture:
$5,000,000 8.750% due 11/1/21
$ 5,225,000
5,000,000 7.830% due 05/01/23
4,650,000
- ---------------------------------------------------------------------------
- -------------
9,875,000
- ---------------------------------------------------------------------------
- -------------
OTHER - 0.2%
3,000,000 Selkirk Cogen Funding Corporation, First Mortgage,
8.980% due 06/26/12
3,003,750
- ---------------------------------------------------------------------------
- -------------
TOTAL CORPORATE BONDS AND NOTES (Cost $745,559,696)
724,951,595
===========================================================================
=============
REPURCHASE AGREEMENT - 0.2% (Cost $3,183,000)
3,183,000 Repurchase agreement with Citibank New York, 4.200% dated
07/29/94, to be repurchased at $3,184,114 on 08/01/94,
collateralized by $3,075,000 U.S. Treasury Note, 8.500%
due 7/15/97.
3,183,000
- ---------------------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (Cost $1,921,630,260*) 98.0%
1,839,730,220
OTHER ASSETS AND LIABILITIES (NET) 2.0
37,539,338
===========================================================================
=============
NET ASSETS 100.0%
$1,877,269,558
===========================================================================
=============
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -------------
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1994
- ---------------------------------------------------------------------------
- -------------
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $1,921,630,260) (Note 1)
See accompanying schedule
$1,839,730,220
Cash
1,088
Receivable for investment securities sold
32,276,822
Interest receivable
16,023,223
Dividends receivable
7,188,625
Receivable for Fund shares sold
2,001,555
- ---------------------------------------------------------------------------
- -------------
TOTAL ASSETS
1,897,221,533
===========================================================================
=============
LIABILITIES:
Payable for investment securities purchased $12,741,149
Dividends payable 2,665,596
Payable for Fund shares redeemed 1,918,820
Distribution fee payable (Note 3) 771,110
Investment advisory fee payable (Note 2) 709,388
Service fee payable (Note 3) 394,210
Administration fee payable (Note 2) 315,284
Transfer agent fees payable (Note 2) 191,500
Custodian fees payable (Note 2) 52,000
Accrued expenses and other payables 192,918
- ---------------------------------------------------------------------------
- -------------
TOTAL LIABILITIES
19,951,975
===========================================================================
=============
NET ASSETS
$1,877,269,558
===========================================================================
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -----------
STATEMENT OF ASSETS AND LIABILITIES (continued)
- ---------------------------------------------------------------------------
- -----------
<S> <C>
NET ASSETS CONSIST OF:
Distributions in excess of net investment income $
(2,665,596)
Accumulated net realized gain on investments sold
10,931,878
Unrealized depreciation of investments
(81,900,040)
Par value
141,405
Paid-in capital in excess of par value
1,950,761,911
- ---------------------------------------------------------------------------
- -----------
TOTAL NET ASSETS
$1,877,269,558
===========================================================================
===========
NET ASSET VALUE
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($41,457,748/3,122,957 shares of beneficial interest
outstanding)
$13.28
===========================================================================
===========
Maximum offering price per share ($13.28/.95) (based on
sales charge of 5.0% of the offering price on July 31, 1994)
$13.98
===========================================================================
===========
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($1,822,545,638/137,282,790 shares of beneficial interest
outstanding)
$13.28
===========================================================================
===========
CLASS C SHARES:
NET ASSET VALUE, offering and redemption price per share
($11,372,352/856,647 shares of beneficial interest outstanding)
$13.28
===========================================================================
===========
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($1,893,820/142,614 shares of beneficial interest outstanding)
$13.28
===========================================================================
===========
<FN>
+ Redemption price per share is equal to Net Asset Value less any
applicable contingent
deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED
JULY 31, 1994
- ---------------------------------------------------------------------------
- ------------
<S> <C>
<C>
INVESTMENT INCOME:
Interest $
81,974,644
Dividends (net of foreign withholding taxes of $16,137)
77,986,717
- ---------------------------------------------------------------------------
- ------------
TOTAL INVESTMENT INCOME
159,961,361
- ---------------------------------------------------------------------------
- ------------
EXPENSES:
Distribution fee (Note 3) $11,761,303
Investment advisory fee (Note 2) 10,896,883
Service fee (Note 3) 6,005,879
Administration fee (Note 2) 4,843,059
Transfer agent fees (Notes 2 and 4) 2,634,860
Custodian fees (Note 2) 217,518
Legal and audit fees 57,268
Trustees' fees and expenses (Note 2) 13,995
Other 417,821
- ---------------------------------------------------------------------------
- ------------
TOTAL EXPENSES
36,848,586
- ---------------------------------------------------------------------------
- ------------
NET INVESTMENT INCOME
123,112,775
===========================================================================
============
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain on investments sold during the year
51,444,413
Net unrealized depreciation of investments during the
year
(410,755,069)
===========================================================================
============
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(359,310,656)
===========================================================================
============
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(236,197,881)
===========================================================================
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -------------
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------
- -------------
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
- ---------------------------------------------------------------------------
- -------------
<S> <C>
<C>
Net investment income $ 123,112,775
$ 118,842,565
Net realized gain on investments sold during the year 51,444,413
56,596,892
Net unrealized appreciation/(depreciation) of investments
during the year (410,755,069)
159,835,601
- ---------------------------------------------------------------------------
- -------------
Net increase/(decrease) in net assets resulting from
operations (236,197,881)
335,275,058
Distributions to shareholders from net investment income:
Class A (3,496,920)
(1,035,033)
Class B (115,814,975)
(117,099,685)
Class C (1,106,602)
(705,614)
Class D (54,545)
(2,233)
Distributions in excess of net investment income:
Class A (131,143)
(19,256)
Class B (4,418,049)
(2,178,520)
Class C (41,285)
(13,127)
Class D (2,239)
(42)
Distributions to shareholders from net realized gain on
investments:
Class A (1,710,735)
(98,332)
Class B (80,281,991)
(21,215,031)
Class C (709,605)
(122,643)
Class D (32,306)
(125)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (3,077,993)
51,983,923
Class B (512,787,025)
855,488,274
Class C (6,947,831)
20,405,316
Class D 1,863,341
242,034
- ---------------------------------------------------------------------------
- -------------
Net increase/(decrease) in net assets (964,947,784)
1,120,904,964
NET ASSETS:
Beginning of year 2,842,217,342
1,721,312,378
- ---------------------------------------------------------------------------
- -------------
End of year (including distributions in excess of net
investment income of $2,665,596 and $2,210,945,
respectively) $1,877,269,558
$2,842,217,342
===========================================================================
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ----------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------
- ----------
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*
- ---------------------------------------------------------------------------
- ----------
<S> <C>
<C>
Net Asset Value, beginning of period $15.97
$14.36
- ---------------------------------------------------------------------------
- ----------
Income from investment operations:
Net investment income 0.56
0.66
Net realized and unrealized gain/(loss) on investments (1.92)
1.72
- ---------------------------------------------------------------------------
- ----------
Total from investment operations (1.36)
2.38
- ---------------------------------------------------------------------------
- ----------
Less distributions:
Distributions from net investment income (0.80)
(0.63)
Distributions in excess of net investment income (0.03)
(0.01)
Distributions from net realized capital gains (0.50)
(0.13)
- ---------------------------------------------------------------------------
- ----------
Total distributions (1.33)
(0.77)
- ---------------------------------------------------------------------------
- ----------
Net Asset Value, end of period $13.28
$15.97
- ---------------------------------------------------------------------------
- ----------
Total return++ (8.99)%
17.01%
===========================================================================
==========
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $41,458
$53,856
Ratio of operating expenses to average net assets 1.07%
1.07%+
Ratio of net investment income to average net assets 5.54%
5.67%+
Portfolio turnover rate 28%
37%
- ---------------------------------------------------------------------------
- ----------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indicated
and does not
reflect any applicable sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------
- -------------
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/94 7/31/93
7/31/92#
- ---------------------------------------------------------------------------
- -------------
<S> <C> <C>
<C>
Net Asset Value, beginning of year $15.97 $14.83
$13.95
- ---------------------------------------------------------------------------
- -------------
Income from investment operations:
Net investment income 0.75 0.79
0.35
Net realized and unrealized gain/(loss) on
investments (2.19) 1.30
0.89
- ---------------------------------------------------------------------------
- -------------
Total from investment operations (1.44) 2.09
1.24
- ---------------------------------------------------------------------------
- -------------
Less distributions:
Distributions from net investment income (0.72) (0.79)
(0.35)
Distributions in excess of net investment income (0.03) (0.01)
- --
Distributions from net realized capital gains (0.50) (0.15)
- --
Distributions from capital (Note 1) -- --
(0.01)
- ---------------------------------------------------------------------------
- -------------
Total distributions (1.25) (0.95)
(0.36)
- ---------------------------------------------------------------------------
- -------------
Net Asset Value, end of year $13.28 $15.97
$14.83
===========================================================================
=============
Total return++ (9.52)% 14.69%
8.98%
===========================================================================
=============
Ratios to average net assets/Supplemental Data:
Net assets, end of year (in 000's) $1,822,546 $2,765,858
$1,721,312
Ratio of operating expenses to average net assets 1.54% 1.56%
1.57%+
Ratio of net investment income to average net assets 5.07% 5.17%
5.78%+
Portfolio turnover rate 28% 37%
10%
===========================================================================
=============
<FN>
+ Annualized.
++ Total return represents aggregate total return for the period indicated
and does not
reflect any applicable sales charge.
# During the period from March 1, 1992 through July 31, 1992, the Fund
changed its fiscal
year end to July 31. Prior to this, the Fund's fiscal year end was
February 28.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -------------
FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------
- -------------
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR
YEAR YEAR PERIOD
ENDED
ENDED ENDED ENDED
2/28/92
2/28/91 2/28/90 2/28/89*
- ---------------------------------------------------------------------------
- --------------------------------
<S> <C>
<C> <C> <C>
Net Asset Value, beginning of year $13.21
$12.93 $12.09 $12.00
- ---------------------------------------------------------------------------
- --------------------------------
Income from investment operations:
Net investment income 0.82
0.88 0.87 0.64
Net realized and unrealized gain on
investments 0.94
0.40 1.08 0.17
- ---------------------------------------------------------------------------
- --------------------------------
Total from investment operations 1.76
1.28 1.95 0.81
- ---------------------------------------------------------------------------
- --------------------------------
Less distributions:
Distributions from net investment income (0.84)
(0.90) (0.90) (0.57)
Distributions in excess of net investment income --
- -- -- --
Distributions from net realized capital gains (0.15)
(0.10) (0.21) (0.15)
Distributions from capital (Note 1) (0.03)
- -- -- --
- ---------------------------------------------------------------------------
- --------------------------------
Total distributions (1.02)
(1.00) (1.11) (0.72)
- ---------------------------------------------------------------------------
- --------------------------------
Net Asset Value, end of year $13.95
$13.21 $12.93 $12.09
===========================================================================
================================
Total return++ 13.63%
10.46% 16.34% 6.80%
===========================================================================
================================
Ratios to average net assets/Supplemental Data:
Net assets, end of year (in 000's) $1,274,853
$707,272 $603,739 $416,320
Ratio of operating expenses to average net assets 1.58%
1.65% 1.70% 1.77%+
Ratio of net investment income to average net assets 6.04%
6.89% 6.83% 6.99%+
Portfolio turnover rate 33%
31% 50% 46%
===========================================================================
================================
<FN>
* The Fund commenced operations on March 28, 1988. On November 6, 1992 the
Fund commenced selling Class A
and Class C shares and on February 4, 1993 the Fund commenced selling
Class D shares. Those shares in
existence prior to November 6, 1992 were designated Class B shares.
+ Annualized.
++ Total return represents aggregate total return for the period indicated
and does not reflect any
applicable sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -----------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------
- -----------
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*
- ---------------------------------------------------------------------------
- -----------
<S> <C>
<C>
Net Asset Value, beginning of period $15.97
$14.36
- ---------------------------------------------------------------------------
- -----------
Income from investment operations:
Net investment income 0.89
0.69
Net realized and unrealized gain/(loss) on investments (2.21)
1.72
- ---------------------------------------------------------------------------
- -----------
Total from investment operations (1.32)
2.41
- ---------------------------------------------------------------------------
- -----------
Less distributions:
Distributions from net investment income (0.84)
(0.65)
Distributions in excess of net investment income (0.03)
(0.01)
Distributions from net realized capital gains (0.50)
(0.14)
- ---------------------------------------------------------------------------
- -----------
Total distributions (1.37)
(0.80)
- ---------------------------------------------------------------------------
- -----------
Net Asset Value, end of period $ 13.28
$ 15.97
===========================================================================
===========
Total return ++ (8.78)%
17.21%
===========================================================================
===========
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $11,372
$22,251
Ratio of operating expenses to average net assets 0.69%
0.68%+
Ratio of net investment income to average net assets 5.92%
6.06%+
Portfolio turnover rate 28%
37%
===========================================================================
===========
<FN>
* The Fund commenced selling Class C shares on November 6, 1992.
+ Annualized
++ Total return represents aggregate total return for the period
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------
- ------------
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*
- ---------------------------------------------------------------------------
- ------------
<S> <C>
<C>
Net Asset Value, beginning of period $15.97
$15.17
- ---------------------------------------------------------------------------
- ------------
Income from investment operations:
Net investment income 0.73
0.35
Net realized and unrealized gain/(loss) on investments (2.17)
0.86
- ---------------------------------------------------------------------------
- ------------
Total from investment operations (1.44)
1.21
- ---------------------------------------------------------------------------
- ------------
Less distributions:
Distributions from net investment income (0.72)
(0.38)
Distributions in excess of net investment income (0.03)
(0.01)
Distributions from net realized capital gains (0.50)
(0.02)
- ---------------------------------------------------------------------------
- ------------
Total distributions (1.25)
(0.41)
- ---------------------------------------------------------------------------
- ------------
Net Asset Value, end of period $13.28
$15.97
===========================================================================
============
Total return++ (9.52)%
8.08%
===========================================================================
============
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $1,894
$252
Ratio of operating expenses to average net assets 1.48%
1.49%+
Ratio of net investment income to average net assets 5.13%
5.25%+
Portfolio turnover rate 28%
37%
===========================================================================
============
<FN>
* The Fund commenced selling Class D shares on February 4, 1993.
+ Annualized
++ Total return represents aggregate total return for the period
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
- -----
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a
"Massachusetts business trust" under the laws of the Commonwealth of
Massachusetts on March 12, 1985. The Fund is registered with the Securities
and
Exchange Commission under the Investment Company Act of 1940, as amended
(the
"1940 Act"), as an open-end management investment company. As of the date
of
this report, the Fund offered eight managed investment portfolios: Smith
Barney
Shearson Premium Total Return Fund, Smith Barney Shearson Convertible Fund,
Smith Barney Shearson Global Bond Fund, Smith Barney Shearson High Income
Fund,
Smith Barney Shearson Tax-Exempt Income Fund, Smith Barney Shearson Money
Market
Fund, Smith Barney Shearson Diversified Strategic Income Fund and Smith
Barney
Shearson Utilities Fund (the "Fund"). As of November 6, 1992, the Fund
offered
three classes of shares: Class A shares, Class B shares, and Class C
shares. As
of January 29, 1993, the Fund offered a fourth class of shares, Class D
shares,
to investors eligible to participate in Smith Barney 401(k) Program. Class
A
shares are sold with a front-end sales charge. Class B shares may be
subject to
a contingent deferred sales charge ("CDSC"). Class B shares will convert
automatically to Class A shares eight years after the date of original
purchase.
Class C shares are offered exclusively to tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and certain unit
investment trusts sponsored by Smith Barney and its affiliates. Class C and
Class D shares are offered without the imposition of a front-end sales
charge or
a CDSC. All classes of shares have identical rights and privileges except
with
respect to the effect of the respective sales charges, the distribution
and/or
service fees borne by each class, expenses allocable exclusively to each
class,
voting rights on matters affecting a single class, the exchange privilege
of
each class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the
Fund in
the preparation of its financial statements.
Portfolio valuation: Generally, the Fund's investments are valued at
market
value or, in the absence of a market value with respect to any securities,
at
fair value as determined by or under the direction of the Trust's Board of
Trustees. A security that is primarily traded on an exchange is valued at
the
last sale price on that exchange or, if there were no sales during the day,
at
the current quoted bid price. Bonds and other fixed-income securities are
valued
by using market quotations and may be valued on the basis of prices
provided by
a pricing service, approved by the Board of Trustees, when the Board of
Trustees
believes that such prices reflect the market value of such securities.
Investments in government securities (other than
31
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
short-term securities) are valued at the average of the quoted bid and
asked
prices in the over-the-counter market. Short-term investments that mature
in 60
days or less are valued at amortized cost.
Repurchase agreements: The Fund engages in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes
possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price
and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right
to use the collateral to offset losses incurred. There is potential loss to
the
Fund in the event the Fund is delayed or prevented from exercising its
rights to
dispose of the collateral securities, including the risk of a possible
decline
in the value of the underlying securities during the period while the Fund
seeks
to assert its rights. The Fund's investment adviser, administrator and/or
sub-administrator acting under the supervision of the Board of Trustees,
reviews
the value of the collateral and the creditworthiness of those banks and
dealers
with which the Fund enters into repurchase agreements to evaluate potential
risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-
issued or
delayed-delivery basis may be settled a month or more after the trade date.
Realized gains and losses from securities sold are recorded on the
identified
cost basis. Dividend income and distributions to shareholders are recorded
on
the ex-dividend date. Interest income is recorded on the accrual basis.
Investment income and realized and unrealized gains and losses are
allocated
based upon the relative net assets of each class of shares.
Dividends and distributions to shareholders: Dividends from net investment
income, if any, of the Fund are declared monthly and are paid on the last
day of
the Smith Barney statement month. Distributions, if any, of any net short-
and
long-term capital gains earned by the Fund will be made annually after the
close
of the fiscal year in which they are earned. Additional distributions of
net
investment income and capital gains from the Fund may be made at the
discretion
of the Trust's Board of Trustees in order to avoid the application of a 4%
nondeductible excise tax on certain undistributed amounts of ordinary
income and
capital gains.
32
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
For purposes of the Statement of Changes in Net Assets, income
distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and
gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund.
Federal taxes: The Trust intends that the Fund separately qualify as a
regulated investment company, if such qualification is in the best interest
of
its shareholders, by complying with the requirements of the Internal
Revenue
Code of 1986, as amended, applicable to regulated investment companies and
by
distributing substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which is controlled by Smith Barney Holdings Inc. ("Holdings").
Holdings
is a wholly-owned subsidiary of The Travelers Inc. Under the Advisory
Agreement,
the Fund pays a monthly fee at the annual rate of 0.45% of the value of its
average daily net assets.
Prior to May 4, 1994, the Fund was party to an administration agreement
(the
"Administration Agreement") with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Administration Agreement, the Fund paid a monthly fee
at
the annual rate of .20% of the value of its average daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains
substantially
the same terms and conditions, including the level of fees, as the
predecessor
agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a
sub-administration agreement with Boston Advisors (the "Sub-Administration
Agreement"). Under the Sub-Administration Agreement, SBA pays Boston
Advisors a
portion of its fee at a rate agreed upon from time to time between SBA and
Boston Advisors.
33
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
For the year ended July 31, 1994, the Fund incurred total brokerage
commissions
of $2,006,028, of which $174,858, was paid to Smith Barney.
For the year ended July 31, 1994, Smith Barney received from shareholders
$364,556 representing commissions (sales charges) on sales of the Class A
shares.
A CDSC is generally payable by a shareholder in connection with the
redemption
of Class B shares within five years (eight years in the case of purchases
by
certain 401(k) plans) after the date of purchase. In circumstances in which
the
CDSC is imposed, the amount ranges between 5% and 1% of net asset value
depending on the number of years since the date of purchase (except in the
case
of purchases by certain 401(k) plans in which case a 3% CDSC is imposed for
the
eight year period after the date of purchase). For the year ended July 31,
1994,
Smith Barney received from shareholders $8,429,876 in CDSCs on the
redemption of
Class B shares.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as a Trustee or
officer of
the Trust. The Fund pays each Trustee who is not an officer, director or
employee of Smith Barney or any of its affiliates $10,000 per annum plus
$1,500
per meeting attended and reimburses each such Trustee for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of
Mellon, serves as the Trust's custodian. The Shareholder Services Group,
Inc., a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Trust's shares pursuant to a
distribution agreement with the Trust and sells shares of the Fund through
Smith
Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services
and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class D
shareholders, and covers expenses incurred in distributing Class B and
Class D
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the rate of 0.25% of the value of
the
average daily net assets of each respective class of shares. Smith Barney
is
also paid an annual distribution fee with respect to Class B and Class D
shares
at the rate of 0.50% of the value of the average daily net assets of each
respective class of shares. For the year ended July 31, 1994, the service
fee
for Class A, Class B and Class D shares was $125,227,
34
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
$5,877,824 and $2,828, respectively. For the year ended July 31, 1994, the
distribution fee for Class B shares and Class D shares was $11,755,647 and
$5,656, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of
shares are prorated among the classes based upon the relative net assets of
each
class. Operating expenses directly attributable to a class of shares are
charged
to that class' operations. In addition to the above service and
distribution
fees, class specific operating expenses include transfer agent fees. For
the
year ended July 31, 1994, transfer agent fees for Class A, Class B, Class C
and
Class D shares were $69,992, $2,562,142, $2,156 and $570, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding long-
term
U.S. government securities and short-term investments, aggregated
$659,500,283
and $1,110,434,195, respectively, for the year ended July 31, 1994
At July 31, 1994, aggregate gross unrealized appreciation for all
securities in
which there was an excess of value over tax cost was $52,547,934, and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of
tax cost over value was $134,447,974.
35
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- -----------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----------------------
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
each
class in each separate series, with a $.001 par value. Changes in shares of
beneficial interest of the Fund which are divided into four classes (Class
A,
Class B, Class C, and Class D) were as follows:
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93**
Class A shares: Shares Amount Shares
Amount
===========================================================================
=======================
<S> <C> <C> <C>
<C>
Sold 1,190,478 $ 18,086,455
4,232,755 $ 65,409,914
Issued as reinvestment of
dividends 263,745 3,899,160
63,590 986,650
Redeemed (1,703,880) (25,063,608)
(923,731) (14,412,641)
- ---------------------------------------------------------------------------
- -----------------------
Net increase/(decrease) (249,657) $ (3,077,993)
3,372,614 $ 51,983,923
===========================================================================
=======================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED
7/31/94
7/31/93**
Class B shares: Shares Amount
Shares Amount
===========================================================================
=======================
<S> <C> <C> <C>
<C>
Sold 18,848,373 $ 289,406,819
70,360,056 $1,057,190,126
Issued as reinvestment of
dividends 10,988,064 162,852,087
7,473,509 112,957,808
Redeemed (65,768,788) (965,045,931)
(20,719,655) (314,659,660)
- ---------------------------------------------------------------------------
- -----------------------
Net increase/(decrease) (35,932,351) $(512,787,025)
57,113,910 $ 855,488,274
- ---------------------------------------------------------------------------
- -----------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93**
Class C shares: Shares Amount
Shares Amount
===========================================================================
=======================
<S> <C> <C> <C>
<C>
Sold 493,082 $ 7,492,064
1,397,151 $ 20,470,632
Issued as reinvestment of
dividends 123,974 1,844,601
54,726 837,510
Redeemed (1,153,635) (16,284,496)
(58,651) (902,826)
- ---------------------------------------------------------------------------
- -----------------------
Net increase/(decrease) (536,579) $ (6,947,831)
1,393,226 $ 20,405,316
===========================================================================
=======================
</TABLE>
36
<PAGE>
Smith Barney Shearson
Utilities Fund
<TABLE>
- ---------------------------------------------------------------------------
- ----------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- ----------------------
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93**
Class D shares: Shares Amount
Shares Amount
===========================================================================
======================
<S> <C> <C> <C>
<C>
Sold 142,046 $ 2,066,406
16,213 $ 248,799
Issued as reinvestment of
dividends 6,211 88,581
149 2,355
Redeemed (21,427) (291,646)
(578) (9,120)
- ---------------------------------------------------------------------------
- ----------------------
Net increase 126,830 $ 1,863,341
15,784 $ 242,034
===========================================================================
======================
<FN>
** The Fund began offering Class A and Class C shares on November 6, 1992.
Any shares outstanding
prior to November 6, 1992 were designated as Class B shares. The Fund
began offering Class D
shares on February 4, 1993.
</TABLE>
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of
credit provided by Continental Bank N.A. under an Amended and Restated Line
of
Credit Agreement (the "Agreement") dated April 30, 1992 and renewed
effective
May 31, 1994, primarily for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. Under this Agreement, the Fund may borrow up to
the
lesser of $25 million or 20% of its net assets. Interest is payable either
at
the bank's Money Market Rate or the London Interbank Offered Rate (LIBOR)
plus
0.375% on an annualized basis. Under the terms of the Agreement, as
amended, the
Fund and the other affiliated entities are charged an aggregate commitment
fee
of $100,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to
maintain
a ratio of net assets (not including funds borrowed pursuant to the
Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less
than 5
to 1. During the year ended July 31, 1994, the Fund had an average
outstanding
daily balance of $966,027 with interest rates ranging from 3.438% to
6.375%.
Interest expense for the year ended July 31, 1994 totalled $59,655. At July
31,
1994, the Fund had no outstanding borrowings under the Agreement.
37
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
NOTES TO FINANCIAL STATEMENTS (continued)
- ---------------------------------------------------------------------------
- -----
8. CONCENTRATION OF CREDIT
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
risks
could adversely affect the ability and inclination of companies within the
utilities industry to declare or pay dividends or interest and the ability
of
holders of such securities to realize any value from the assets of the
issuer
upon liquidation or bankruptcy.
38
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------------------
- -----
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF SMITH BARNEY SHEARSON
UTILITIES
FUND OF SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of the
Smith Barney Shearson Utilities Fund of Smith Barney Shearson Income Funds,
including the schedule of portfolio investments, as of July 31, 1994, and
the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended,
and
the financial highlights for each of the two years in the period ended July
31,
1994, the five-month period ended July 31, 1992, each of the three years in
the
period ended February 29, 1992 and for the period March 28, 1988
(commencement
of operations) to February 28, 1989. 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.
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 include examining,
on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. Our procedures included confirmation of securities owned as of
July
31, 1994 by correspondence with the custodian and brokers. 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 Shearson Utilities Fund of Smith Barney Shearson Income Funds
as of
July 31, 1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended,
and the financial highlights for each of the two years in the period ended
July
31, 1994, the five-month period ended July 31, 1992, each of the three
years in
the period ended February 29, 1992 and for the period from March 28, 1988
(commencement of operations) to February 28, 1989, in conformity with
generally
accepted accounting principles.
Coopers & Lybrand,
L.L.P.
Boston, Massachusetts
September 9, 1994
39
<PAGE>
Smith Barney Shearson
Utilities Fund
- ---------------------------------------------------------------------------
- -----
TAX INFORMATION (UNAUDITED)
- ---------------------------------------------------------------------------
- -----
The following tax information represents fiscal year end disclosures of
various
tax benefits passed through to shareholders at calendar year end.
During the fiscal year ended July 31, 1994, the Fund paid $82,734,637 of
long
term capital gains to its shareholders.
Of the distribution from ordinary income made by the Fund during the fiscal
year
ended July 31, 1994, 63.35% represents the amount of each distribution
which
will qualify for the dividend received deduction available to corporate
shareholders.
The above figure may differ from those cited elsewhere in this report due
to
differences in the calculations of income and capital gains for Securities
and
Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
40
<PAGE>
UTILITIES
FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman of the Board This report is submitted for the
and Investment Officer general information of the
shareholders of Smith Barney
Stephen J. Treadway Shearson Utilities Fund. It is not
President authorized for distribution to
prospective investors unless
Richard P. Roelofs accompanied or preceded by an
Executive Vice President effective Prospectus for the
Fund, which contains information
Jack S. Levande concerning the Fund's investment
Vice President and policies, fees and expenses as
Investment Officer well as other pertinent information.
Lewis E. Daidone
Treasurer Performance is cited through
July 31, 1994. Please consult
Christina T. Sydor Smith Barney Shearson mutual
Secretary funds Quarterly Performance
Update for figures through the
most recent calendar quarter.
SMITH BARNEY
------------
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
[RECYCLE Recycled Fund 65, 173, 174, 210
LOGO] Recyclable FD0426 I4
1994
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing a black and white picture of stock
certificates, a desk plotter, pocket watch and an ink pen.
SMITH BARNEY SHEARSON
CONVERTIBLE FUND
JULY 31, 1994
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report and portfolio of in-
vestments for Smith Barney Shearson Convertible Fund for the fiscal year
ended July 31, 1994. During the past twelve months, in response to declin-
ing prices for convertible securities, the net asset value of the Fund's
Class A and Class B shares both declined to $14.56 from $14.99 per share.
Investors owning Class A shares received distributions of $.73 per share;
investors owning Class B shares received distributions of $.66 per share.
The total return for this fiscal period was 1.99% for Class A shares and
1.50% for Class B shares. Most of the decline in the Fund's net asset
value per share occurred as a result of market volatility caused by the
Federal Reserve Bank's decision in February of this year to begin raising
short-term interest rates. The Fund's total return for Class A shares and
Class B shares was 5.91% and 5.66% for the period between August 1, 1993
and January 31, 1994, respectively. In contrast, the total return between
February 1, 1994 and July 31, 1994 for Class A shares was (3.70)% and
(3.93)% for Class B shares. Further information about the performance of
your investment during this and previous fiscal periods is available from
the Performance pages of this report.
ECONOMIC AND FINANCIAL MARKET OVERVIEW
During the past twelve months and since our last report, the domestic
economy has shown significant improvement as a result of lower interest
rates in 1993. Following several quarters of sluggish growth, the U.S.
economy began to show signs of expansion in the second half of 1993 and
this momentum has continued as evidenced by continued strength in the
housing and auto sectors. The favorable interest rate environment sparked
a housing recovery by increasing mortgage lending and refinancing. The ad-
ditional disposable income derived through these refinancing efforts con-
tributed to a rise in consumer spending. Consumer confidence also improved
and was clearly reflected in retail sales and automobile purchases. Pro-
ductivity enhancements of previous years enabled the already "lean and
mean" corporations to increase capital spending and production schedules
to meet the new demand.
In early February, the Federal Reserve Bank, fearing a resurgence of in-
flation in an expanding economy, increased short-term rates for the first
time in seven years. A rise in commodity prices and an improving employ-
ment picture led to subsequent rate hikes in an effort to control the pace
of economic growth and was intended as a preemptive strike against renewed
inflation. We agree with the actions of the Federal Reserve and believe
that these interest rate increases will eventually slow the rate of eco-
nomic growth and inflation will remain under control.
The initial reaction of the financial markets to renewed economic growth
was positive, since a stronger economy would lead to higher corporate
earnings. The equity market, as measured by the Dow Jones Industrial Aver-
age rose dramatically and reached an all-time high in late January 1994.
This all came to an end the day the Federal Reserve began to raise short-
term interest rates. The financial markets weakened following the Fed's
action and between February 3, 1994 and July 31, 1994, long-term interest
rates as measured by the 30-year Treasury bond rose over 100 basis points
or 1%. The yield on the 30-year Treasury bond increased from 6.3% to 7.4%.
The higher interest rate environment made equities look less attractive
and consequently the Dow Jones Industrial Average declined from the 3967
level on February 3, 1994 to 3764 on July 29, 1994.
Looking forward we believe the financial markets and long-term interest
rates will stabilize and improve as a result of the inflation fighting
policies of the Federal Reserve Bank. The equity market should continue to
benefit from rising corporate earnings.
The convertible securities market continues to attract investors seeking
long-term growth and higher current income. Prior to the Federal Reserve's
rate hike in early February, the convertible market performed well, as the
favorable interest rate environment resulted in additional new convertible
offerings. Several of the new issues (Thermo Electron 5% of 2001 convert-
ible bonds and Inco 5 3/4 % of 2002 convertible bonds) immediately traded
above issue price. This momentum carried conversion premiums to overvalued
levels. Following the Federal Reserve's move in February, the convertibles
market corrected and conversion premiums contracted. Since convertibles
have both fixed income and equity characteristics, these investments were
adversely impacted by the selloff in the financial markets subsequent to
the Federal Reserve's actions to control inflation. The new issue calendar
has slowed dramatically as corporations await a better interest rate envi-
ronment in which to raise funds. The correction has created an attractive
opportunity in existing issues for long-term, value-oriented investors.
Given our upbeat outlook for the economy and financial markets over the
next year, we believe convertibles will continue to provide investors with
superior risk-adjusted returns.
INVESTMENT STRATEGY
The primary objective of the Fund is to provide investors with current in-
come and capital appreciation by investing in convertible securities. The
goal of investing in convertible securities is to achieve long-term growth
with reduced volatility and higher income than common stocks. Although the
appreciation potential of convertibles is in general not as great as that
of common stocks, convertibles usually provide better downside protection.
This is due to the higher income generated by convertibles and their sta-
tus as a senior corporate security.
DIVIDEND POLICY
Although not explicitly stated in the prospectus, the Fund's policy is to
pay a level monthly dividend based on our projections for the equity mar-
ket and the general direction of interest rates. This policy has no appre-
ciable affect on the Fund's investment strategies or net asset value per
share since it is guided by market conditions. We continually monitor both
the market and the Fund's income stream to see that our dividend projec-
tions are on target.
We seek to achieve our objective through a strategy that combines funda-
mentally strong companies with attractively priced convertible securities.
Our focus is on convertible issues of better quality. As of July 31, 1994
over 50% of the 50 issues in the Fund were rated investment grade (rated
BBB or higher by S&P). The Fund is comprised primarily of convertible de-
bentures and convertible preferred stock. At times we have purchased vari-
ations of convertible securities such as zero coupon convertibles with put
features and convertibles with shorter maturities. These investments have
excellent defensive characteristics and help us control volatility.
The Fund is well diversified with over 20 different industries repre-
sented. The broad range of economic sectors covered should benefit from a
continuance of the economic recovery. Some of the sectors well represented
in the Fund include: financials, metals, mining, foods and energy. We be-
lieve these groups will continue to report solid results given our outlook
for the economy in the next 12 months. Since our last report, we have
added Bank America to our bank holdings. In the metals and mining area we
have added to positions in Cyprus Amax Minerals and Newmont Mining and
have purchased Bethlehem Steel. The food area is well represented with
holdings in ConAgra, Sysco and RJR Nabisco Holdings. We have recently in-
creased our energy weighting by adding positions in Chevron and Unocal.
Other additions to the Fund include Thermo Electron, Interpublic Group,
Corning Inc., Burlington Northern, California Microwave and American
Stores. Kerr-McGee and Goodyear are two issues that were called for re-
demption. We will continue to make every effort to provide you with a high
level of professional management and investment performance and thank you
for your continued support.
Sincerely,
Heath B. McLendon
Chairman of the Board and
Investment Officer
Jack S. Levande
Vice President
and Investment Officer
September 19, 1994
PORTFOLIO HIGHLIGHTS
JULY 31, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Income Fund -- Convertible
Fund's investment securities held at July 31, 1994 by industry classifica-
tion. The pie is broken in pieces representing industries in the following
percentages:
<TABLE>
<CAPTION>
INDUSTRY
PERCENTAGE
<S>
<C>
BANKING AND FINANCE
17.5%
OIL, GAS, METALS AND MINING
24.3%
OTHER INDUSTRIES
19.9%
REPURCHASE AGREEMENT AND NET OTHER ASSETS AND LIABILI-
TIES
3.8%
REAL ESTATE
4.1%
LEISURE AND AMUSEMENT
5.0%
COMPUTERS AND ELECTRONICS
7.2%
INSURANCE
7.2%
GROCERY, FOOD AND BEVERAGE
11.0%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET
ASSETS
<S> <C>
FREEPORT MCMORAN INC.
4.2%
TIME WARNER INC.
4.0
CYPRUS AMAX MINERALS COMPANY
4.0
BANKAMERICA CORP.
4.0
CHUBB CAPITAL CORP.
3.6
BARNETT BANKS INC.
3.4
GREAT WESTERN FINANCIAL CORP.
3.3
GENERAL MOTORS CORP.
3.2
AMOCO CDA PETROLEUM CO.
2.8
BURLINGTON NORTHERN INC.
2.8
</TABLE>
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS
TOTAL
JULY 31 BEGINNING ENDING PAID PAID
RETURN*
<S> <C> <C> <C> <C>
<C>
11/6/92-7/31/93 $13.82 $14.99 $.03 $ .51
12.63%
1994 14.99 14.56 -- .73
1.99
Total $.03 $1.24
Cumulative Total Return -- (11/6/92 through 7/31/94)
14.87%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the front-end
sales charge (maximum 5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
WITHOUT SALES CHARGE WITH SALES
CHARGE***
<S> <C> <C>
Year Ended 7/31/94 1.99% (3.11)%
Inception 11/6/92 through 7/31/94 8.37% 5.20%
<FN>
** All average annual total return figures shown reflect reinvestment
of dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the max-
imum 5% sales charge.
</TABLE>
NOTE: On November 6, 1992, the Fund began offering Class A shares.
Class A shares are subject to a maximum 5% front-end sales charge
and a service fee of 0.25% of the value of the average daily net as-
sets attributable to that class.
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY SHEARSON CONVERTIBLE FUND+ VS.
UNMANAGED INDICES
November 6, 1992 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN
SHEARSON COVERS (CLASS A)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Con-
vertible Fund Class A shares on November 6, 1992 through July 31, 1994 as
compared with the growth of a $10,000 investment in the Standard & Poor's
500 Index and the Lipper Convertible Securities Index. The plot points
used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF
$10,000
GROWTH OF $10,000 INVESTMENT IN THE INVESTMENT IN
THE
MONTH INVESTED IN CLASS A STANDARD & POOR'S LIPPER
CONVERTIBLE
ENDED SHARES OF THE FUND 500 INDEX SECURITIES
INDEX
<S> <C> <C> <C>
10/30/92 - $10,000
$10,000
11/09/92 $9,500 - -
11/92 $9,686 $10,340
$10,280
12/92 $9,867 $10,467
$10,496
3/93 $10,434 $10,924
$11,129
6/93 $10,564 $10,976
$11,383
9/93 $10,894 $11,259
$11,937
12/93 $11,156 $11,521
$12,144
3/94 $10,863 $11,085
$11,924
6/94 $10,681 $11,131
$11,672
7/94 $10,913 $11,496
$11,869
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 5% sales charge at the time of invest-
ment and reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
</TABLE>
S&P 500 -- The Standard & Poor's Composite Daily Price Index of 500 Com-
mon Stocks is an unmanaged index used to portray the pattern of common
stock price movement.
LIPPER CONVERTIBLE SECURITIES INDEX -- The Lipper Analytical Services,
Inc. Convertible Securities Index is composed of the Fund's peer group
of mutual funds investing in convertible securities.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class A shares and do not guarantee future results.
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED RETURN OF CAPITAL GAINS
DIVIDENDS TOTAL
JULY 31 BEGINNING ENDING CAPITAL PAID
PAID RETURN*
<S> <C> <C> <C> <C>
<C> <C>
9/2/86-7/31/87 $13.00 $13.93 -- $.03
$ .62 12.34%
1988 13.93 13.04 -- .27
.85 2.22
1989 13.04 13.80 -- .01
.86 13.09
1990 13.80 12.21 $.04 .11
.83 (4.53)
1991 12.21 12.51 .03 --
.68 8.86
1992 12.51 13.84 .02 --
.64 16.25
1993 13.84 14.99 -- .04
.62 13.40
1994 14.99 14.56 -- --
.66 1.50
Total $.09 $.46
$5.76
Cumulative Total Return -- (9/2/86 through 7/31/94)
80.61%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the contin-
gent deferred sales charge ("CDSC").
</TABLE>
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
WITHOUT CDSC WITH
CDSC***
<S> <C> <C>
Year Ended 7/31/94 1.50% (3.35)%
Five Years Ended 7/31/94 6.82 6.66
Inception 9/26/86 through
7/31/94 7.76 7.76
<FN>
** All average annual total return figures shown reflect reinvestment
of dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the max-
imum applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: The Fund commenced operations on September 2, 1986. Those
shares in existence prior to November 6, 1992 were designated Class
B shares. Class B shares are subject to a maximum 5.0% CDSC and ser-
vice and distribution fees of .25% and .50%, respectively, of the
value of the average daily net assets attributable to that class.
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY SHEARSON CONVERTIBLE FUND+ VS.
UNMANAGED INDICES
September 9, 1986 -- July 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN
SHEARSON COVERS (CLASS B)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Con-
vertible Fund Class B shares on September 9, 1986 through July 31, 1994 as
compared with the growth of a $10,000 investment in the Standard & Poor's
500 Index and the Lipper Convertible Securities Index. The plot points
used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000 GROWTH OF
$10,000
GROWTH OF $10,000 INVESTMENT IN THE INVESTMENT IN
THE
MONTH INVESTED IN CLASS B STANDARD & POOR'S LIPPER
CONVERTIBLE
ENDED SHARES OF THE FUND 500 INDEX SECURITIES
INDEX
<S> <C> <C> <C>
8/30/86 - $10,000
$10,000
9/02/86 $10,000 - -
9/86 $9,985 $9,173
$9,635
12/86 $10,142 $9,684
$9,870
3/87 $10,954 $11,753
$11,015
6/87 $11,106 $12,342
$10,991
9/87 $11,272 $13,157
$11,280
12/87 $10,085 $10,194
$9,529
3/88 $10,979 $10,773
$10,197
6/88 $11,510 $11,489
$10,616
9/88 $11,432 $11,529
$10,525
12/88 $11,587 $11,883
$10,654
3/89 $12,113 $12,725
$11,103
6/89 $12,584 $13,847
$11,679
9/89 $12,976 $15,327
$12,353
12/89 $12,719 $15,642
$12,164
3/90 $12,487 $15,172
$11,980
6/90 $12,439 $16,125
$12,375
9/90 $11,319 $13,912
$11,056
12/90 $11,612 $15,157
$11,490
3/91 $12,835 $17,354
$12,897
6/91 $13,159 $17,313
$13,104
9/91 $14,080 $18,237
$13,986
12/91 $14,504 $19,764
$14,840
3/92 $15,062 $19,266
$15,236
6/92 $15,403 $19,631
$15,309
9/92 $15,885 $20,251
$16,010
12/92 $15,644 $21,269
$16,973
3/93 $17,379 $22,198
$17,996
6/93 $17,574 $22,304
$18,406
9/93 $18,102 $22,879
$19,303
12/93 $18,516 $23,411
$19,637
3/94 $18,009 $22,526
$19,282
6/94 $17,684 $22,618
$18,874
7/94 $18,061 $23,360
$19,193
+ Illustration of $10,000 invested in Class B shares on September 9, 1986
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
</TABLE>
S&P 500 -- The Standard & Poor's Composite Daily Price Index of 500 Com-
mon Stocks is an unmanaged index used to portray the pattern of common
stock price movement.
LIPPER CONVERTIBLE SECURITIES INDEX -- The Lipper Analytical Services,
Inc. Convertible Securities Index is composed of the Fund's peer group
of mutual funds investing in convertible securities.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
PORTFOLIO OF INVESTMENTS
JULY 31, 1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE 1)
<S> <C> <C>
CONVERTIBLE SECURITIES -- 93.7%
CONVERTIBLE PREFERRED STOCKS -- 51.4%
BANKING AND FINANCE -- 17.5%
30,000 Ahmanson (HF) & Co., Conv. Pfd., Series D, 6.000%
$1,447,500
20,000 Barnett Banks Inc., Conv. Pfd., Series A, Exch.
$4.50
1,730,000
20,000 Barnett Banks Inc., Conv. Pfd., Series C, Exch.
$4.00
1,265,000
60,000 BankAmerica Corp., Conv. Pfd., Series G, 6.500%
3,457,500
20,000 First Fidelity Bancorporation, Conv. Pfd.,
Series B, Exch. $2.15
737,500
50,000 Great Western Financial Corporation, Conv. Pfd.,
Represents 1/5 Share
2,850,000
20,000 SunAmerica Inc., Depository Shares Representing
1/50 Demand Conv. Pfd., Series D, $2.78
842,500
30,000 Northern Trust Corporation, Depositary Shares,
Represents 1/20 Share, Conv. Pfd., Series E,
6.250%
1,635,000
40,000 Union Planter Corporation, Conv. Pfd., Series
E, 8.000%
1,320,000
15,285,000
OIL, GAS, METALS AND MINING -- 14.8%
30,000 Bethlehem Steel Corporation, Conv. Pfd., Exch.
$3.50 144A+
1,781,250
50,000 Cyprus AMAX Minerals Company, Conv. Pfd., Series
A, Exch. $4.00
3,475,000
40,000 Freeport McMoRan Inc., Conv. Pfd., Exch.
$42.3758 144A+
1,870,000
40,000 Newmont Mining, Depositary Shares, Represents
1/2 Share Conv. Pfd., Series A $2.75 144A+
2,325,000
40,000 Unocal Corp., Conv. Pfd., 7.00% 144A+
2,230,000
20,000 WHX Corp., Pfd., Series A, 6.500%
1,307,500
12,988,750
COMPUTERS AND ELECTRONICS -- 6.0%
50,000 General Motors Corporation, Depositary Share
Represents 1/10 Share Conv. Pfd., Series C,
Exch. $3.25
2,818,750
50,000 Salomon Inc., Equity-Linked Debt Securities,
Series Oracle 7.250% due 10/21/96, Conv. Pfd.
1,725,000
50,000 Westinghouse Electric Corp., Depository Shares,
Represent 1/10 Pfd. Series C, $1.30 6/01/1997
144A+
687,500
5,231,250
REAL ESTATE -- 4.1%
50,000 Property Trust America, Conv. Pfd. $1.75 Series
A
1,243,750
25,000 Rouse Company, Conv. Pfd., Series A, $6.50
1,300,000
40,000 Tanger Factory Outlet Centers Inc., Depositary
Share Representing 1/10 Pfd. Shares, Series
A $1.658
950,000
3,493,750
GROCERY, FOOD AND BEVERAGE -- 3.5%
Conagra Inc., Conv. Pfd., $1.6875 8/14/02, Class
50,000 E
1,668,750
30,000 Salomon Inc., Equity-Linked Debt Securities,
Snapple, 7.625% due 2/01/97, Conv. Pfd.
720,000
100,000 RJR Nabisco Holdings Corporation, Depositary
Shares, Represents 1/10 Share Conv. Pfd.,
Series C, 9.250%
675,000
3,063,750
TRANSPORTATION -- 2.8%
40,000 Burlington Northern Inc., Conv. Pfd., Series
A, 6.25%
2,460,000
PACKAGING AND CONTAINERS -- 1.1%
20,000 Corning Del L P, Conv. Pfd. 6.000%
1,000,000
RETAIL -- 1.1%
30,000 K Mart Corp., Depositary Shares, Represents 1/4
Share Conv. Pfd.,
Series A, Exch. $3.41
997,500
CONSTRUCTION -- 0.5%
25,000 Kaufman & Broad Home Corporation, Depository
Shares, Representing 1/5 Share Conv. Pfd.,
Series B $1.52
418,750
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost
$45,787,762)
44,938,750
FACE
VALUE
CONVERTIBLE BONDS AND NOTES -- 42.3%
OIL, GAS, METALS AND MINING -- 9.5%
2,000,000 Amoco CDA Petroleum Company, Conv. Sub. Deb.,
Series 7.375% due 9/01/13
2,460,000
2,000,000 Freeport McMoRan Inc., Conv. Sub. Deb., 6.500%
due 1/15/01
1,790,000
2,000,000 Pennzoil Company, Conv. Bonds, 6.500% due
1/15/03
2,285,000
2,000,000 USX-Marathon Group, Conv. Sub. Deb., 7.000% due
6/15/17
1,802,500
8,337,500
GROCERY, FOOD AND BEVERAGE -- 7.5%
2,000,000 American Stores Company, Conv. Sub. Notes,
7.250% due 9/15/01
2,355,000
1,000,000 Kroger Company, Conv. Jr. Sub. Deb., 8.250% due
4/15/11
1,053,750
1,000,000 Kroger Company, Conv. Jr. Sub. Note, 6.375% due
12/1/99
1,385,000
3,000,000 Sysco Corporation, Conv. Sub. Liquid Option
Note, Zero Coupon due 10/12/04
1,770,000
6,563,750
INSURANCE -- 7.2%
1,500,000 Alexander & Alexander Services, Conv. Deb.,
11.00% due 4/15/07
1,526,250
1,500,000 Cigna Corporation, Conv. Sub. Deb., 8.200% due
7/10/10
1,618,125
3,000,000 Chubb Capital Corporation, Conv. Bonds, 6.000%
due 05/15/98
3,120,000
6,264,375
LEISURE AND AMUSEMENT -- 5.0%
3,000,000 Coleman WorldWide Corporation, Conv. Note, Zero
Coupon due 5/27/13
840,000
3,500,000 Time Warner Inc. Sub. Deb. Conv., 8.750% due
01/10/15
3,508,750
4,348,750
PAPER AND FORESTRY PRODUCTS -- 2.4%
2,000,000 International Paper Co., Conv. Sub. Deb., 5.750%
due 9/23/02
2,140,000
AUTOMOTIVE -- 2.3%
2,000,000 Arvin Industries Inc., Conv. Sub. Deb., 7.500%
due 9/30/14
2,030,000
COMMUNICATIONS -- 1.9%
1,000,000 California Microwave Inc., Conv. Sub. Notes,
5.250% due 12/15/03
963,750
1,250,000 Rogers Communications Inc., Conv. Deb., 2.000%
due 11/26/05
732,812
1,696,562
AIRLINES -- 1.6%
2,000,000 Delta Airlines Inc., Conv. Sub. Note, 3.230%
due 6/15/03
1,417,500
HOUSEHOLD APPLIANCES -- 1.3%
3,000,000 Whirlpool Corporation, Conv. Sub. Liquid Note,
Zero Coupon due 5/14/11
1,177,500
COMPUTERS & ELECTRONICS -- 1.2%
1,000,000 Thermo Electron Corp. Conv. Senior Deb., 5.000%
due 4/15/01, 144A+
1,066,250
DIVERSIFIED CONGLOMERATE -- 0.9%
750,000 Gencorp Inc., Conv. Sub. Deb., 8.000% due 8/1/02
746,250
OTHER -- 1.5%
1,500,000 Interpublic Group Co., Conv. Sub. Deb., 3.750%
due 4/1/02, 144A+
1,275,000
TOTAL CONVERTIBLE BONDS AND NOTES (Cost
$36,346,113)
37,063,437
TOTAL CONVERTIBLE SECURITIES (Cost $82,133,875)
82,002,187
SHARES
COMMON STOCKS -- 2.5%
CHEMICALS -- 1.7%
49,999 Witco Corporation
1,456,221
COMMUNICATIONS -- 0.8%
30,000 Tele Communications Inc., Class A
699,375
TOTAL COMMON STOCKS (Cost $2,091,683)
2,155,596
FACE
VALUE
REPURCHASE AGREEMENT -- 3.4% ($2,933,000)
2,933,000 Agreement with Credit Lyonnais, 4.250% dated
07/29/94, to be repurchased at $2,934,039 on
08/01/94, collateralized by $3,115,000 U.S.
Treasury Bill, 5.170% due 5/04/95
2,933,000
TOTAL INVESTMENTS (Cost $87,158,558*) 99.6%
87,090,783
OTHER ASSETS AND LIABILITIES 0.4
393,106
NET ASSETS 100.0% $
87,483,889
<FN>
* Aggregate cost for Federal tax purposes.
+ Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from reg-
istration, normally to qualified institutional buyers.
</TABLE>
See Notes to Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $87,158,558) (Note 1)
See accompanying schedule
$87,090,783
Cash
726
Interest receivable
495,476
Receivable for Fund shares sold
174,700
Dividends receivable
166,129
TOTAL ASSETS
87,927,814
LIABILITIES:
Payable for Fund shares redeemed $156,255
Dividends payable 65,206
Accrued shareholder reports expense 50,000
Investment advisory fee payable (Note 2) 36,941
Distribution fee payable (Note 3) 35,925
Accrued legal and audit fees 31,200
Service fee payable (Note 3) 18,470
Administration fee payable (Note 2) 14,776
Transfer agent fees payable (Note 2) 13,275
Custodian fees payable (Note 2) 9,705
Accrued Trustees' fees and expenses (Note 2) 1,833
Accrued expenses and other payables 10,339
TOTAL LIABILITIES
443,925
NET ASSETS
$87,483,889
NET ASSETS CONSIST OF:
Distributions in excess of net investment income $
(65,206)
Accumulated net realized loss on investments sold
(6,178,822)
Unrealized depreciation of investments
(67,775)
Par value
6,008
Paid-in capital in excess of par value
93,789,684
TOTAL NET ASSETS
$87,483,889
NET ASSET VALUE:
CLASS A SHARES:
Net asset value and redemption price per share
($2,294,026 / 157,572 shares of beneficial interest
outstanding)
$14.56
Maximum offering price per share ($14.56 / 0.95)
(based on sales charge of 5% of the offering price on
July 31, 1994)
$15.33
CLASS B SHARES:
Net asset value and offering price per share
($85,189,849 / 5,850,908 shares of beneficial interest
outstanding)
$14.56
CLASS D SHARES:
Net asset value, offering and redemption price per
share ($14.56 / 1 share of beneficial interest out-
standing)
$14.56
</TABLE>
See Notes to Financial Statements
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends
$2,619,143
Interest
2,657,041
TOTAL INVESTMENT INCOME
5,276,184
EXPENSES:
Investment advisory fee (Note 2) $425,505
Distribution fee (Note 3) 414,394
Service fee (Note 3) 212,753
Administration fee (Note 2) 170,202
Transfer agent fees (Notes 2 and 4) 122,251
Shareholder reports expense 94,611
Legal and audit fees 47,228
Custodian fees (Note 2) 37,723
Trustees' fees and expenses (Note 2) 14,960
Other 51,574
TOTAL EXPENSES
1,591,201
NET INVESTMENT INCOME
3,684,983
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on investments sold during the
year
2,361,914
Net unrealized depreciation of investments during
the year
(5,170,821)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(2,808,907)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$876,076
</TABLE>
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C> <C>
Net investment income $3,684,983
$2,768,225
Net realized gain on investments sold 2,361,914
4,424,311
Net unrealized appreciation/(depreciation) on in-
vestments sold during the year (5,170,821)
1,213,308
Net increase in net assets resulting from opera-
tions 876,076
8,405,844
Distributions to shareholders from net investment
income:
Class A (105,174)
(24,877)
Class B (3,525,176)
(2,743,348)
Distributions to shareholders in excess of net in-
vestment income:
Class A (4,222)
(617)
Class B (141,524)
(68,076)
Distributions to shareholders from net realized
gain on investments:
Class A --
(1,645)
Class B --
(202,411)
Net increase in net assets from Fund share trans-
actions (Note 6):
Class A 723,617
1,621,573
Class B 13,148,417
12,405,798
Class D --
15
Net increase in net assets 10,972,014
19,392,256
NET ASSETS:
Beginning of year 76,511,875
57,119,619
End of year (including distributions in excess of
net investment income of $65,206 and $54,633,
respectively) $87,483,889
$76,511,875
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*
<S> <C> <C>
Net asset value, beginning of period $14.99
$13.82
Income from investment operations:
Net investment income 0.72
0.49
Net realized and unrealized gain/(loss) on in-
vestments (0.42)
1.22
Total from investment operations 0.30
1.71
Less distributions:
Distributions from net investment income (0.70)
(0.50)
Distributions in excess of net investment income (0.03)
(0.01)
Distributions in excess of net realized gains --
(0.03)
Total distributions (0.73)
(0.54)
Net asset value, end of period $14.56
$14.99
Total return++ 1.99%
12.63%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $2,294
$1,655
Ratio of operating expenses to average net as-
sets 1.40%
1.37%+
Ratio of net investment income to average net
assets 4.80%
4.86%+
Portfolio turnover rate 54%
95%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indi-
cated and does not reflect any
applicable sales charge.
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C> <C>
Net asset value, beginning of year $14.99
$13.84
Income from investment operations:
Net investment income 0.65
0.61
Net realized and unrealized gain/(loss) on in-
vestments (0.42)
1.20
Total from investment operations 0.23
1.81
Less distributions:
Distributions from net investment income (0.64)
(0.60)
Distributions in excess of net investment income (0.02)
(0.02)
Distributions from net realized gains --
- --
Distributions in excess of net realized gains --
(0.04)
Distributions from capital --
- --
Total distributions (0.66)
(0.66)
Net asset value, end of year $14.56
$14.99
Total return++ 1.50%
13.40%
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $85,190
$74,857
Ratio of operating expenses to average net as-
sets 1.88%
2.00%
Ratio of net investment income to average net
assets 4.32%
4.20%
Portfolio turnover rate 54%
95%
<FN>
* The Fund commenced operations on September 2, 1986. Those shares in
existence prior to November 6, 1992 were designated Class B Shares.
** Annualized expense ratio before waiver of fees by investment adviser
and sub-investment adviser and administrator was 1.82%.
+ Annualized.
++ Total return represents aggregate total return for the period indi-
cated and does not reflect any applicable sales charge.
</TABLE>
See Notes to Financial Statements
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/92 7/31/91 7/31/90 7/31/89 7/31/88
7/31/87*
<C> <C> <C> <C> <C> <C>
$12.51 $12.21 $13.80 $13.04 $13.93
$13.00
0.64 0.68 0.79 0.85 0.87
0.63
1.35 0.33 (1.40) 0.78 (0.64)
0.95
1.99 1.01 (0.61) 1.63 0.23
1.58
(0.64) (0.68) (0.83) (0.86) (0.85)
(0.62)
-- -- -- -- -- -
- -
-- -- (0.11) (0.01) (0.27)
(0.03)
-- -- -- -- -- -
- -
(0.02) (0.03) (0.04) -- -- -
- -
(0.66) (0.71) (0.98) (0.87) (1.12)
(0.65)
$13.84 $12.51 $12.21 $13.80 $13.04
$13.93
16.25% 8.86% (4.53)% 13.09% 2.22%
12.34%
$57,120 $65,523 $97,157 $153,137 $172,587
$235,685
1.88% 1.92% 1.85% 1.74% 1.75%
1.78%+**
4.76% 5.81% 6.10% 6.41% 6.74%
5.85%+
77% 26% 24% 32% 45%
21%
</TABLE>
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a "Mas-
sachusetts business trust" under the laws of the Commonwealth of Massachu-
setts on March 12, 1985. The Trust is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. As of the
date of this report, the Trust offered eight managed investment funds:
Smith Barney Shearson Premium Total Return Fund, Smith Barney Shearson
Convertible Fund (the "Fund"), Smith Barney Shearson Global Bond Fund,
Smith Barney Shearson High Income Fund, Smith Barney Shearson Tax-Exempt
Income Fund, Smith Barney Shearson Money Market Fund, Smith Barney Shear-
son Diversified Strategic Income Fund and Smith Barney Shearson Utilities
Fund. As of November 6, 1992, the Fund offered two classes of shares to
the general public: Class A shares and Class B shares. As of January 29,
1993, the Fund began offering Class D shares to investors eligible to par-
ticipate in the Smith Barney 401(k) Program. Class A shares are sold with
a front-end sales charge. Class B shares may be subject to a contingent
deferred sales charge ("CDSC"). Class B shares will convert automatically
to Class A shares eight years after the date of original purchase. Class D
shares are offered without a front-end sales load or CDSC. Each class of
shares has identical rights and privileges except with respect to the ef-
fect of the respective sales charges, the distribution and/or service fees
borne by each class, expenses allocable exclusively to each class, voting
rights on matters affecting a single class, the exchange privilege of each
class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements.
Portfolio valuation: Generally, the Fund's investments are valued at mar-
ket value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Trust's Board of Trustees. Portfolio securities that are traded primarily
on a domestic or foreign exchange are valued at the last sale price on
that exchange or, if there were no sales during the day, at the current
quoted bid price. Over-the-counter securities are valued on the basis of
the bid price at the close of business on each day. Debt securities are
valued by The Boston Company Advisors, Inc. ("Boston Advisors") after con-
sultation with an independent pricing service (the "Pricing Service") ap-
proved by the Board of Trustees. When, in the judgment of the Pricing Ser-
vice, quoted bid prices for investments are readily available and are rep-
resentative of the bid side of the market, these investments are valued at
the mean between the quoted bid prices and asked prices. Investments for
which, in the judgment of the Pricing Service, there are no readily ob-
tainable market quotations are carried at fair value as determined by the
Pricing Service. The procedures of the Pricing Service are reviewed peri-
odically by the officers of the Trust under the general supervision and
responsibility of the Board of Trustees. Restricted securities are valued
by or under the direction of the Trust's Board of Trustees in good faith
at fair value, taking into consideration all indications of value avail-
able. Short-term investments that mature in 60 days or less are valued at
amortized cost.
Repurchase Agreements: The Fund engages in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of
the seller to repurchase, and the Fund to resell, the obligation at an
agreed- upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return
that is not subject to market fluctuations during the Fund's holding pe-
riod. The value of the collateral is at least equal at all times to the
total amount of the repurchase obligations, including interest. In the
event of counterparty default, the Fund has the right to use the collat-
eral to offset losses incurred. There is potential loss to the Fund in the
event that the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities including the risk of a possible de-
cline in the value of the underlying securities during the period while
the Fund seeks to assert its rights. The Fund's investment adviser, admin-
istrator and/or sub-administrator, acting under the supervision of the
Trust's Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters
into repurchase agreements to evaluate potential risks.
Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Securities purchased or sold on a when-
issued or delayed-delivery basis may be settled a month or more after the
trade date. Realized gains and losses from securities sold are recorded on
the identified cost basis. Dividend income and distributions to sharehold-
ers are recorded on the ex-dividend date. Interest income is recorded on
the accrual basis. Investment income and realized and unrealized gains and
losses are allocated based upon relative net assets of each class of
shares.
Dividends and distributions to shareholders: Dividends from net invest-
ment income, if any, are determined on a class level, are declared monthly
and are paid on the last day of the Smith Barney Inc. ("Smith Barney")
statement month. Distributions, if any, of net short- and long-term capi-
tal gains earned by the Fund will be made annually after the close of the
fiscal year in which they are earned. Additional distributions of net in-
vestment income and capital gains from the Fund may be made at the discre-
tion of the Trust's Board of Trustees in order to avoid the application of
a 4% nondeductible excise tax on certain undistributed amounts of ordinary
income and capital gains. For the purposes of the Statement of Changes in
Net Assets, income distributions and capital gain distributions on a Fund
level are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences
are primarily due to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund as a whole.
Federal income taxes: The Trust intends that the Fund qualify as a regu-
lated investment company, if such qualification is in the best interest of
its shareholders, by complying with the requirements of the Internal Reve-
nue Code of 1986, as amended, applicable to regulated investment companies
and by distributing substantially all of its taxable income to its share-
holders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Manage-
ment Corp., which is controlled by Smith Barney Holdings Inc. ("Hold-
ings"). Holdings is a wholly owned subsidiary of The Travelers Inc. Under
the Advisory Agreement, the Fund pays a monthly fee at the annual rate of
0.50% of the value of its average daily net assets.
Prior to May 4, 1994, the Fund was party to an administration agreement
with Boston Advisors, an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). Under this agreement, the Fund paid a monthly fee
based on the annual rate .20% of the value of the Fund's average daily net
assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as the
Fund's administrator. The new administration agreement contains substan-
tially the same terms and conditions, including the level of fees, as the
predecessor agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with Boston Advisors. Under the Sub-Administration Agreement, SBA pays
Boston Advisors a portion of its fee at a rate agreed upon from time to
time between SBA and Boston Advisors.
For the year ended July 31, 1994, Smith Barney received from investors
$14,561 representing commissions (sales charges) on sales of Class A
shares.
A CDSC is generally payable by a shareholder in connection with the re-
demption of Class B shares within five years (eight years in the case of
purchases by certain 401(k) Plans) after the date of purchase. In circum-
stances in which the CDSC is imposed, the amount ranges between 5% and 1%
of net asset value depending on the number of years since the date of pur-
chase (except in the case of purchases by certain 401(k) plans in which
case a 3% charge is imposed for the eight year period after the date of
purchase). For the year ended July 31, 1994, Smith Barney received from
shareholders $87,160 in CDSCs on the redemption of Class B shares.
No officer, director or employee of Smith Barney, or any parent or subsid-
iary of Smith Barney receives any compensation from the Trust for serving
as a Trustee or officer of the Trust. The Trust pays each of its Trustees
who is not an officer, director or employee of Smith Barney or any of its
affiliates $10,000 per annum plus $1,500 per meeting attended and reim-
burses each such Trustees for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Trust's custodian. The Shareholder Services Group
Inc., a subsidiary of First Data Corporation, serves as the Trust's trans-
fer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Trust's shares pursuant to a dis-
tribution agreement with the Trust and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services
and distribution plan (the "Plan"). Under this Plan, the Fund compensates
Smith Barney for servicing shareholder accounts for Class A, Class B and
Class D shareholders, and covers expenses incurred in distributing Class B
and Class D shares. Smith Barney is paid an annual service fee with re-
spect to Class A, Class B and Class D shares of the Fund at the annual
rate of 0.25% of the value of the average daily net assets of each respec-
tive class of shares. Smith Barney is also paid an annual distribution fee
with respect to Class B and Class D shares at the annual rate of 0.50% of
the value of the average daily net assets of each respective class of
shares. For the year ended July 31, 1994, the Fund incurred a service fee
of $5,556 and $207,197 for Class A and Class B shares, respectively. For
the year ended July 31, 1994, the Fund incurred a distribution fee of
$414,394 for Class B shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class
of shares are charged to that class' operations. In addition to the above
servicing and distribution fees, class specific operating expenses include
transfer agent fees. For the year ended July 31, 1994, the Fund incurred
transfer agent fees of $3,554 and $118,697 for Class A and Class B shares,
respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments and U.S. government securities, aggregated $58,417,244
and $42,238,163, respectively, for the year ended July 31, 1994.
At July 31, 1994, the aggregate gross unrealized appreciation for all se-
curities in which there was an excess of value over tax cost was
$3,137,330, and the aggregate gross unrealized depreciation for all secu-
rities in which there was an excess of tax cost over value was $3,205,105.
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest
of each class in each separate series with a $.001 par value. Changes in
shares of beneficial interest of the Fund which are divided into three
classes (Class A, Class B and Class D) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
7/31/94 7/31/93*
CLASS A SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
Sold 84,040 $ 1,276,232 111,611 $
1,639,937
Issued as reinvestment of
dividends 6,923 103,472 1,808
26,716
Redeemed (43,742) (656,087) (3,068)
(45,080)
Net increase 47,221 $ 723,617 110,351 $
1,621,573
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR
ENDED
7/31/94
7/31/93
CLASS B SHARES: Shares Amount Shares
Amount
<S> <C> <C> <C>
<C>
Sold 1,720,098 $25,995,096 1,546,570
$22,196,104
Issued as reinvestment of
dividends 199,238 2,978,825 170,622
2,450,981
Redeemed (1,060,928) (15,825,504) (853,136)
(12,241,287)
Net increase 858,408 $13,148,417 864,056
$12,405,798
<FN>
* The Fund commenced selling Class A shares on November 6, 1992. Any
shares outstanding prior to November 6, 1992 were designated as Class B
shares.
</TABLE>
As of July 31, 1994, the Fund had issued one Class D share in the amount
of $15 to Smith Barney Shearson. During the period ended July 31, 1993 and
the year ended July 31, 1994, there was no income or expense allocated to
the one Class D share.
7. CAPITAL LOSS CARRYFORWARD
As of July 31, 1994, the Fund had available for Federal tax purposes an
unused capital loss carryforward of $6,064,771 expiring in 1999.
In accordance with tax law, the Fund has elected to defer the recognition
of losses occurring between October 31 and July 31 until the first day of
the following fiscal year. The amount of such deferral is $114,051 of cap-
ital losses. These losses for tax purposes will be deemed to occur on Au-
gust 1, 1994.
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated
Line of Credit Agreement (the "Agreement") dated April 30, 1992, and re-
newed effective May 31, 1994, primarily for temporary or emergency pur-
poses, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. The Fund may borrow up to
the lesser of $25 million or 10% of its net assets. Interest is payable
either at the bank's Money Market Rate or the London Interbank Offered
Rate (LIBOR) plus 0.375% on an annualized basis. Under the terms of the
Agreement, as amended, the Fund and the other affiliated entities are
charged an aggregate commitment fee of $100,000 which is allocated equally
among each of the participants. The Agreement requires, among other provi-
sions, each participating fund to maintain a ratio of net assets (not in-
cluding funds borrowed pursuant to the Agreement) to aggregate amount of
indebtedness pursuant to the Agreement of no less than 5 to 1. During the
year ended July 31, 1994, the Fund did not borrow under the Agreement.
9. CONCENTRATION OF RISK
The Fund invests in securities offering high current income which gener-
ally will be in the lower rating categories of recognized rating agencies.
These securities generally involve more credit risk than securities in the
higher rating categories. In addition, the trading market for high yield
securities may be relatively less liquid than the market for higher-rated
securities.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY SHEARSON CONVERTIBLE FUND OF
SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
Smith Barney Shearson Convertible Fund of Smith Barney Shearson Income
Funds ("the Fund"), including the schedule of portfolio investments, as of
July 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the seven
years in the period then ended and for the period September 2, 1986 (com-
mencement of operations) to July 31, 1987. 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.
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 fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of July 31, 1994 by correspondence with the custodian
and brokers. 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 Fund as of July 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the
seven years in the period then ended and for the period September 2, 1986
(commencement of operations) to July 31, 1987, in conformity with gener-
ally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 19, 1994
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED JULY 31, 1994
The following information represents fiscal year end disclosures of vari-
ous tax benefits passed through to shareholders at calendar year end.
Of the distribution from ordinary income made by the Fund during the
fiscal year ended July 31, 1994, 71.08% represents the amount of each dis-
tribution which will qualify for the dividend received deduction available
to corporate shareholders.
The above figures may differ from those cited elsewhere in this report
due to differences in the calculations of income and capital gains for Se-
curities and Exchange Commission (book) purposes and Internal Revenue Ser-
vice (tax) purposes.
CONVERTIBLE FUND
TRUSTEES
LEE ABRAHAM
ANTOINETTE C. BENTLEY
ALLAN J. BLOOSTEIN
RICHARD E. HANSON, JR.
HEATH B. MCLENDON
MADELON DEVOE TALLEY
OFFICERS
HEATH B. MCLENDON
Chairman of the Board
and Investment Officer
STEPHEN J. TREADWAY
President
RICHARD P. ROELOFS
Executive Vice President
JACK S. LEVANDE
Vice President and
Investment Officer
LEWIS E. DAIDONE
Treasurer
CHRISTINA T. SYDOR
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney Shearson Convertible Fund. It is not authorized for dis-
tribution to prospective investors unless accompanied or preceded by an
effective Prospectus for the Fund, which contains information concerning
the Fund's investment policies, fees and expenses as well as other perti-
nent information.
[Logo]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 27, 196, 245
FD0219 I4
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME
SHOWING A BLACK AND WHITE PICTURE
OF A METAL SUITCASE, KEYS, A PEN
AND A PC SCREEN EXHIBITING GRAPH
STATISTICS.
1994 Smith Barney Shearson
ANNUAL HIGH
REPORT INCOME
FUND
.......................................
JULY 31, 1994
[LOGO]
<PAGE>
High Income Fund
DEAR SHAREHOLDER:
We are pleased to provide the Annual Report for Smith
Barney
Shearson High Income Fund for the fiscal year ended July
31,
1994. Over the past year, the Fund paid dividends for
Class
A, Class B and Class C shares totaling $1.12, $1.06 and $1.15,
per
share, respectively. The Fund generated total returns for Class
A,
Class B and Class C shares of 2.11%, 1.60% and 2.37%,
respectively.
This surpassed returns of -3.89% for 10-year Treasuries. The
Fund's
performance was slightly below the high yield mutual fund average
total return of 3.07% as reported by Lipper Analytical Services.
Our
primary objective is to deliver a consistently high level of
current
income with total return our secondary objective. To achieve
these
goals, we use the consistent and disciplined strategy of
investing
primarily in better quality, high yielding corporate bonds that are likely
to
receive an upgrade in credit rating over the next one to three years. We
have
also selectively added attractively valued convertible bonds, preferred
stocks
and common stocks to the portfolio to further enhance total return. By
emphasizing the improving credits in the high yield market, we can generate
not
only attractive current dividend yields for the shareholder, but capital
appreciation as well. While the Fund has a level dividend policy, we are
not
attempting to maximize yield regardless of credit risk but rather to
provide a
competitive dividend yield with total return (income with price
appreciation)
over time.
MARKET AND ECONOMIC OVERVIEW
The high yield market continued to suffer along with the other financial
markets
during the past years as interest rates continued to move higher in
response to
the Federal Reserve's continued raising of short-term interest rates. The
Federal Reserve is clearly trying to limit potentially higher inflation
rates as
the economic expansion matures. The first seven months of 1994 were
challenging
for fixed-income investors, with interest rates rising and bond prices
continuing to deteriorate from the fourth quarter of 1993. This has been
the
first significant downturn in the fixed income markets in the past several
years. While the strengthening economic expansion continued to benefit the
corporate sector of the economy, the overwhelmingly negative impact of more
constrictive Federal Reserve monetary policy has, in the near-term, caused
weak
performance returns across all of the financial markets. The Federal
Reserve
will most likely continue to raise short-term interest rates during 1994 to
forestall any potential threat of higher inflation
1
<PAGE>
from the strengthening economic expansion. This shift towards higher
interest
rates will continue to make fixed-income investing much more challenging.
As previously mentioned, the Fund generated modestly positive total returns
for
Class A, Class B and Class C shares during the past 12 months of 2.11%,
1.60%
and 2.37%, respectively. This was slightly below the high yield mutual
average
of 3.07% for the past 12 months as reported by Lipper Analytical Services,
a
major mutual fund performance measurement firm. We continue to
conservatively
manage the Fund by emphasizing the stronger companies. Ironically our
higher
credit quality mix penalized our performance compared to high yield mutual
funds
with lower credit quality orientations. The middle and upper tiers of the
high
yield market have historically been more interest rate sensitive and were
in
fact more negatively affected by rising interest rates in the past year
than
lower tier issues. We tried to limit this greater interest rate risk by
limiting
the average maturity of the Fund to the 5 to 7 year range. These actions
did not
eliminate negative price performance in 1994, but they have limited our
losses.
We have no intentions of abandoning our strategy and chasing the riskier,
lower
quality (CCC rated) issues which outperformed the market in 1993's
overheated
environment. As we have mentioned in previous letters, we tend to avoid the
lower tier issues given their higher default risk and greater price
fluctuations
over longer time periods. Instead, we focus on better quality issues which
carry
B or higher ratings. We try to emphasize improving companies that are
demonstrating increased potential for credit rating upgrades. Consequently,
our
net asset value deterioration in the past year was not the result of credit
problems. There have been no bankruptcies in the portfolio in the past 12
months.
We continue to emphasize the more economically-sensitive companies that are
benefiting from the improving economy. This would include such industries
as
automobile manufacturing and related suppliers, general manufacturing,
paper and
forest products, containers, basic chemicals, transportation, and metals
and
mining, particularly steel producers. These industries continue to
experience
improving sales and profitability in reaction to the strengthening economic
expansion. We will also continue to emphasize the higher coupon issues in
the
market that are relatively less sensitive to changing interest rates. We
will
also continue to maintain an intermediate average maturity in the portfolio
ranging between 5 to 7 years. We believe this maturity segment of the bond
market offers the best risk/reward relationship.
2
<PAGE>
- --------------------------------------------------------------------
D I V I D E N D P O L I C Y
ALTHOUGH NOT EXPLICITLY STATED IN THE PROSPECTUS, THE FUND'S POLICY IS TO
PAY A LEVEL MONTHLY DIVIDEND BASED ON OUR PROJECTIONS FOR THE HIGH YIELD
MARKET AND THE GENERAL DIRECTION OF INTEREST RATES. THIS POLICY HAS NO
APPRECIABLE AFFECT ON THE FUND'S INVESTMENT STRATEGIES OR NET ASSET VALUE
PER SHARE SINCE IT IS GUIDED BY MARKET CONDITIONS. WE CONTINUALLY MONITOR
BOTH THE MARKET AND THE FUND'S INCOME STREAM TO SEE THAT OUR DIVIDEND
PROJECTIONS ARE ON TARGET.
SUMMARY THOUGHTS
We continue to believe that in the future returns in the financial markets
will
be lower than in previous years. Our goal is to limit downside price action
while generating the most attractive current yield attainable without
incurring
undue credit risk. In this more challenging environment, we believe a more
defensive strategy will generate relatively superior results. We appreciate
your
past support and look forward to satisfying your financial needs in what
should
prove to be a more challenging environment.
Sincerely,
Heath B. McLendon John C. Bianchi, CFA
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
AUGUST 17, 1994
3
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
11/6/92-
7/31/93 $11.03 $12.01 -- -- $0.86
17.29%
- ---------------------------------------------------------------------------
1994 12.01 11.16 -- -- 1.12
2.11
- ---------------------------------------------------------------------------
Total $-- $-- $1.98
- ---------------------------------------------------------------------------
Cumulative Total Return -- (11/6/92 through 7/31/94)
19.77%
- ---------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value and do not assume deduction of the front-end sales charge
(maximum 4.5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES
<TABLE>
<CAPTION>
Without Sales Charge With Sales
Charge***
<S> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 7/31/94 2.11%
(2.48)%
- ---------------------------------------------------------------------------
Inception 11/6/92 through 7/31/94 10.97
8.06
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures assume the deduction of the maximum
4.5%
sales charge.
NOTE: On November 6, 1992, the Fund began offering Class A shares. Class A
shares are subject to a maximum 4.5% front-end sales charge and a service
fee of
.25% of the value of the average daily net assets attributable to that
class.
</TABLE>
4
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in High Income
Fund's
Class A shares on November 6, 1992 through July 31, 1994 as compared with
the
growth of a $10,000 investment in the Salomon Brothers Intermediate-Term
High-Yield Index. The plot points used to draw the line graph were as
follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 SALOMON BROTHERS
MONTH INVESTED IN CLASS A INTERMEDIATE-TERM
ENDED SHARES OF THE FUND HIGH-YIELD INDEX
<S> <C> <C>
10/92 -- $ 10,000
11/06/92 $ 9,550 --
11/92 $ 9,697 $ 10,162
12/92 $ 9,811 $ 10,288
3/92 $10,570 $ 10,935
6/93 $11,106 $ 11,366
9/93 $11,291 $ 11,577
12/93 $11,738 $ 12,030
3/94 $11,534 $ 11,764
6/94 $11,455 $ 11,752
7/94 $11,438 $ 11,838
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of the maximum 4.5% sales charge at the time of
investment
and reinvestment of dividends and capital gains at net asset value
through
July 31, 1994.
THE SALOMON BROTHERS INTERMEDIATE-TERM HIGH YIELD INDEX - The Salomon
Brothers
Intermediate-Term High-Yield Index includes cash-pay and deferred-
interest
bonds with a remaining maturity of at least seven years, but less than
ten
years.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class A shares and do not guarantee future results.
5
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
- -
HISTORICAL PERFORMANCE -- CLASS B SHARES
<TABLE>
<CAPTION>
Return
Year Ended Net Asset Value of Capital Gains Dividends
Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
9/2/86-
7/31/87 $14.00 $14.26 -- $0.03 $ 1.03
9.55 %
- ---------------------------------------------------------------------------
- -
1988 14.26 14.01 -- 0.04 1.54
10.06
- ---------------------------------------------------------------------------
- -
1989 14.01 13.36 -- -- 1.53
6.60
- ---------------------------------------------------------------------------
- -
1990 13.36 10.59 $0.01 -- 1.61
(8.66 )
- ---------------------------------------------------------------------------
- -
1991 10.59 10.05 0.02 -- 1.27
8.82
- ---------------------------------------------------------------------------
- -
1992 10.05 11.15 0.06 -- 1.11
23.86
- ---------------------------------------------------------------------------
- -
1993 11.15 12.01 -- -- 1.10
18.55
- ---------------------------------------------------------------------------
- -
1994 12.01 11.16 -- -- 1.06
1.60
- ---------------------------------------------------------------------------
- -
Total $0.09 $0.07 $10.25
- ---------------------------------------------------------------------------
- -
Cumulative Total Return -- (9/2/86 through 7/31/94)
90.58 %
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value and do not assume deduction of the contingent deferred
sales
charge ("CDSC").
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES
<TABLE>
<CAPTION>
Without CDSC With CDSC***
<S> <C> <C>
- ---------------------------------------------------------------------------
- -
Year Ended 7/31/94 1.60%
(2.59)%
- ---------------------------------------------------------------------------
- -
Five Years Ended 7/31/94 8.20
8.08
- ---------------------------------------------------------------------------
- -
Inception 9/2/86 through 7/31/94 8.49
8.49
- ---------------------------------------------------------------------------
- -
<FN>
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
***Average annual total return figures assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
NOTE: The Fund commenced operations on September 2, 1986 and on November
6, 1992
existing shares were designated as Class B shares. Class B shares are
subject to
a 4.5% CDSC and service and distribution fees of 0.25% and 0.50%,
respectively,
of the value of the average daily net assets attributable to that class.
</TABLE>
6
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in High Income
Fund's
Class B shares on September 2, 1986 through July 31, 1994 as compared with
the
growth of a $10,000 investment in the Salomon Brothers Intermediate-Term
High-Yield Index. The plot points used to draw the line graph were as
follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 SALOMON BROTHERS
MONTH INVESTED IN CLASS B INTERMEDIATE-TERM
ENDED SHARES OF THE FUND HIGH-YIELD INDEX
<S> <C> <C>
8/30/86 -- $10,000
9/2/86 $10,000 --
9/86 $10,050 $10,202
12/86 $10,275 $10,373
3/87 $10,905 $11,032
6/87 $11,035 $10,952
9/87 $10,916 $10,736
12/87 $10,982 $10,924
3/88 $11,615 $11,648
6/88 $11,963 $11,914
9/88 $12,229 $12,195
12/88 $12,342 $12,434
3/89 $12,534 $12,612
6/89 $12,881 $13,125
9/89 $12,561 $12,964
12/89 $11,774 $12,592
3/90 $11,219 $12,141
6/90 $11,613 $12,502
9/90 $10,936 $11,029
12/90 $10,221 $11,946
3/91 $11,647 $12,680
6/91 $12,384 $13,787
9/91 $13,017 $14,718
12/91 $13,776 $15,602
3/92 $14,999 $16,722
6/92 $15,478 $17,377
9/92 $16,321 $18,134
12/92 $16,479 $18,352
3/93 $17,732 $19,508
6/93 $18,606 $20,276
9/93 $18,893 $20,653
12/93 $19,617 $21,462
3/94 $19,252 $20,987
6/94 $19,095 $20,965
7/94 $19,058 $21,118
</TABLE>
+ Illustration of $10,000 invested in Class B shares on September 2, 1986
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
SALOMON BROTHERS INTERMEDIATE-TERM HIGH-YIELD INDEX - The Salomon
Brothers
Intermediate-Term High-Yield Index includes cash-pay and deferred-
interest
bonds with a remaining maturity of at least seven years, but less than
ten
years.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
7
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
- -
HISTORICAL PERFORMANCE -- CLASS C SHARES
<TABLE>
<CAPTION>
Year Ended Net Asset Value Return of Capital Gains
Dividends Total
July 31 Beginning Ending Capital Paid Paid
Return*
<S> <C> <C> <C> <C> <C>
<C>
- ---------------------------------------------------------------------------
- -
11/6/92-
7/31/93 $11.03 $12.01 -- --
$0.88 17.47%
- ---------------------------------------------------------------------------
- -
1994 12.01 11.16 -- --
1.15 2.37
- ---------------------------------------------------------------------------
- -
Total $-- $--
$2.03
- ---------------------------------------------------------------------------
- -
Cumulative Total Return -- (11/6/92 through 7/31/94)
20.26%
- ---------------------------------------------------------------------------
- -
<FN>
*Figures assume reinvestment of all dividends and capital gains
distributions at
net asset value.
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS C SHARES
<TABLE>
<S> <C>
- ------------------------------------------------------------
Year Ended 7/31/94 2.37%
- ------------------------------------------------------------
Inception 11/6/92 through 7/31/94 11.23
- ------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
NOTE: On November 6, 1992, the Fund began offering Class C shares. Class C
shares are not subject to a sales charge or a service fee and are
available only
to tax-exempt employee and retirement plans and certain UITs of Smith
Barney and
its affiliates.
</TABLE>
8
<PAGE>
A line graph depicting the total growth (including reinvestment of
dividends and
capital gains) of a hypothetical investment of $10,000 in High Income
Fund's
Class C shares on November 6, 1992 through July 31, 1994 as compared with
the
growth of a $10,000 investment in the Salomon Brothers Intermediate-Term
High-Yield Index. The plot points used to draw the line graph were as
follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 SALOMON BROTHERS
MONTH INVESTED IN CLASS C INTERMEDIATE-TERM
ENDED SHARES OF THE FUND HIGH-YIELD INDEX
<S> <C> <C>
10/31/92 -- $10,000
11/6/92 $10,000 --
11/92 $10,156 $10,162
12/92 $10,277 $10,288
3/93 $11,078 $10,935
6/93 $11,645 $11,366
9/93 $11,845 $11,577
12/93 $12,320 $12,030
3/94 $12,114 $11,764
6/94 $12,041 $11,752
7/94 $12,026 $11,838
</TABLE>
+ Illustration of $10,000 invested in Class C shares on November 6, 1992
assuming reinvestment of dividends and capital gains at net asset value
through July 31, 1994.
SALOMON BROTHERS INTERMEDIATE-TERM HIGH-YIELD INDEX - The Salomon
Brothers
Intermediate-Term High-Yield Index includes cash-pay and deferred-
interest
bonds with a remaining maturity of at least seven years, but less than
ten
years.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance of Class C shares and do not guarantee future results.
9
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JULY 31,
1994
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds - High Income Fund's
investment securities held at July 31, 1994 by industry classification. The
pie
is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Consumer Durables 3.6%
Oil & Gas 3.7%
Broadcasting 4.3%
Paper and Forest Products 5.9%
Grocery 4.5%
Metals & Mining 6.6%
Health Care & Pharmaceuticals 6.4%
Building and Construction 7.7%
Repurchase Agreement and Net
Other Assets and Liabilities 5.5%
Other Industries 26.0%
Publishing 7.9%
Containers 8.7%
Hotel and Gaming 9.2%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net
Assets
<S> <C>
------------------------------------------------------------------
ANACOMP
2.6%
MESA CAPITAL CORP.
2.3
TRUMP TAJ MAHAL
2.1
CONTAINER CORPORATION OF AMERICA
2.1
AMERICAN STANDARD INC.
2.0
INTERNATIONAL SEMI-TECH
2.0
STONE CONTAINER CORP.
1.7
AMERICAN MEDICAL INTERNATIONAL INC.
1.7
ORNDA HEALTH CORP.
1.6
COLMAN HOLDINGS INC.
1.6
</TABLE>
10
<PAGE>
Smith Barney Shearson
High Income Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
<C> <S> <C> <C>
--------------------------------------------------------------------------
- ---
CORPORATE BONDS AND NOTES -- 84.7%
CONTAINERS -- 8.7%
$14,150,000 Container Corporation of America, Sr.
Sub. Note,
$
15,529,625
13.500% due 12/1/99
7,000,000 Container Corporation of America,
Guaranteed Sr. Note,
7,218,750
11.250% due 5/1/04
10,775,000 Gaylord Container Corporation,
10,950,094
11.500% due 5/15/01
1,500,000 Gaylord Container Corporation,
1,246,875
Zero coupon due 5/15/05 (1)
1,225,000 Sea Containers Ltd. Sr. Sub. Deb.
1,290,844
12.500% due 12/1/04
5,020,000 Silgan Holdings, Inc., Sr. Disc. Deb.,
3,921,875
Zero coupon due 12/15/02 (2)
Stone Container Corporation, Sr. Note:
1,800,000 12.625% due 7/15/98
1,892,250
13,650,000 9.875% due 2/1/01
12,762,750
3,250,000 Sweetheart Cup Inc., Sr. Sub. Note,
3,136,250
10.500% due 9/1/03
6,100,000 United States Can Company, Sr. Sub. Note,
6,824,375
13.500% due 1/15/02
--------------------------------------------------------------------------
- ---
64,773,688
--------------------------------------------------------------------------
- ---
BUILDING AND CONSTRUCTION -- 7.1%
14,500,000 American Standard, Inc., Sr. Sub. Disc.
Deb.,
15,243,125
11.375% due 5/15/04
6,750,000 American Standard, Inc., Sr. Sub. Disc.
Deb.,
4,244,063
Zero coupon due 6/1/05 (3)
8,250,000 Greystone Homes, Inc., Guaranteed Sr.
Note,
8,074,688
10.750% due 3/1/04 144A+
Hovnainan K Enterprises Inc.:
5,500,000 11.250% due 4/15/02
5,891,875
4,935,000 9.750% due 6/1/05
4,885,650
7,700,000 UDC Homes Inc., Sr. Notes,
7,478,625
11.750% due 4/30/03
8,050,000 US Home Corporation, New Notes,
7,355,687
9.750% due 6/15/03
--------------------------------------------------------------------------
- ---
53,173,713
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
PUBLISHING -- 6.3%
$17,090,000 Anacomp, Inc., Sr. Sub. Note,
$
19,140,800
15.000% due 11/1/00
16,975,000 Bell & Howell Holdings Company, Sr. Disc.
Deb., Series B,
9,166,500
Zero Coupon due 3/1/05 (4)
10,800,000 Marvel Holdings Inc., Sr. Disc. Note,
Series B,
6,750,000
Zero Coupon due 4/15/98
6,775,000 Marvel III Holdings, Inc., Sr. Secured
Note,
5,978,938
9.125% due 2/15/98
9,550,000 AUD News America Holdings Inc., Deb.,
5,506,673
8.625% due 2/7/14
--------------------------------------------------------------------------
- ---
46,542,911
--------------------------------------------------------------------------
- ---
HOTEL, CASINO AND GAMING -- 6.2%
5,975,000 Boyd Gaming Corporation, Series B,
5,989,937
10.750%, due 9/1/03
6,550,000 Empress River Casino Financing
Corporation Note,
6,361,687
10.750 due 4/1/02
7,900,000 GNF Corporation,
5,539,875
10.625% due 4/1/03
10,050,000 Lady Luck Gaming Finance Corporation,
8,442,000
10.500% due 3/1/01
Station Casinos Inc., Sr. Sub. Note:
7,150,000 9.625% due 6/1/03
6,551,188
6,425,000 9.625% due 6/1/03
5,886,906
9,175,000 Trump Plaza Funding Inc., Note,
7,305,594
10.875% due 6/15/01
--------------------------------------------------------------------------
- ---
46,077,187
--------------------------------------------------------------------------
- ---
METALS AND MINING -- 6.0%
8,075,000 AK Steel Corporation, Sr. Note,
8,135,562
10.750% due 4/1/04
2,000,000 Armco, Inc., Sr. Note,
2,095,000
11.375% due 10/15/99
5,150,000 Essex Group Inc., Sr. Note,
4,898,938
10.000% due 5/1/03
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
METALS AND MINING -- (CONTINUED)
$ 6,675,000 Federal Industries Ltd., Sr. Note,
$
6,483,094
10.250% due 6/15/00
1,700,000 Geneva Steel Company, Sr. Notes,
1,736,125
11.125% due 3/15/01
1,800,000 Inland Steel Company, First Mortgage,
Series T,
1,984,500
12.000% due 12/1/98
3,500,000 Interlake Corporation, Sr. Sub. Deb.,
3,360,000
12.125% due 3/1/02
2,750,000 Jorgensen (Earle M) Company, Sr. Notes,
2,767,187
10.750% due 3/1/00
7,500,000 Republic Engineered Steels,
7,134,375
9.875% due 12/15/01
8,625,000 CAD Stelco Inc., Deb.,
5,923,550
10.400% due 11/30/09
--------------------------------------------------------------------------
- ---
44,518,331
--------------------------------------------------------------------------
- ---
PAPER AND FOREST PRODUCTS -- 5.9%
Domtar Inc, Senior Notes:
1,975,000 11.750% due 3/15/99
2,054,000
8,550,000 12.000% due 4/15/01
9,030,938
India Kiat International Finance Company:
1,250,000 11.375% due 6/15/99
1,264,062
3,175,000 11.875% due 6/15/02
3,175,000
3,500,000 Malette, Inc., Sr. Secured Note,
3,521,875
12.250% due 7/15/04
7,025,000 Repap Wisconsin, Second Priority Sr.
Note,
6,278,595
9.875% due 5/1/06
Riverwood International Corporation, Sr.
Sub. Notes:
4,120,000 11.250% due 6/15/02
4,284,800
7,180,000 11.250% due 6/15/02
7,503,100
6,875,000 Stone Consolidated Corporation, Sr.
Secured Note,
6,720,312
10.250% due 12/15/00
--------------------------------------------------------------------------
- ---
43,832,682
--------------------------------------------------------------------------
- ---
HEALTH CARE AND PHARMACEUTICALS -- 5.6%
3,698,943 Alco Health Distributor Corporation,
Pay-in-Kind,
3,731,309
11.250% due 7/15/05
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
HEALTH CARE AND PHARMACEUTICALS -- (CONTINUED)
$11,195,000 American Medical International, Inc., Sr.
Sub. Note,
$
12,622,362
13.500% due 8/15/01
4,600,000 Charter Medical Corporation, Sr. Sub.
Note,
4,715,000
11.250% due 4/15/04 144A+
8,900,000 Healthtrust Inc., The Hospital Company,
9,155,875
10.750% due 5/1/02
10,835,000 Ornda HealthCorp, Sr. Sub. Notes,
11,661,169
12.250% due 5/15/02
--------------------------------------------------------------------------
- ---
41,885,715
--------------------------------------------------------------------------
- ---
GROCERY -- 4.5%
3,300,000 Big V Supermarket Inc., Sr. Sub. Note,
3,069,000
11.000% due 2/15/04
3,975,000 Farm Fresh, Inc., Sr. Note, Series A,
3,875,625
12.250% due 10/1/00
9,165,000 Grand Union Company, Sr. Note,
8,718,206
11.250% due 7/15/00
Pathmark Stores Inc.: Sub. Notes:
5,250,000 11.625% due 6/15/02
5,302,500
5,550,000 12.625% due 6/15/02
6,000,937
7,150,000 Penn Traffic Company, New Sr. Sub. Note,
6,658,438
9.625% due 4/15/05
--------------------------------------------------------------------------
- ---
33,624,706
--------------------------------------------------------------------------
- ---
BROADCASTING -- 4.3%
12,350,000 Bell Cablemedia PLC Sr. Disc. Note,
6,946,875
Zero coupon due 7/15/04 (5)
2,625,000 Cablevision Systems,
2,418,281
9.875% due 2/15/13
2,425,000 Continental Cablevision Inc., Sr. Sub.
Deb.,
2,464,406
11.000% due 6/1/07
1,975,000 Jones Intercable, Inc., Sr. Sub. Note,
2,016,969
10.500% due 3/1/08
Rogers Cablesystems Ltd., Guaranteed
Note:
2,815,000 10.125% due 9/1/12
2,804,444
7,350,000 CAD 9.650% due 1/15/14
4,463,401
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
BROADCASTING -- (CONTINUED)
$ 4,625,000 Rogers Communications, Inc., Sr. Sub.
Deb.,
$
4,746,406
10.875% due 4/15/04
11,100,000 Videotron Holdings PLC, Sr. Disc. Note,
6,216,000
Zero coupon due 7/1/04 (6)
--------------------------------------------------------------------------
- ---
32,076,782
--------------------------------------------------------------------------
- ---
CONSUMER DURABLES -- 3.6%
17,325,000 Colman Holdings Inc., Sr. Secured Note,
11,629,406
Zero coupon due 5/27/98
30,175,000 International Semi-Tech, Sr. Notes,
15,012,063
Zero coupon due 8/15/03 (7)
--------------------------------------------------------------------------
- ---
26,641,469
--------------------------------------------------------------------------
- ---
OIL AND GAS -- 3.5%
1,425,000 Dual Drilling Company, Sr. Sub. Notes,
1,330,594
9.875% due 1/15/04
4,250,000 Giant Industries Inc., Guaranteed Sr.
Sub. Notes,
4,010,937
9.750% due 11/15/03
18,448,000 Mesa Capital Corporation, Secured Disc.
Note,
16,879,920
Zero Coupon due 6/30/98 (8)
3,500,000 Santa Fe Energy Resources, Inc., Sr. Sub.
Note,
3,548,125
11.000% due 5/15/04
--------------------------------------------------------------------------
- ---
25,769,576
--------------------------------------------------------------------------
- ---
TEXTILES AND APPAREL -- 3.1%
6,525,000 CMI Industries, Sr. Sub. Notes,
6,125,344
9.500% due 10/1/03
8,000,000 Dan River Inc., Sr. Sub. Notes,
7,130,000
10.125% due 12/15/03
8,000,000 Hartmarx Corporation, Sr. Sub. Note,
7,870,000
10.875% due 1/15/02
2,125,000 JPS Textile Group, Sr. Sub. Note,
1,986,875
10.250% due 6/1/99
--------------------------------------------------------------------------
- ---
23,112,219
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
RETAIL -- 2.8%
$ 7,400,000 Barnes & Noble, Inc., Sr. Sub. Deb.,
Series 14,
$
8,038,250
11.875% due 1/15/03
7,445,000 Bradlees Inc., Sr. Sub. Note,
7,556,675
11.000% due 8/1/02
5,575,000 Wickes Lumber Company, Sr. Sub. Notes,
5,721,344
11.625% due 12/15/03
--------------------------------------------------------------------------
- ---
21,316,269
--------------------------------------------------------------------------
- ---
CHEMICAL -- 2.7%
2,125,000 Buckeye Celluose Corporation, Sr. Note,
2,087,812
10.250% due 5/15/01
4,775,000 Huntsman Corporation, First Mortgage
Note,
4,882,437
11.000% due 4/15/04
5,025,000 NL Industries, Inc., Sr. Secured Note,
5,238,562
11.750% due 10/15/03
UCC Investment Holding Inc., Sr. Sub.
Notes:
5,750,000 11.000% due 5/1/03
5,865,000
3,100,000 Sub. Notes,
2,053,750
Zero coupon due 5/1/05 (9)
--------------------------------------------------------------------------
- ---
20,127,561
--------------------------------------------------------------------------
- ---
PERSONAL CARE -- 2.7%
5,305,000 MacAndrews & Forbes Group, Sub. Note,
5,298,369
12.250% due 7/1/96
Revlon Consumer Products Corporation:
6,925,000 10.500% due 2/15/03
5,739,094
22,900,000 Sr. Disc. Note,
9,045,500
Zero coupon due 3/15/98
--------------------------------------------------------------------------
- ---
20,082,963
--------------------------------------------------------------------------
- ---
TELEPHONE AND COMMUNICATIONS -- 2.3%
7,500,000 Dial Call Communications, Sr. Disc.
Notes,
4,396,875
Zero coupon due 12/15/05 144A+ (10)
1,750,000 MFS Communications Inc., Sr. Disc.,
1,010,625
Zero coupon due 1/15/04 (11)
4,650,000 Nextel Communications, Inc., Sr. Note,
2,859,750
Zero coupon due 9/1/03 (12)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
TELEPHONE AND COMMUNICATIONS --
(CONTINUED)
$12,300,000 Nextel Communications, Inc., Sr. Note,
$
6,826,500
Zero Coupon, 8/15/04
2,400,000 USA Mobile Communication, Inc.,
2,190,000
9.500% due 2/1/04
--------------------------------------------------------------------------
- ---
17,283,750
--------------------------------------------------------------------------
- ---
INSURANCE -- 2.2%
6,570,000 Bankers Life Holding Corporation, Series
B,
7,555,500
13.000% due 11/1/02
8,250,000 Life Partners Group Inc., Sr. Sub. Note,
9,291,563
12.750% due 7/15/02
--------------------------------------------------------------------------
- ---
16,847,063
--------------------------------------------------------------------------
- ---
AUTOMOBILES AND TRUCKING -- 2.1%
3,350,000 Harvard Industries, Inc. Sr. Note,
3,358,375
12.000% due 7/15/04
3,500,000 SPX Corporation, Sr. Sub. Note,
3,587,500
11.750% due 6/1/02
8,250,000 Truck Components, Inc., Sr. Note Series
A,
8,775,938
12.750% due 6/30/01 144A+
--------------------------------------------------------------------------
- ---
15,721,813
--------------------------------------------------------------------------
- ---
LEISURE -- 1.7%
5,100,000 Gillett Holdings, Inc., Sr. Sub. Note,
5,450,625
12.250% due 6/30/02
8,125,000 Remington Arms Inc., New Sr. Notes,
7,373,438
10.500% due 12/1/03 144A+
--------------------------------------------------------------------------
- ---
12,824,063
--------------------------------------------------------------------------
- ---
FINANCE -- 1.5%
5,750,000 Lomas Mortgage USA, Inc., Sr. Note,
5,570,312
10.250% due 10/1/02
Reliance Group Holdings Inc., Sr. Notes:
2,800,000 9.000% due 11/15/00
2,555,000
3,325,000 9.750% due 11/15/03
2,975,875
--------------------------------------------------------------------------
- ---
11,101,187
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
FACE VALUE (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
ELECTRIC UTILITIES -- 0.8%
$ 6,058,741 Midland Funding Corporation, Sr. Secured
Note,
$
6,013,300
10.330% due 7/23/02 144A+
--------------------------------------------------------------------------
- ---
MANUFACTURING -- 0.6%
4,150,000 Fairfield Manufacturing Inc., Sr. Sub.
Note,
4,170,750
11.375% due 7/1/01
--------------------------------------------------------------------------
- ---
AEROSPACE AND DEFENSE -- 0.5%
3,425,000 Tracor Inc., Sr. Sub. Notes,
3,510,625
10.875% due 8/15/01
--------------------------------------------------------------------------
- ---
DIVERSIFIED INDUSTRIES -- 0.0%
Thermadyne Industries Inc., Sr. Notes:
318 10.250% due 5/1/02**
306
441 10.750% due 11/1/03**
415
--------------------------------------------------------------------------
- ---
721
--------------------------------------------------------------------------
- ---
631,029,044
TOTAL CORPORATE BONDS AND NOTES
(Cost $655,844,116)
--------------------------------------------------------------------------
- ---
<CAPTION>
SHARES
<C> <S> <C> <C>
--------------------------------------------------------------------------
- ---
UNITS -- 4.1%
HOTEL AND GAMING -- 2.8%
5,050,000 Santa Fe Hotels Inc., Unit Guaranteed,
4,949,000
11.000% due 12/15/00
19,931,048 Trump Taj Mahal Funding, 1st Mortgage,
Pay-in-Kind,
15,745,528
11.350% due 11/15/99
--------------------------------------------------------------------------
- ---
20,694,528
--------------------------------------------------------------------------
- ---
TELEPHONE AND COMMUNICATIONS -- 0.7%
8,150,000 Pagemart Inc., Disc. Notes and Warrants,
5,093,750
Zero coupon due 11/1/03 144A+
--------------------------------------------------------------------------
- ---
BUILDING AND CONSTRUCTION -- 0.6%
4,700,000 Miles Homes Services, Inc., Units,
4,611,875
12.000% due 4/1/01
--------------------------------------------------------------------------
- ---
30,400,153
TOTAL UNITS
(Cost $33,679,067)
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
CONVERTIBLE PREFERRED STOCKS -- 3.3%
PUBLISHING -- 1.6%
42,000 Anacomp Inc. Conv. Pfd. Exch. Adjustable $
1,470,000
Dividend
K-III Communications Corporation:
68,437 Series B, Sr. Conv. Pfd. Exch. 11.625%,
6,775,220
Pay-in-Kind
137,600 Sr. Conv. Pfd. Exch. 11.500%
3,629,200
--------------------------------------------------------------------------
- ---
11,874,420
--------------------------------------------------------------------------
- ---
AUTOMOBILES & TRUCKING -- 0.9%
135,200 Navistar International Corporation,
Series G,
6,827,600
Conv. Pfd. $6.00
--------------------------------------------------------------------------
- ---
METALS & MINING -- 0.6%
35,225 Geneva Steel Company, Series B,
Pay-in-Kind,
4,614,475
Conv. Pfd. Exch. 14.000%**
--------------------------------------------------------------------------
- ---
OIL AND GAS -- 0.2%
640,100 Gulf CDA Res Ltd., Series 1,
1,712,178
Conv. Pfd. Exch. Adjustable Dividend**
--------------------------------------------------------------------------
- ---
25,028,673
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $26,079,059)
--------------------------------------------------------------------------
- ---
PREFERRED STOCKS -- 1.9%
FINANCE -- 1.1%
501,983 Algoma Finance Corporation, Preferred
7,983,825
Cumulative, 5.50%
--------------------------------------------------------------------------
- ---
HEALTH CARE -- 0.8%
163,568 National Intergroup, Inc., Pay-in-Kind,
5,786,212
Series A, Preferred, $4.20
--------------------------------------------------------------------------
- ---
13,770,037
TOTAL PREFERRED STOCKS
(Cost $14,522,218)
--------------------------------------------------------------------------
- ---
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES (NOTE
1)
--------------------------------------------------------------------------
- ---
<C> <S> <C> <C>
WARRANTS -- 0.3%
CDK Holding Corporation:
4,057 Series A, Expires 7/7/99** 144A+ $
151,123
4,339 Series B, Expires 7/7/99** 144A+
144,272
2,450 Reallocation Certificate, Expires
91,262
7/7/99** 144A+
11,572 Dial Call, Expires 4/15/97** 144A+
114,274
331,750 Gaylord Container Corporation, Expires
1,534,344
7/31/96**
320 Trump Plaza Holdings Association, Expires
160,000
6/15/96**
--------------------------------------------------------------------------
- ---
2,195,275
TOTAL WARRANTS
(Cost $2,293,085)
--------------------------------------------------------------------------
- ---
COMMON STOCK -- 0.2% (Cost $2,080,000)
104,000 Station Casinos Inc.**
1,170,000
--------------------------------------------------------------------------
- ---
<CAPTION>
FACE VALUE
<C> <S> <C> <C>
--------------------------------------------------------------------------
- ---
REPURCHASE AGREEMENT -- 3.3% (Cost $24,807,000)
$24,807,000 Agreement with Credit Lyonnais, 4.250%
24,807,000
dated 7/29/94, to be repurchased at
$24,815,786 on 8/1/94, collateralized by
$26,020,000 U.S. Treasury Note, 4.375%
due 11/15/96
--------------------------------------------------------------------------
- ---
TOTAL INVESTMENTS (Cost $759,304,545*) 97.8%
728,400,182
OTHER ASSETS AND LIABILITIES (NET) 2.2
16,256,689
--------------------------------------------------------------------------
- ---
NET ASSETS 100.0%
$744,656,871
--------------------------------------------------------------------------
- ---
<FN>
* Aggregate cost for Federal tax purposes.
** Non-income producing security.
+ Security exempt from registration under Rule 144A of the Securities
Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(1) Non-interest bearing until 5/15/96, 12.750% due 5/15/05.
(2) Non-interest bearing until 6/15/96, 13.250% due 12/15/02.
(3) Non-interest bearing until 6/1/98, 10.500% due 6/1/05.
(4) Non-interest bearing until 3/1/00, 11.5000% due 3/1/05.
(5) Non-interest bearing until 7/15/99, 11.950% due 7/15/04.
(6) Non-interest bearing until 7/1/99, 11.125% due 7/1/04.
(7) Non-interest bearing until 8/15/00,11.5000% due 8/15/03.
(8) Non-interest bearing until 6/30/95, 12.750% due 6/30/98.
(9) Non-interest bearing until 5/1/98, 12.000% due 5/1/05.
(10) Non-interest bearing until 12/15/98, 10.250% due 12/15/05.
(11) Non-interest bearing until 1/15/99, 9.375% due 1/15/04.
(12) Non-interest bearing until 9/1/98, 11.500% due 9/1/03.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JULY 31,
1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$759,304,545) (Note 1)
See accompanying schedule $
728,400,182
Cash and foreign currency (Cost
$16,391)
16,403
Interest receivable
14,031,140
Receivable for investment securities
sold
12,797,864
Receivable for Fund shares sold
2,961,262
Dividends receivable
204,934
- ---------------------------------------------------------------------------
- --
TOTAL ASSETS
758,411,785
- ---------------------------------------------------------------------------
- --
LIABILITIES:
Payable for investment securities
purchased $9,625,851
Dividends payable 2,711,815
Payable for Fund shares redeemed 373,835
Investment advisory fee payable (Note
2) 314,996
Distribution fee payable (Note 3) 214,902
Service fee payable (Note 3) 155,023
Administration fee payable (Note 2) 125,998
Transfer agent fees payable (Note 2) 62,588
Custodian fees payable (Note 2) 35,702
Accrued Trustees' fees and expenses
(Note 2) 833
Accrued expenses and other payables 133,371
- ---------------------------------------------------------------------------
- --
TOTAL LIABILITIES
13,754,914
- ---------------------------------------------------------------------------
- --
NET ASSETS $
744,656,871
- ---------------------------------------------------------------------------
- --
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) JULY 31,
1994
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income $
(2,710,484)
Accumulated net realized loss on
securities, futures contracts and
foreign currencies
(206,049,510)
Net unrealized depreciation of
securities, foreign currency
and net other assets
(30,902,239)
Par value
66,725
Paid-in capital in excess of par value
984,252,379
- ---------------------------------------------------------------------------
- ---
TOTAL NET ASSETS $
744,656,871
- ---------------------------------------------------------------------------
- ---
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($223,678,454 DIVIDED BY 20,045,330 shares of
beneficial interest outstanding)
$11.16
- ---------------------------------------------------------------------------
- ---
MAXIMUM OFFERING PRICE PER SHARE ($11.16 DIVIDED BY
0.955)
(based on sales charge of 4.5% of the offering price on
July 31, 1994)
$11.69
- ---------------------------------------------------------------------------
- ---
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($509,607,999 DIVIDED BY 45,660,599 shares of
beneficial interest outstanding)
$11.16
- ---------------------------------------------------------------------------
- ---
CLASS C SHARES:
NET ASSET VALUE, offering and redemption price per share
($11,370,407 DIVIDED BY 1,018,864 shares of beneficial
interest outstanding)
$11.16
- ---------------------------------------------------------------------------
- ---
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per share
($11.16 DIVIDED BY 1 share of beneficial interest
outstanding)
$11.16
- ---------------------------------------------------------------------------
- ---
<FN>
+ Redemption price per share is equal to net asset value less any
applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31,
1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest
$70,705,006
Dividends (net of withholding taxes of $37,909)
7,549,893
- ---------------------------------------------------------------------------
- ---------
TOTAL INVESTMENT INCOME
78,254,899
- ---------------------------------------------------------------------------
- ---------
EXPENSES:
Investment advisory fee (Note 2) $3,771,643
Distribution fee (Note 3) 2,476,479
Service fee (Note 3) 1,831,250
Administration fee (Note 2) 1,508,657
Transfer agent fees (Notes 2 and 4) 671,244
Custodian fees (Note 2) 127,740
Legal and audit fees 55,518
Trustees' fees and expenses (Note 2) 13,961
Other 264,436
- ---------------------------------------------------------------------------
- ---------
TOTAL EXPENSES
10,720,928
- ---------------------------------------------------------------------------
- ---------
NET INVESTMENT INCOME
67,533,971
- ---------------------------------------------------------------------------
- ---------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities
22,969,229
Futures contracts
173,839
Foreign currencies
(27,102)
- ---------------------------------------------------------------------------
- ---------
Net realized gain on investments during the year
23,115,966
- ---------------------------------------------------------------------------
- ---------
Net change in unrealized appreciation/(depreciation) on:
Securities
(78,043,342)
Foreign currencies and net other assets
2,124
- ---------------------------------------------------------------------------
- ---------
Net unrealized depreciation of investments during the year
(78,041,218)
- ---------------------------------------------------------------------------
- ---------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(54,925,252)
- ---------------------------------------------------------------------------
- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$12,608,719
- ---------------------------------------------------------------------------
- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93
<S> <C>
<C>
Net investment income $ 67,533,971
$ 48,902,060
Net realized gain on securities, futures contracts and
currency transactions during the year 23,115,966
2,737,512
Net unrealized appreciation/(depreciation) on
securities, foreign currency and net other assets
during the year (78,041,218)
47,616,071
- ---------------------------------------------------------------------------
- ----------
Net increase in net assets resulting from operations 12,608,719
99,255,643
Distributions from net investment income:
Class A (21,175,998)
(14,622,229)
Class B (42,140,515)
(32,768,686)
Class C (1,971,416)
(1,511,145)
Distributions in excess of net investment income:
Class A (1,130,680)
(663,536)
Class B (2,250,069)
(1,486,997)
Class C (105,263)
(68,574)
Net increase in net assets from share transactions
(Note 6):
Class A (1,922,300)
222,981,643
Class B 99,101,201
117,496,429
Class C (13,478,394)
24,474,146
Class D --
11
- ---------------------------------------------------------------------------
- ----------
Net increase in net assets 27,535,285
413,086,705
NET ASSETS:
Beginning of year 717,121,586
304,034,881
- ---------------------------------------------------------------------------
- ----------
End of year (including distributions in excess of net
investment income of $2,710,484 and $1,015,948,
respectively) $744,656,871
$717,121,586
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*+++
<S> <C>
<C>
Net Asset Value, beginning of period $ 12.01 $
11.03
- ---------------------------------------------------------------------------
- ---------
Income from investment operations:
Net investment income 1.08
0.75
Net realized and unrealized gain/(loss) on
investments (0.81)
1.09
- ---------------------------------------------------------------------------
- ---------
Total from investment operations 0.27
1.84
Less distributions:
Distributions from net investment income (1.06)
(0.82)
Distributions in excess of net investment income (0.06)
(0.04)
- ---------------------------------------------------------------------------
- ---------
Total distributions (1.12)
(0.86)
- ---------------------------------------------------------------------------
- ---------
Net Asset Value, end of period $ 11.16 $
12.01
- ---------------------------------------------------------------------------
- ---------
Total return++ 2.11%
17.29%
- ---------------------------------------------------------------------------
- ---------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $223,678
$242,371
Ratio of operating expenses to average net assets 1.11%
1.16%+
Ratio of net investment income to average net assets 9.27%
9.52%+
Portfolio turnover rate 98%
95%
- ---------------------------------------------------------------------------
- ---------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR
YEAR
ENDED
ENDED
7/31/94
7/31/93+++
<S> <C>
<C>
Net Asset Value, beginning of year $ 12.01 $
11.15
- ---------------------------------------------------------------------------
- --------
Income from investment operations:
Net investment income 1.02
1.08
Net realized and unrealized gain/(loss) on
investments (0.81)
0.88
- ---------------------------------------------------------------------------
- --------
Total from investment operations 0.21
1.96
Less distributions:
Distributions from net investment income (1.00)
(1.05)
Distributions in excess of net investment income (0.06)
(0.05)
Distributions from net realized capital gains --
- --
Distributions from capital --
- --
- ---------------------------------------------------------------------------
- --------
Total distributions (1.06)
(1.10)
- ---------------------------------------------------------------------------
- --------
Net Asset Value, end of year $ 11.16 $
12.01
- ---------------------------------------------------------------------------
- --------
Total return++ 1.60%
18.55%
- ---------------------------------------------------------------------------
- --------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $509,608
$448,639
Ratio of operating expenses to average net assets 1.60%
1.66%
Ratio of net investment income to average net assets 8.77%
9.02%
Portfolio turnover rate 98%
95%
- ---------------------------------------------------------------------------
- --------
<FN>
* The Fund commenced operations on September 2, 1986. Those shares in
existence
prior to November 6, 1992 were designated Class B shares.
** Annualized expense ratio before waiver of fees by investment adviser
and
sub-investment adviser and administrator was 1.77%.
+ Annualized.
++ Total return represents aggregate total return for the period
indicated and
does not reflect any applicable sales charge.
# The annualized operating expense ratio excludes interest expense. The
annualized ratio including interest expense was 1.66% for the year
ended July
31, 1992.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Smith Barney Shearson
High Income Fund
- ------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
YEAR PERIOD
ENDED ENDED ENDED ENDED
ENDED ENDED
7/31/92 7/31/91 7/31/90 7/31/89
7/31/88 7/31/87*
<S> <C> <C> <C>
<C> <C>
$ 10.05 $ 10.59 $ 13.36 $ 14.01 $
14.26 $ 14.00
- ---------------------------------------------------------------------------
- ----------
1.11 1.27 1.53 1.61
1.53 1.03
1.16 (0.52) (2.68) (0.73)
(0.20) 0.29
- ---------------------------------------------------------------------------
- ----------
2.27 0.75 (1.15) 0.88
1.33 1.32
(1.11) (1.27) (1.61) (1.53)
(1.54) (1.03)
-- -- -- --
- -- --
-- -- -- --
(0.04) (0.03)
(0.06) (0.02) (0.01) --
- -- --
- ---------------------------------------------------------------------------
- ----------
(1.17) (1.29) (1.62) (1.53)
(1.58) (1.06)
- ---------------------------------------------------------------------------
- ----------
$ 11.15 $ 10.05 $ 10.59 $ 13.36 $
14.01 $ 14.26
- ---------------------------------------------------------------------------
- ----------
23.86% 8.82% (8.66)% 6.60%
10.06% 9.55%
- ---------------------------------------------------------------------------
- ----------
$304,035 $238,588 $323,139 $609,862
$434,272 $221,683
1.65%# 1.75% 1.68% 1.63%
1.64% 1.74%+**
10.52% 13.30% 12.93% 11.93%
11.12% 9.49%+
137% 112% 43% 74%
5% 19%
- ---------------------------------------------------------------------------
- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94
7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $ 12.01 $
11.03
- ---------------------------------------------------------------------------
- --------
Income from investment operations:
Net investment income 1.10
0.79
Net realized and unrealized gain/(loss) on
investments (0.80)
1.06
- ---------------------------------------------------------------------------
- --------
Total from investment operations 0.30
1.85
Less distributions:
Distributions from net investment income (1.09)
(0.84)
Distributions in excess of net investment income (0.06)
(0.04)
- ---------------------------------------------------------------------------
- --------
Total distributions (1.15)
(0.88)
- ---------------------------------------------------------------------------
- --------
Net Asset Value, end of period $ 11.16 $
12.01
- ---------------------------------------------------------------------------
- --------
Total return++ 2.37%
17.47%
- ---------------------------------------------------------------------------
- --------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $11,370
$26,112
Ratio of operating expenses to average net assets 0.77%
0.81%+
Ratio of net investment income to average net assets 9.61%
9.88%+
Portfolio turnover rate 98%
95%
- ---------------------------------------------------------------------------
- --------
<FN>
* The Fund commenced selling Class C shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period
indicated.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a
"Massachusetts business trust" under the laws of the Commonwealth of
Massachusetts on March 12, 1985. The Trust is registered with the
Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the
"1940 Act"), as an open-end management investment company. As of the date
of
this report, the Trust offered eight managed investment funds: Smith Barney
Shearson Premium Total Return Fund, Smith Barney Shearson Convertible Fund,
Smith Barney Shearson Global Bond Fund, Smith Barney Shearson High Income
Fund
(the "Fund"), Smith Barney Shearson Tax-Exempt Income Fund, Smith Barney
Shearson Money Market Fund, Smith Barney Shearson Diversified Strategic
Income
Fund and Smith Barney Shearson Utilities Fund. As of November 6, 1992, the
Fund
offered three classes of shares: Class A shares, Class B shares and Class C
shares. As of January 29, 1993, the Fund offered a fourth class of shares,
Class
D shares, to investors eligible to participate in the Smith Barney 401(k)
Program. Class A shares are sold with a front-end sales charge. Class B
shares
may be subject to a contingent deferred sales charge ("CDSC"). Class B
shares
will convert automatically to Class A shares eight years after the date of
original purchase. Class C shares are offered exclusively to tax-exempt
employee
benefit and retirement plans of Smith Barney Inc. ("Smith Barney") and
certain
unit investment trusts sponsored by Smith Barney and its affiliates. Class
C and
Class D shares are offered without a front-end sales charge or CDSC. All
classes
of shares have identical rights and privileges except with respect to the
effect
of the respective sales charges, the distribution and/or service fees borne
by
each class, expenses allocable exclusively to each class, voting rights on
matters affecting a single class, the exchange privilege of each class and
the
conversion feature of Class B shares. The following is a summary of
significant
accounting policies consistently followed by the Fund in the preparation of
its
financial statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Trust's
Board of Trustees. Portfolio securities that are traded primarily on a
domestic
or foreign exchange are valued at the last sale price on that exchange or,
if
there were no sales during the day, at the current quoted bid price.
Over-the-counter securities are valued on the basis of the bid price at
29
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the close of business each day. Debt securities are valued by The Boston
Company
Advisors, Inc. ("Boston Advisors"), after consultation with an independent
pricing service (the "Pricing Service") approved by the Board of Trustees.
When,
in the judgment of the Pricing Service, quoted bid prices for investments
are
readily available and are representative of the bid side of the market,
these
investments are valued at the mean between the quoted bid prices and asked
prices. Investments for which, in the judgment of the Pricing Service,
there are
no readily obtainable market quotations are carried at fair value as
determined
by the Pricing Service. The procedures of the Pricing Service are reviewed
periodically by the officers of the Fund under the general supervision and
responsibility of the Trustees. Investments in government securities (other
than
short-term securities) are valued at the average of the quoted bid and
asked
price in the over-the-counter market. Restricted securities are valued by
or
under the direction of the Trust's Board of Trustees in good faith at fair
value, taking into consideration all indications of value available. Short-
term
investments that mature in 60 days or less are valued at amortized cost.
FUTURES CONTRACTS: Upon entering into a futures contract, the Fund is
required
to deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by
the
Fund each day, depending on the daily fluctuation of the value of the
contract.
For financial statement purposes, an amount equal to the settlement amount
of
the contract is included in its Statement of Assets and Liabilities as an
asset
and as an equivalent liability. For long futures positions, the asset is
marked-to-market daily; for short futures positions, the liability is
marked-to-
market daily. The daily changes in the contract are recorded as unrealized
gains
or losses. The Fund recognizes a realized gain or loss when the contract is
closed.
There are several risks in connection with the use of futures contracts as
a
hedging device. The change in value of futures contracts primarily
corresponds
with the value of their underlying instruments, which may not
30
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
correlate with the change in value of the hedged investments. In addition,
there
is the risk the Fund may not be able to enter into a closing transaction
because
of an illiquid secondary market.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes
possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligations at an agreed-upon price
and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral
is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right
to use the collateral to offset losses incurred. There is potential loss to
the
Fund in the event that the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities including the risk of a
possible
decline in the value of the underlying securities during the period while
the
Fund seeks to assert its rights. The Fund's investment adviser,
administrator or
sub-administrator, acting under the supervision of the Board of Trustees,
reviews the value of the collateral and the creditworthiness of those banks
and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
PAY-IN-KIND BONDS: The Fund may invest in pay-in-kind ("PIK") bonds. PIK
bonds
pay interest through the issuance of additional bonds. PIK bonds are
recorded at
fair market value on the ex-dividend date. PIK bonds carry a risk in that
unlike
bonds which pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment dates unless a portion of such
securities
is sold. If the issuer of a PIK bond defaults, the Fund may obtain no
return at
all on its investment.
FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities
are
translated into U.S. dollars at the exchange rates prevailing at the end of
the
period, and purchases and sales of investment securities, income and
expenses
are translated on the respective dates of such transactions. Unrealized
gains
and losses which result from changes in foreign currency
31
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exchange rates have been included in the unrealized
appreciation/(depreciation)
of currencies and net other assets. Net realized foreign currency gains and
losses resulting from changes in exchange rates include foreign currency
gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Fund and the
amount actually received. The portion of foreign currency gains and losses
related to fluctuation in the exchange rates between the initial purchase
trade
date and subsequent sale trade date is included in realized gains and
losses on
investment securities sold.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-
issued or
delayed-delivery basis may be settled a month or more after the trade date.
Realized gains and losses from securities sold are recorded on the
identified
cost basis. Dividend income and distributions to shareholders are recorded
on
the ex-dividend date. Interest income is recorded on the accrual basis.
Investment income and realized and unrealized gains and losses are
allocated
based upon relative net assets of each class of shares.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level, are declared monthly and
are
paid on the last day of the Smith Barney statement month. Distributions, if
any,
of net short-and long-term capital gains earned by the Fund will be made
annually after the close of the fiscal year in which they are earned.
Additional
distributions of net investment income and capital gains from the Fund may
be
made at the discretion of the Board of Trustees in order to avoid the
application of a 4% nondeductible excise tax on certain undistributed
amounts of
ordinary income and capital gains. For the purposes of the Statement of
Changes
in Net Assets, income distributions and capital gain distributions on a
Fund
level are determined in accordance with income tax regulations which may
differ
from generally accepted accounting principles. These differences are
primarily
due to differing treatments of income and gains on various investment
securities
held by the Fund, timing differences and differing characterization of
distributions made by the Fund as a whole. Permanent differences incurred
during
the year
32
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ended July 31, 1994 as a result of distributions from net investment income
in
excess of earnings and different book and tax accounting for certain debt
securities, have been reclassified from income to paid-in capital.
FEDERAL INCOME TAXES: The Trust intends that the Fund qualify as a
regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue
Code of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER PARTY TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which is controlled by Smith Barney Holdings Inc. ("Holdings").
Holdings
is a wholly owned subsidiary of The Travelers Inc. Under the Advisory
Agreement,
the Fund pays a monthly fee at the annual rate of 0.50% of the value of its
average daily net assets.
Prior to May 4, 1994, the Fund was party to an administration agreement
with
Boston Advisors, an indirect wholly owned subsidiary of Mellon Bank
Corporation
("Mellon"). Under this agreement the Fund paid a monthly fee based on the
annual
rate of .20% of the value of the Fund's average daily net assets.
As of the close of business on May 4, 1994, Smith, Barney Advisers, Inc.
("SBA"), which is controlled by Holdings, succeeded Boston Advisors as
Fund's
administrator. The new administration agreement contains substantially the
same
terms and conditions, including level of fees, as the predecessor
agreement.
As of the close of business on May 4, 1994, the Fund and SBA also entered
into a
sub-administration agreement (the "Sub-Administration Agreement") with
Boston
Advisors. Under the Sub-Administration Agreement, SBA pays Boston Advisors
a
portion of its fee at a rate agreed upon from time to time between SBA and
Boston Advisors.
33
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended July 31, 1994, Smith Barney received from investors
$507,890
representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption
of Class B shares within five years (eight years in the case of purchases
by
certain 401(k) plans) after the date of purchase. In circumstances in which
the
CDSC is imposed, the amount of the charge ranges between 4.5% and 1% of net
asset value depending on the number of years since the date of purchase
(except
in the case of purchases by certain 401(k) plans in which case a 3% CDSC is
imposed for the eight year period after the date of purchase). For the year
ended July 31, 1994, Smith Barney received $743,718 from shareholders in
CDSCs
on the redemption of Class B shares.
No officer, director or employee of Smith Barney or of any parent or
subsidiary
of Smith Barney receives any compensation from the Trust for serving as a
Trustee or officer of the Trust. The Fund pays each Trustee who is not an
officer, director or employee of Smith Barney or any of its affiliates
$10,000
per annum plus $1,500 per meeting attended and reimburses each such Trustee
for
travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of
Mellon, serves as the Trust's custodian. The Shareholder Services Group,
Inc., a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Trust's shares pursuant to a
distribution agreement with the Trust and sells shares of the Fund through
Smith
Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund adopted a services and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class D
shareholders, and covers expenses incurred in distributing Class B and
Class D
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class D shares of the Fund at the annual rate of .25%
34
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of the value of the average daily net assets of each respective class of
shares.
Smith Barney is also paid an annual distribution fee with respect to Class
B and
Class D shares at the annual rate of .50% of the value of the average daily
net
assets of each respective class of shares. For the year ended July 31,
1994, the
Fund incurred a service fee of $593,011 and $1,238,239 for Class A and
Class B
shares, respectively. For the year ended July 31, 1994, the Fund incurred a
distribution fee of $2,476,479 for Class B shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of
shares are prorated among the classes based upon the relative net assets of
each
class. Operating expenses directly attributable to a class of shares are
charged
to that class' operations. In addition to the above servicing and
distribution
fees, class specific operating expenses include transfer agent fees. For
the
year ended July 31, 1994, the Fund incurred transfer agent fees of
$228,674,
$441,693 and $877 for Class A, Class B and Class C shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term
investments and U.S. government securities, aggregated $759,238,768 and
$691,781,221, respectively, for the year ended July 31, 1994.
At July 31, 1994, aggregate gross unrealized appreciation for all
securities in
which there was an excess of value over tax cost was $5,990,992 and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of
tax cost over value was $36,895,355.
35
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
each
class in each separate series with a $.001 par value. Changes in shares of
beneficial interest of the Fund which are divided into four classes (Class
A,
Class B, Class C and Class D) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93*
CLASS A SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 4,325,503 $ 50,678,736
3,473,948 $39,223,140
Issued as reinvestment of dividends 1,107,951 13,065,031
777,730 9,041,275
Issued in exchange for shares of
High Yield Fund (Note 10) -- --
19,200,568 212,742,394
Redeemed (5,572,672) (65,666,067)
(3,267,698) (38,025,166 )
- ---------------------------------------------------------------------------
- ----------
Net increase/(decrease) (139,218) $ (1,922,300)
20,184,548 $222,981,643
- ---------------------------------------------------------------------------
- ----------
<CAPTION>
YEAR ENDED
YEAR ENDED
7/31/94
7/31/93*
CLASS B SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 16,441,359 $ 195,368,628
15,959,348 $184,276,212
Issued as reinvestment of dividends 1,985,753 23,392,959
1,515,274 17,415,829
Redeemed (10,131,679) (119,660,386)
(7,372,292) (84,195,612 )
- ---------------------------------------------------------------------------
- ----------
Net increase 8,295,433 $ 99,101,201
10,102,330 $117,496,429
- ---------------------------------------------------------------------------
- ----------
<CAPTION>
YEAR ENDED
PERIOD ENDED
7/31/94
7/31/93*
CLASS C SHARES: Shares Amount
Shares Amount
<S> <C> <C>
<C> <C>
- ---------------------------------------------------------------------------
- ----------
Sold 358,636 $ 4,317,604
2,099,076 $23,596,184
Issued as reinvestment of dividends 174,500 2,076,668
136,321 1,579,719
Redeemed (1,688,775) (19,872,666)
(60,894) (701,757 )
- ---------------------------------------------------------------------------
- ----------
Net increase/(decrease) (1,155,639) $ (13,478,394)
2,174,503 $24,474,146
- ---------------------------------------------------------------------------
- ----------
<FN>
* The Fund commenced selling Class A and Class C shares on November 6,
1992.
Any shares outstanding prior to November 6, 1992 were designated Class
B
shares.
</TABLE>
36
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of July 31, 1994, the Fund had issued one Class D share in the amount of
$11.16 to Smith Barney Shearson. During the period ended July 31, 1993 and
year
ended July 31, 1994, there was no income or expense allocated to the one
Class D
share.
7. CAPITAL LOSS CARRYFORWARDS
As of July 31, 1994, the fund had available for Federal tax purposes unused
capital loss carryforwards as follows:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------
Expiring in: 2000 $9,861,336
1999 84,656,140
1998 68,549,898
1997 39,893,232
1996 3,088,904
- ---------------------------------------------------------------------------
</TABLE>
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of
credit provided by Continental Bank N.A. under an Amended and Restated Line
of
Credit Agreement (the "Agreement") dated April 30, 1992, and renewed
effective
May 31, 1994, primarily for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Fund may borrow up to the lesser of $25
million
or 10% of its net assets. Interest is payable either at the bank's Money
Market
Rate or the London Interbank Offered Rate plus 0.375% on an annualized
basis.
Under the terms of the Agreement, the Fund and the other affiliated
entities are
charged an aggregate commitment fee of $100,000 which is allocated equally
among
each of the participants. The Agreement requires, among other provisions,
each
participating Fund to maintain a ratio of net assets (not including funds
borrowed pursuant to the Agreement) to aggregate amount of indebtedness
pursuant
to the Agreement of no less than 5 to 1. During the year ended July 31,
1994,
the Fund had an average outstanding daily balance of $55,342 with interest
rates
ranging from 3.437% to 3.500%. Interest expense totaled $1,963 for the year
ended July 31, 1994 and is offset against interest income on the Fund's
Statement of Operations for the year ended July 31, 1994. At July 31, 1994,
the
Fund had no outstanding borrowings under this Agreement.
37
<PAGE>
Smith Barney Shearson
High Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CONCENTRATION OF CREDIT
The Fund invests in securities offering high current income which generally
will
be in the lower rating categories of recognized rating agencies. These
securities generally involve more credit risk than securities in the higher
rating categories. In addition the trading market for high yield securities
may
be relatively less liquid than the market for higher-rated securities.
10. REORGANIZATION
On November 20, 1992, the Fund (Acquiring Fund) acquired the assets and
certain
liabilities of the High Yield Fund (Acquired Fund), in a tax free exchange
for
Class A shares of the Acquiring Fund, pursuant to a plan of reorganization
approved by the Acquired Fund's shareholders on October 13, 1992. Total
shares
issued by the Acquiring Fund and total net assets of the Acquired Fund and
the
Acquiring Fund are as follows:
<TABLE>
<CAPTION>
SHARES TOTAL NET TOTAL NET
ISSUED BY ASSETS OF ASSETS OF
ACQUIRING ACQUIRED ACQUIRING ACQUIRED ACQUIRING
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
The
Fund High Yield Fund 19,200,568 $212,742,394
$336,322,775
- ---------------------------------------------------------------------------
</TABLE>
The total net assets of the Acquired Fund before acquisition included
unrealized
appreciation of $917,625. The total net assets of the Acquiring Fund
immediately
after the acquisition were $549,065,169.
38
<PAGE>
Smith Barney Shearson
High Income Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF SMITH BARNEY SHEARSON HIGH
INCOME
FUND OF SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of
Smith
Barney Shearson High Income Fund of Smith Barney Shearson Income Funds,
including the schedule of portfolio investments, as of July 31, 1994, and
the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended,
and
the financial highlights for each of the seven years in the period then
ended
and for the period September 2, 1986 (commencement of operations) to July
31,
1987. 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.
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
July
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
Smith
Barney Shearson High Income Fund of Smith Barney Shearson Income Funds as
of
July 31, 1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended,
and the financial highlights for each of the seven years in the period then
ended and for the period September 2, 1986 (commencement of operations) to
July
31, 1987, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
September 19, 1994
39
<PAGE>
Smith Barney Shearson
High Income Fund
- --------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED JULY 31, 1994
The following tax information represents fiscal year end disclosures of
various
tax benefits passed through to shareholders at calendar year end.
Of the distribution from ordinary income made by the Fund during the fiscal
year
ended July 31, 1994, 8.84% represents the amount of each distribution which
will
qualify for the dividend received deduction available to corporate
shareholders.
The above figures may differ from those cited elsewhere in this report due
to
differences in the calculations of income and capital gains for Securities
and
Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
40
<PAGE>
HIGH INCOME
FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
AND INVESTMENT OFFICER
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
John Bianchi
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON HIGH INCOME FUND. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY AN EFFECTIVE
PROSPECTUS
FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING THE FUND'S INVESTMENT
POLICIES, FEES AND EXPENSES AS WELL AS OTHER PERTINENT INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
[LOGO]
Fund 28, 185, 243
FD0429 I4
